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Fortnightly Magazine - November 15 2000

a retail service.

Nevertheless, there's an added wrinkle-one that makes this case so much more interesting than your common turf battle between states and the feds. In this new Battle of Dunkirk, a key third party has entered the fray. And that third party is the PJM ISO, the FERC's shining example of innovative restructuring in electricity markets.

Back in August, in a separate case, the PJM ISO had proposed its so-called "Attachment K." That move would amend PJM tariffs to give power producers the option to acquire station power from the PJM Interchange Energy Market instead of from utilities at retail. PJM saw the netting as "an appropriate adjunct" to regional transmission service and the "interconnected operations" of generators.

Will the FERC bow to state regulators, or endorse PJM's innovation?

"The same utilities that are now trying to impose retail tariffs on their divested generation benefitted from netting right up until the time those assets were divested."

That's NRG speaking, and the comment sums up the feeling of many power producers, such as Duke Energy, AES, Orion Power, and others: That by netting station power the new plant owners are only doing what the vertically integrated utilities used to do under full cost-of-service regulation.

PJM admits as much: "In the case of an integrated utility, [station] energy typically was supplied by its other generation stations or, if the utility was part of a centrally dispatched power pool such as PJM, by the pool's then-available energy supplies."

But the utilities and PUCs cite this "did-it-before" defense as out of touch with competitive markets. PPL Corp. explains why:

"The benefits and costs of providing power to the vertically integrated utility's generating plants were internalized. ... Distribution-side losses were countered by generation-side gains ... leaving customers whole. ... [But] now that the vertically integrated structure no longer exists, the practice PJM seeks permission to perpetuate is infeasible."

The utilities and regulators also complain that PJM's rule giving plant owners the option to acquire station power from regional spot markets would bypass the so-called nonbypassable surcharges imposed by state PUCs to recover stranded costs from unprofitable generation. Yet the generators and their allies have a strong rejoinder. If generators must acquire standby power through retail rates that already include stranded cost surcharges, won't customers end up paying twice for the bailout? Listen to the PJM Industrial Customer Coalition, which counts among its members such companies as DuPont, Praxair, Bethlehem Steel, Boeing, Union Carbide, and Merck.

"Requiring a generator that had been divested by a formerly vertically integrated utility to pay retail rates, including any charges for stranded cost recovery, could lead to the absurd result of a generator being responsible for stranded costs associated with that generator."

And real dollars are at risk. In its protest against PJM's plan, Conectiv said that station power can add up to 5 to 10 percent of plant generating capacity. In the Dunkirk case, in a protest filed Oct. 20, Ni-Mo said NRG still owed over $8 million in disputed delivery charges on the retail utility bills for sale