Studies and Reports

Natural Gas Retail Choice. Utility affiliates hold large market shares in natural gas customer choice programs, raising questions about the extent of true competition, according to a study released on Dec. 15 by the U.S. General Accounting Office. Participation varies by region, however, according to the report, "Energy Deregulation - Status of Natural Gas Customer Choice Programs."

In Pennsylvania, for example, three out of four programs showed very high shares for utility affiliates. The Equitable Gas Co. affiliate served all 42,000 residential customers who participated in the utility's choice program as of Aug. 31, 1998, according to the GAO. As of July 31, the Peoples Gas affiliate served 79 percent of participating residential customers. Only under the Columbia Gas program did the affiliate not serve the largest market share.

In Nebraska, however, the local gas utility sponsoring the state's single program estimated that 70 percent of eligible residential customers had selected an alternate gas provider, while in New York, a local gas utility sponsoring one program reported that no residential customers had selected an alternative supplier.

The GAO counted 43 gas utilities in 16 states having customer choice programs in place. Meanwhile, gas utilities in 11 other states and the District of Columbia either were beginning or considering implementing choice programs. More information is available at the GAO web site, http://www.gao.gov.

Hydroelectric Development. The National Hydropower Association estimates that up to 20,915 megawatts of additional capacity could be developed by 2010 without building a single new dam or impoundment - but only if changes are made to the licensing process, which now discourages development, according to the NHA.

Ninety-seven percent of the nation's 75,000 dams are without hydropower capacity, as noted in an NHA report, "Forecast for Hydropower Development Through 2021." Thus, development of only a small fraction of those existing dams would meet NHA's forecast. Also, that new capacity would offset about 24 million metric tons of carbon emissions from the burning of coal.

Stranded Costs; Securitization. Moody's Investors Service reports that for Illinois electric utilities, securitization of stranded costs will pose risks not seen previously in securitization deals in California. The reason stems from unique political, legal and structural characteristics for Illinois deals, according to a recent report, "Illinois Stranded Utility Costs Securitizations: Are All Transactions Created Equal?"

In Illinois, notes Moody's, the instrument funding charge (which repays bondholders) will come out of existing utility rates, rather than from a separate dedicated levy, as in California. Moreover, under Illinois law, a legislative "inseverability provision" dictates that if any part of the state's restructuring legislation is declared unconstitutional, the entire act will be held invalid, which likely would void any securitization deal.

Commonwealth Edison Co. and Illinois Power Co. were expected to issue $4.3 billion of "Aaa-rated," debt to securitize costs left stranded in Illinois. Nationwide, Moody's estimates that utility securitizations in 1999 could total between $50 billion and $75 billion.

Gas Pipeline Construction. The U.S. Energy Information Administration reports that expenditures for natural gas pipeline construction will rise significantly in 1999 and 2000 - up to double the figure for 1998 - though net additions of transportation capacity will drop.

Spending will rise from $2.9 billion (1998) to $3.1 billion and $6.3 billion (1999, 2000). However net new capacity (1999: 8.2 billion cubic feet per day; 2000: 7.8 Bcf/d) will fall short of the 11 Bcf/d added in 1998, according to the report, "Natural Gas Pipeline Network: Changing and Growing."

The difference occurs because 1998 construction mostly involved expansion of existing lines, while later work involves construction of new long-distance systems, such as the Alliance, Independence, Tri-State and Vector projects, many of which will bring gas from western Canada to the Chicago hub and points East. The report is available at http://www.eia.doe.gov.

FERC

Nuclear Plant Decommissioning. The Maine PUC voted on Dec. 22 to join a settlement of two cases at the FERC concerning decommissioning costs for the Maine Yankee nuclear plant and the prudence of the plant shutdown, in terms of replacement power costs and the impact on retail electric rates in the state of Maine.

The settlement would cut Maine Yankee decommissioning rates by nearly 10 percent per year, reduce allowed return on common equity from 10.65 percent to 6.5 percent and require plant owners to trim stranded cost recovery if replacement power costs should exceed initial estimates. However, Maine Yankee could seek to recover spent fuel storage costs from the Department of Energy. Docket Nos. ER98-570-000, EL98-14-000 (F.E.R.C.).

