No clear signal as yet from new chair James Hoecker.

The Federal Energy Regulatory Commission had a busy day on July 30, but observers will have to wait until the fall to learn of any new wide-ranging policy initiatives planned by incoming chair James Hoecker, who has now succeeded Elizabeth Moler in the top post.

The end-of-summer meeting (em and Commissioner Donald F. Santa Jr.'s last (em was marked largely by a lack of controversy. Among other items, the FERC revisited the old ratemaking issue of double leverage in the capital structure for corporate subsidiaries and cleaned up its docket on electric utility mergers and open-access transmission tariffs. It also turned away requests for additional hearings or technical conferences on the California Power Exchange and Independent System Operator.

Pipeline Capital Structure. In two orders involving interstate natural gas pipelines, the FERC modified its policy on capital structure (em regarding the amount of equity it will recognize in setting an overall return for pipelines that operate as corporate subsidiaries. The two pipelines, Transcontinental Gas Pipeline Corp. (Docket Nos. RP95-197-023 et al.) and Williams Natural Gas Co. (Docket No. RP93-109-011), both operate as subsidiaries of The Williams Cos.

Commissioner Vicky Bailey said the orders will affect rate of return throughout the pipeline industry. Chair James Hoecker said return-on-equity methods will be subject to debate, and so perhaps FERC should explore use of incentive rates.

The issue concerns subsidiaries, which can issue debt capital in part on the strength of the parent company. And, because the parent company issues its own debt, a portion of the subsidiary's apparent equity capital is actually funded by parent company debt.

To ensure a fair rate of return for gas pipelines that operate as subsidiaries, the FERC said it would accept the pipeline's nominal capital structure on two conditions: 1) the subsidiary issues its own debt, without guarantee by the parent, and 2) the subsidiary has its own bond rating. Even then, however, the pipeline's nominal equity ratio must fall within the range observed for comparable, market-driven proxy companies.

Thus, it accepted Transco's nominal capital structure, but rejected the 64.29-percent equity ratio claimed by WNG, noting that it exceeded the equity ratio of all other companies in the proxy group. For WNG, the FERC assigned the equity ratio of the corporate parent.

A Clean Merger Slate. The FERC also approved two mergers, bringing to 13 the number of merger applications it has acted on since issuance of its Merger Policy Statement last December. It approved the convergence merger of NorAm Energy and Houston Industries (Docket No. EC97-24-000) and the more traditional merger of Delmarva Power & Light Co. and Atlantic Electric Co. (Docket No. EC97-7-000).

Commissioner William Massey disagreed with industry speculation that the FERC does not like traditional mergers and favors convergence mergers. Massey, referring to the Delmarva deal, said the commission had approved a merger that many had thought it would reject, adding, "each merger is unique and must be considered on the merits."

In the convergence merger of natural gas company NorAm Energy and holding company Houston Industries, the FERC found no threat to the wholesale generation market within the Electric Reliability Council of Texas. However, it accepted a modified version of NorAm's proposed code of conduct for interactions with Houston Light & Power Co., a subsidiary of Houston Industries.

HL&P is a member of ERCOT and operates under state jurisdiction and, as part of the deal, agreed not to boost transmission rates for four years on its D.C. ties linking ERCOT with the Southwest Power Pool. NorAm Energy has a power marketing subsidiary that is subject to FERC jurisdiction.

In the second case, the commission approved the reorganization of Atlantic City Electric and Delmarva Power & Light into wholly owned subsidiaries of new holding company, Conectiv. The FERC found the applicants could not exercise transmission market power, because both are members of the Pennsylvania-New Jersey-Maryland Interconnection and will provide transmission under the PJM open access transmission tariff.

The California PX, ISO. Denying requests for any new hearings or technical conferences, the Commission has agreed to guide California's three major electric utilities, its independent system operator and its power exchange to move quickly to competition (em but not without uncertainty. (Docket Nos. EC96-19-003 and ER96-1663-003).

Commissioner William Massey said it would be impossible to "get everything right from the start," but that the order was significant, because it shows FERC is committed to the Jan. 1, 1998 start-up date for competition in California.

While lauding the applicants on their consensus on difficult issues, the FERC admitted it was finding it impossible to process a "moving target." The FERC said it had worked hard to accommodate the Jan. 1 deadline, but had realized that every aspect of restructuring could not be up and running by that date. The Commission ordered the ISO and PX governing boards to file their final restructuring proposals by Aug. 15 (Phase II).

To simplify matters, the FERC identified eight elements of the ISO and PX that would not have to be operational on the start date. These elements included an ancillary service auction by the PX, and an hour-ahead market, congestion management and a day-ahead market for ancillary services. The ISO and PX only have to deal with the items expected to go into effect by the deadline.

Also, the FERC delayed action on firm transmission rights. It ordered the ISO to file a plan by June 30, 1998 making transmission rights available starting Jan. 1, 1999. The rights would allow market participants to hedge against uncertain fluctuations in hourly transmission charges.

The FERC also addressed several related issues:

• Transmission Congestion. Accepted ISO's proposed rate design for transmission congestion pricing, with a fee to recover the transmission owner's revenue requirement and a usage charge when there is congestion;

• Grid Upgrades. Approved ISO's proposal for transmission expansion and planning, which calls for agreement from all grid owners before proceeding. (The ISO will belong to the Western System Coordinating Council and the Western Regional Transmission Agreement); and

• "Dump" Hydro. Rejected proposal to deal with market power by large sellers that, according to the FERC, had unfairly targeted the Bonneville Power Administration and its alleged opportunity to "dump" cheap hydropower into the California market.

• Order 888 Tariffs. Lastly, the Commission ok'd compliance filings by 74 electric utilities under FERC Order 888 (Docket No. OA96-18-000 et al.), completing the processing of all issues, rate and nonrate, relating to the 165 tariffs filed last year.

The FERC was able to resolve all issues involving 57 of the tariffs, but found that hearings are required for the remaining 17.

The FERC now plans to focus on a second round of electric open-access filings under Order 888 that will fall due Dec. 31, 1996, dealing with power pools and holding companies. t

Lori A. Burkhart is an associate legal editor with PUBLIC UTILITIES FORTNIGHTLY.

Upcoming ...

El Paso, Las Cruces Spar on Stranded Costs

FERC will review a request by Las Cruces, N.M., to exempt the city from having to pay stranded costs to El Paso Electric Co. if the New Mexico town purchases power from another supplier using the company's transmission system (Docket No. SC97-2-000).

The hearing will examine two issues in particular: 1) whether El Paso Electric could have had a reasonable expectation that it would continue to provide retail electric service to Las Cruces, thus justifying a stranded-cost charge, and 2) if so, what level of recovery is appropriate.

The FERC noted that Las Cruces has initiated proceedings to condemn and acquire El Paso's distribution facilities to form an operating municipal utility system. It said that a factual dispute exists regarding the level of La Cruces' potential stranded cost obligation. El Paso has estimated Las Cruces stranded cost obligation at $234 million, a figure that Las Cruces disputes.

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