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Commission Watch

State regulators redouble their deregulation efforts-or abandon them altogether.
Fortnightly Magazine - January 15 2003

to enter the energy trading business when a fully restructured industry may have seemed inevitable. Major losses in unregulated businesses leave companies weakened and throw risk on consumers who purchase what are still monopoly utility products. Again, the state PUC is often seen as the last and best hope for such consumers.

Last year's prizewinner in this category is Westar Industries and the Kansas State Corporation Commission's (KCC) review of that company's failures in diversification. The KCC ruled that financial and corporate restructuring of Western Resources Inc. (WRI) is necessary to achieve a balanced capital structure within the company's public utility business. WRI is a holding company that provides electric service in parts of Kansas as KPL and in a separate service territory through its wholly owned affiliate, Kansas Gas and Electric Co. WRI also owns 100 percent of Westar Industries Inc., a holding company that owns several nonutility businesses, most prominently ONEOK, an energy services company with gas pipeline and production assets, and Protection One, a company specializing in monitored security services for residential and commercial consumers.

The KCC found that Westar's Protection One venture had experienced losses totaling over $291 million between 1997 and 2001. If Westar were permitted to shift debt and assets to its own advantage, the company's regulated utility business, if viewed as a stand-alone, would be left with a capital structure consisting of 117 percent debt and a negative 17 percent equity. To protect consumers of regulated services from paying higher prices as a result of the company's financial difficulties, the KCC ordered Westar to make a series of accounting entries to reverse the allocation of debt made to the regulated side of the business. It also directed WRI to transfer its KPL utility business to a utility-only subsidiary. The KCC also opened an investigation into further transactions between utility operations and unregulated business activities to remove opportunities for WRI to use the utility business to build nonutility ventures and to cover losses.

Pennsylvania Finds Market Manipulation

Even in Pennsylvania, a state sometimes identified as a place where deregulation of the electric market might one day work, the state PUC has found evidence of anticompetitive behavior in its regional wholesale market and has moved to assist ratepayers as competitors leave the retail market.

On June 13, 2002, the PUC issued a report finding clear evidence that PPL Electric Utilities Corp. had engaged in an unlawful exercise of market power and gaming of market rules to force up prices for regional power pool capacity during the first half of 2001. The PUC forwarded the report to the Federal Energy Regulatory Commission (FERC) and the U.S. Department of Energy.

The PUC asked FERC to consider taking further action against the company. It said that PPL unilaterally had raised the price of capacity credits to unprecedented levels. Under wholesale power pool rules, marketers and aggregators are required to own or have a right to sufficient generating capacity to cover daily energy transactions. Failure to maintain sufficient rights results in the imposition of a capacity deficiency charge.

According to the