Power Supply Contracts. Central Illinois Light Co. (CILCO) filed a complaint at FERC alleging that Central Illinois Public Service Co. (CIPSCO) violated long-term power supply contracts.

CILCO alleged that CIPSCO promised to provide CILCO with "continuously available" capacity through 2009, with the right to buy energy at capacity cost plus 10 percent, but was diverting the reserved capacity to Union Electric, an affiliate of CIPSCO by way of the 1997 Ameren merger, and instead was buying energy on the spot market and charging CILCO the higher market price.

"We did not agree to pay CIPSCO $10 million per year for capacity so that CIPSCO could purchase energy on the spot market and resell it to us," said Robert Viets, CEO of CILCO. According to Viets, CIPSCO has taken part in affiliate favoritism, which FERC has "condemned." Docket No. EL99-17-000, filed Dec. 22, 1998 (F.E.R.C).

Electric Reliability

Gas-Fired Generation. The California ISO was plunged into a "stage-two" emergency on Dec. 21, forcing a scale-back of load on the state's transmission system.

Extreme cold in the Northwest extending into northern California temporarily caused shortages of natural gas due to heating demands. The shortfall affected fuel supply to generate electricity, reducing the amount of backup power available. Transmission line congestion created additional problems, as the states in the Southwest, not suffering from the cold weather, sent surplus electricity via California to the Northwest.

A stage-two emergency occurs when operating reserves dip below 5 percent, or are expected to drop that low within two hours. At that point, the ISO asks California's utilities to implement their load management programs.

State PUCs

Electric Distribution Tariffs. Citing a time crunch under state legislation for electric restructuring (with retail choice starting Oct. 1 for some customers), the Illinois Commerce Commission opened a docket to consider whether to unbundle electric delivery services statewide, whether to make exceptions for small utilities and how to apply transition charges to customers taking unbundled delivery services. An expedited hearing schedule will allow for a final decision on or about March 31, less than four weeks after utilities are required to file tariffs for delivery services. No. 99-0013, Jan. 13, 1999 (Ill.C.C.).

Retail Choice Lottery. A hearing examiner at the Illinois commission approved a phased implementation plan for retail choice for electric service developed jointly by the state's major electric utilities. The plan includes guidelines for a lottery to select which nonresidential customers within four specific groups will be the first to participate, despite objections that a lottery process will select some eligible customers who are uninterested in or unsuited for competitive services, or perhaps exclude others who are inclined and best prepared to exercise retail choice. No. 98-0650, Jan. 12, 1999 (Ill.C.C.).

Software Development Costs. At a meeting held Dec. 3, Wisconsin regulators reviewed and approved a state position paper that accepts the recommendations issued in March 1998 by the American Institute of Certified Public Accounts in the AICPA's "Statement of Position 98-1: Accounting for the Costs of Computer Software Developed or Obtained for Internal Use."

The policy covers software developed internally, where no substantive plan exists or is being developed to market the software externally.

As noted by the PSC staff, SOP 98-1 does not change the conclusions of the Emerging Issues Task Force in its Issue Paper No. 96-14, which requires current expense treatment for external and internal costs incurred to modify internal-use software to correct the Y2K bug.

Nuclear Depreciation. North Carolina regulators authorized Carolina Power & Light Co. to accelerate cost recovery of its nuclear generating assets through depreciation over a five-year period starting Jan. 1, 2000, extending prior authorization granted in December 1996. The accelerated cost recovery must be accomplished through existing rates, and allocated among customer classes using the same factor used to allocate nuclear production plant costs. Docket No. E-2, SUB 737, Dec. 22, 1998 (N.C.U.C.).

Purchased Gas Adjustments. The Oregon PUC OK'd stipulated changes to its policy on purchased gas costs. The new policy provides for a general earnings review each spring, but allows utilities to avoid a fall earnings review if they accept a risk-reward sharing mechanism that allocates responsibility to stockholders for at least 33 percent of commodity cost discrepancies under the PGA cost-tracking procedure. UM 903, Order No. 98-543, Dec. 23, 1998 (Ore.P.U.C.).

Plant Divestitures. Oregon also denied a request by Portland General Electric Co., supported in principle by PacifiCorp and a coalition of industrial customers, to open a generic proceeding to design an auction process that utilities might use to sell all or a substantial portion of their generating assets and energy purchase and sales contracts. The PUC questioned whether broad guidelines would be useful for utilities with different resource mixes and different jurisdictional issues. UE 102, Dec. 17, 1998 (Or.P.U.C.).

Marketing Affiliates. The Nevada Public Utilities Commission adopted regulations on Dec. 18 barring marketing affiliates of electric or natural gas utilities from using either a name or logo that may appear "deceptively similar" to that of the regulated utility distribution company, unless the marketer operates as a provider of last resort. The rules allow affiliates to use a "tagline" to advertise their relationship with the utility, provided a disclaimer states that the two companies are not the same.

A study conducted in Nevada by Manoj Hastak of American University concluded that most Nevada electricity customers tended to choose a power marketing affiliate whose name most closely resembled that of their traditional electric utility, Nevada Power Co., with more than half the customers believing the affiliate to be the same organization.

Emission Reductions. Colorado was expected to hold hearings early in 1999 on a proposal by Public Service Co. of Colorado to recover its costs for voluntary emissions reductions at three power plants. The utility proposed to spend $205 million on air pollution reduction measures and charge retail customers over a 15-year period starting in 2003. It estimated that an average residential customer would pay about 79 cents a month for the program. The legislature in 1998 approved a bill allowing utilities to recover prudent costs for air quality improvements that exceed state and federal requirements.

Electric Retail Choice. Michigan regulators settled a decade-long rate dispute involving Detroit Edison, and has approved the utility's request for accelerated amortization of its Fermi 2 nuclear plant, removing obstacles that had stood in the way of a program for electric retail choice.

"The last impediment to open access is removed so that in the future customers will be able to choose their electric supplier," said PSC Chairman John Strand. Case Nos. U-8789 and U-11726, Dec. 28, 1998 (Mich.P.S.C.).

Renewable Resources. The Maine PUC issued rulings to carry out the state's electric restructuring legislation and its anticipated March 2000 start date for electric competition:

R&D Funding. A voluntary customer contribution program will fund research and development in renewable energy. Customers may contribute small amounts through a "check-off" on bills or customer response cards. Utilities will forward funds to the PUC, for rerouting to designated state universities. Utilities may recover program costs through applicable rates. Docket No. 98-620, Dec. 10, 1998 (Me.P.U.C.).

Net Billing. The PUC OK'd an annualized approach for net billing after competition begins in March 2000. Usage and generation are netted against one another on a roll-over basis for a 12-month period. Utilities may not charge a net billing customer directly for installing a second meter, but must recover such costs through "generally applicable rates." Docket No. 98-621, Dec. 10, 1998 (Me.P.U.C.).

Portfolio Standard. Renewable resource generation must total 30 percent of a competitive electricity provider's total retail sales. Providers must meet the 30 percent portfolio obligation over a 12-month period. Docket No. 98-619, Dec. 2, 1998 (Me.P.U.C.).

Electric Marketing Affiliates. Maine set rules that will limit retail energy sales by an electric utility marketing affiliate to 33 percent of the total kilowatt-hours sold within the service territory of its affiliated distribution utility. Further, the utility must make its regulated products and services available to all customers and competitive electricity providers "simultaneously and without ¼ discrimination." Docket No. 98-457, Dec. 7, 1998 (Me.P.U.C.).

Stranded Costs; Indian Tribes. The New York PSC ruled that the St. Regis Mohawk Nation would be required to pay stranded costs to Niagara Mohawk Power Corp. if it should leave the utility's system, as long as some "appropriate jurisdictional body" determines that electric service to the Indian Nation is governed by its utility's tariff.

The issue arose when Akwesasne Power Authority, a tribal organization, sought to purchase the electric lines and poles from NiMo that were located on the tribal land of the St. Regis Tribe. Case No. 98-E-1155, Dec. 16, 1998 (N.Y.P.S.C.).

Storm Damage. Reviewing an ice storm from last winter, the Maine PUC said it will ask the National Association of Regulatory Utility Commissioners to seek amendment to the National Electric Safety Code to add a new ice loading category for pole and line design. It also recommends that all public utilities develop contingency plans for loss of utility-provided power and for loss of telecommunications for customer contact. Electric utilities should develop new programs where possible to assess root causes of pole failures during major storms. For water utilities, the commission recommended installing and maintaining backup power for supply, treatment and booster stations. Docket No. 98-026, Dec. 29, 1998 (Me.P.U.C.).

Courts

Electric Monopolies. Reversing a trial court decision, Alabama's Supreme Court ruled that the state law guaranteeing monopoly rights for electric utilities is constitutional, as it prevents "wasteful duplication" of facilities.

The trial court had found the law unconstitutional on six counts. Among other points, it said the act violated Section 108 of the Alabama Constitution and bars any suspension of law for the benefit of private companies. The trial court also had found the act violates the Fifth Amendment of the U.S. Constitution because the Alabama law set the amount of compensation for a taking of property, instead of allowing the judiciary to do so. Ala. Pwr. Co. v. Alabama, No. 1961087, 1998 WL 854800, Dec. 11, 1998 (Ala.).

Competitive Checklists. A federal appeals court upheld the competitive checklist in the Telecommunications Act of 1996 as a test for whether the regional Bell System carriers have opened their local calling networks to competition and can enter the long-distance calling market.

It rejected arguments that the checklist represented an unconstitutional bill of attainder, inflicting punishment on incumbent carriers. BellSouth Corp. v. FCC, No. 98-1019, 1998 WL 886764, Dec. 22, 1998 (D.C. Cir.).

Land-Use Rights. Acknowledging the possible environmental ramifications, West Virginia's high court affirmed that the state PSC lacked authority to review or block a sale of land in the Blackwater River Canyon by West Virginia Power and Transmission Co., a real estate holding company affiliated with Allegheny Power, despite arguments that regulators should "pierce the corporate veil" and recognize the real estate affiliate as part of a public utility system subject to PSC jurisdiction.

Justice Starcher dissented, complaining that Allegheny Power "gets the milk without having to buy the cow - it gets to drink in profits from selling electricity to the citizens of West Virginia, without having to submit its activities to the scrutiny of the PSC." West Virginia Highlands Conservancy Inc. v. W.Va.P.S.C., No. 25048, 1998 WL 874963, Dec. 14, 1998 (W.Va.).

Property Taxes. A state court rejected a claim by the Institute of Nuclear Power Operations for a property tax exemption as a charitable organization, pointing to INPO's industry sponsorship and its $12 billion in annual profits. INPO was set up in 1979 to promote safety and reliability in nuclear plants. INPO v. Cobb County Bd. of Tax Assessors et al., Nos. A98A2077-A98A2084, 1999 WL 2650, Jan. 5, 1999 (Ga.App.).

Gas Transport Rights. Calling the commission's reasoning "too confused to pass muster," a federal appeals court reversed and remanded a FERC ruling that had denied Southern California Edison Co. the right to contest a gas pipeline rate settlement agreement both as a direct customer of the interstate pipeline, El Paso Natural Gas Co., and an indirect customer, via connections through Southern California Gas Co., an intrastate pipeline.

Edison argued that SoCal Gas would not represent its interests in the El Paso case, as SoCal easily could flow through rates to captive customers. The court agreed: "The commission's murmurings here are not enough to show substantial congruity of interests." So. Calif. Edison Co. v. FERC, No. 97-1450, 1998 WL 852544, Dec. 11, 1998 (D.C. Cir.)

Mergers and Acquisitions

ONEOK + Southwest Gas. Oklahoma-based ONEOK, Inc. and Nevada-based Southwest Gas Corp. have decided to merge to create the largest stand-alone natural gas distribution company in the United States, serving 2.6 million customers in five states. The merger was expected to close in fall 1999.

ONEOK would pay $28.50 per share (total value approximately $1.8 billion) to acquire Southwest Gas, which would retain its name in the local markets it serves, operating as a division within ONEOK. No layoffs are expected; any reductions should occur through attrition. Approvals are needed from Arizona, California, Nevada and the Federal Energy Regulatory Commission.

Nevada Power + Sierra Pacific. After tacking on several conditions to ensure the legislature's intent of promoting competition, Nevada regulators approved a merger to reorganize Nevada Power Co. as a wholly owned subsidiary of Sierra Pacific Resources.

One condition requires the parties to plan to divest certain generation plants and form an independent system operator to manage transmission service. A second condition stipulates that the merged entity must not become a registered holding company, which would preempt state authority over certain company transactions. Docket No. 98-7023, Dec. 31, 1998 (Nev.P.U.C.).

Generating Plants

Wisconsin Power Market. Wisconsin regulators certified two new gas-fired simple-cycle combustion turbines, stemming from the PSC's Advance Plan 7 (under the review process in State Act 204), issued in September 1997, which had identified unmet needs for electric generating capacity.

RockGen Plant. A 525-MW unit, operating as a nonutility merchant plant to sell power at wholesale to Alliant Energy. Under the state's certification process for merchant plants, the PSC was barred from considering whether the project met a public need or whether the design and location served the public interest. No. 9335-CE-101, Dec. 18, 1998 (Wisc.P.S.C.).

West Marinette. A $33.4 million, 83-MW plant, planned by Madison Gas & Electric Co. at the site of the company's West Marinette Generating Station. The cost rose from $31.4 million after General Electric, the turbine manufacturer, had moved up the construction time slot, adding to MG&E's carrying costs until commercial operation. No. 3270-CE- 121, Dec. 22, 1998 (Wisc. P.S.C.).

Business Wire

CMS Energy Corp. acquired Panhandle Eastern Pipe Line Co., Truckline Gas Co. and the storage related to those systems, as well as the Trunkline LNG Co. terminal, from Duke Energy for $2.2 billion involving a cash payment of $1.9 billion and existing Panhandle debt of $300 million. The assets include: 11,500 miles of mainline gas pipe extending from the Texas Gulf Coast to Michigan and from the Kansas/Oklahoma mid-continent to Michigan, for a combined capacity of 3.5 billion cubic feet per day. They also include 340 miles of pipeline offshore in the Gulf of Mexico, 70 billion cubic feet of underground gas storage facilities, an LNG port, unloading and regasification facilities with a production capacity of 700 million cubic feet per day and liquid storage of 1.8 million barrels.

Ohio-based Cinergy Corp. selected LodeMap RTP as the alternative to its previous system. LODESTAR Corp.'s Lodemap Real-Time Pricing Solution enables energy users to reduce their energy costs by scheduling loads based on "real time" consumption and pricing.

Keyspan Energy and Gulf Canada Resources Ltd. reached an agreement whereby Keyspan Energy Development Corp. will acquire a 50 percent interest in Gulf's midstream business in western Canada and will form a partnership with Gulf called Gulf Midstream Services Partnership. Keyspan will pay Gulf approximately $189 million. In addition, Keyspan will provide a three-year, $65 million loan on commercial terms that at Gulf's option can be repaid or exchanged by Keyspan for an additional 19.7 percent interest in GMS.

Aquila Energy signed an eight-year contract to supply natural gas for a 265 MW independent power project being constructed in Maine. Under terms of the contract, Aquila will supply the power plant with up to 46 million cubic feet of natural gas per day for eight years. The estimated value of the contract is $500 million. The plant is expected to begin operation sometime in 2000.

Cost Responsibility. Concerned that callers may use the Internet as a substitute for traditional telephone service, bypassing the public switched network, regulators in Nebraska will examine Internet service providers (ISPs) and the extent to which they are liable for telephone access charges, funding for universal service and other system costs. But the commission acknowledges that such charges and funding requirements, if imposed on ISPs, could "suffocate" development of Internet protocol telephony. Application No. C-1825/PI-21, Sept. 28, 1998 (Neb.P.S.C.).

Revenue Settlements. Are calls placed to ISPs "local" or interstate in nature? By completing local calls, competitive local exchange carriers are entitled to reciprocal compensation from incumbent LECs. Three states - Massachusetts, Ohio and North Carolina - have each affirmed that ISP calls qualify as "local," though some incumbent carriers see such traffic as interstate in nature. Case No. 98-308-TP-CSS, Oct. 14, 1998 (Ohio P.U.C.); No. 97-116, Oct. 26, 1998 (Mass.D.T.E.); Docket No. P-55, Sub 1096, Nov. 4, 1998 (N.C.U.C.).

Overbilling? Meanwhile, Pennsylvania has opened an investigation on allegations that competitive carriers are handing out "phony local telephone numbers" to ISPs and thus overbilling incumbent LECs that offer interconnection services. The PUC described the issue as "of grave policy concern." Failure to resolve it, said the PUC, could risk placing the state in "the break-down lane on the information superhighway." P-00981404, Sept. 2, 1998 (Pa.P.U.C.). - P.C.

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