As regulators continue to investigate industrywide restructuring as an answer to regional electric rate disparities and calls from large consumers for price reductions, the trend of dealing with the problem through rate discounting also remains strong. Regulators have taken steps to ensure that shareholders bear at least some of the risk for revenue shortfalls that might result under the new contracts. In addition, utilities have been careful to avoid asking for current rate increases for services provided to smaller customers.
The California Public Utilities Commission (CPUC) has approved a set of "preapproved generic discount" contract rate options for large industrial and commercial electric users served by Pacific Gas & Electric Co. (PG&E). It rejected allegations by ratepayer groups and representatives of independent power producers in the state that the discount programs would impede the effective restructuring of the state's electric industry. The CPUC emphasized that the programs are consistent with current market conditions, including the economics of cogeneration. It added that as with the overall goals of its industry reform efforts, the utility's shareholders assume the risk for any future costs of uneconomic assets "should there be a restructuring of the California electric industry." Commissioner Jessie J. Knight, Jr. dissented, however, claiming that the new discount rules allow PG&E to advantage itself in the future restructured electric services industry by offering current discounts funded in large part by ratepayer dollars. Knight noted that the terms of the proposed discount contracts apply "well into the restructured era." He also said that the decision contains a bias against direct access in favor of "virtual direct access" that would occur through implementation of a power pool.
The CPUC approved three separate discount programs proposed by the utility for: 1) business attraction, 2) business retention and expansion, and 3) deferral of cogeneration. To gain CPUC approval, the utility was required to accept partial shareholder responsibility for the revenue shortfall resulting from the discounts. Shareholders will bear 35 percent of the shortfall associated with the business attraction option, and 50 percent of the lost revenues under the remaining two programs. According to the CPUC, shareholder responsibility for the lost revenues will increase to 100 percent after "direct access" or other such major industry restructuring is made available to the qualifying customers. The new preapproved contract rate options are designed to allow the "swift execution of individual contracts" necessary to retain customers with competitive alternatives. Ratepayers are protected by system caps of 100 megawatts (Mw) for the business attraction and cogeneration options, and 50 Mw for business expansion customers. Ratepayers are assured of a benefit under each contract as a result of a price floor for each contract set at the customer's specific marginal cost plus 20 percent. Re Pacific Gas and Electric Co., application 91-11-036, Decision 95-10-033, Oct. 18, 1995 (Cal.P.U.C.).
The Michigan Public Service Commission (PSC) has approved a 10-year "special manufacturing contract" negotiated by Consumers Power Co. to supply retail electric service at reduced prices to General Motors Corp. General Motors is the utility's largest electric customer, with a total demand in excess of 400 Mw, and accounts for more than 9 percent of its retail sales. Consumers said it would serve General Motors at rates above variable costs, and that it was not currently requesting a change in cost of service to other customers.
The PSC cited benefits to all parties (em the utility, General Motors, ratepayers, and the general public (em especially in light of the utility's commitment to bear the burden of showing, should it seek to raise rates for other customers, that the discounts are based on cost of service or that it is more beneficial to ratepayers to retain General Motors as a customer than to lose the sales. The PSC said that the commitment by Consumers Power was apparently patterned after requirements set forth in an earlier order approving a similar rate discount plan for services provided to the automobile industry by Detroit Edison Co. Re The Detroit Edison Co., 160 PUR4th 132; order on rehearing 162 PUR4th 163 (Mi.P.S.C.).
As was required for Detroit Edison, the PSC directed Consumers Power to account for the contract as a separate rate class in future cost of service studies. It said that this requirement, along with annual reports by the utility showing actual contract revenues as well as hypothetical tariff rate revenues using the same billing determinants, would guarantee protection for other ratepayer classes. Re Consumers Power Co., Case No. U-10961, Oct. 25, 1995 (Mi.P.S.C.).
The Ohio Public Utilities Commission (PUC) has approved a comprehensive rate plan for Ohio Edison Co. designed to enhance economic development within its service territory and to provide stable, long-term competitive pricing of energy services. The plan acknowledges the PUC's ongoing effort to introduce more competition within the electric industry in the state and provides a schedule for the retirement of "stranded investment costs" should the plan be terminated as a part of a wider restructuring. Under the settlement agreement, however, the company may seek recovery of stranded costs from customers that might cancel bundled electric service.
The plan calls for a rate freeze and scheduled rate reductions combined with inflation-indexed fuel-cost adjustment clause reforms and authority to accelerate amortization or depreciation of generating station investment and deferred regulatory assets. In addition, the utility is granted preliminary authority to dispose of or alter its present investments in generating stations, subject to notification requirements and the possibility of further PUC review of individual transactions. (In late 1992, the PUC approved an initial plan with similar objectives that included a rate freeze through 1996, an antibypass rate tariff, efficiency and job development programs, as well as cost deferrals and amortization schedules aimed at providing the utility with an opportunity to develop a long-range competitive pricing strategy.)
The newly approved plan results from a review of utility operations under initial rate stabilization
efforts as well as meetings between the company, PUC staff, and customer groups. The plan calls for a rate freeze until January 1, 2006, as well as a phased reduction in residential rates of approximately $600 million during the plan period. The rate plan also permits the utility to reduce rates for large general service customers under new tariffs and to further reduce base rates by 20 percent at the end of the rate freeze period.
A freeze in Edison's electric fuel-charge rate, with limited adjustments based on an inflation index (Gross Domestic Product Implicit Price Deflator), is designed to encourage fuel purchasing and operation efficiencies. In addition, the fuel rate is capped at a level tied to the current average of the fuel components of the major electric utilities in the state. To ensure that customers share the benefits from efficiency improvements, the plan includes an earnings cap that requires a customer refund of the entire amount of earnings in excess of the 13.21-percent equity allowance granted in the company's last rate case. Re Ohio Edison Co., Case No. 95-830-EL-UNC, Oct. 18, 1995 (Ohio P.U.C.).
Based on requirements under a new state law seeking to stimulate economic development through changes in electricity pricing, the New Jersey Board of Public Utilities (BPU) has approved a detailed set of regulations for utilities to follow in implementing "off-tariff" rate agreement programs. The rules contain standards for: 1) confidentiality of the discount rate agreements, 2) initial and periodic filing requirements, 3) minimum pricing components, 4) the maximum term for discount agreements, and 5) conditions and terms for exceeding maximum term and marginal-cost pricing restrictions. Under the new rules, utilities are granted expanded flexibility to negotiate discounts with customers, but minimum pricing provisions require that rates cover the marginal cost of service plus numerous specific cost factors, including a BPU-determined contribution to fixed costs as well as existing per-unit charges for costs associated with conservation programs, environmental cleanup, gross receipts and franchise taxes, and nuclear decommissioning trust funds. The rules forbid any recovery of "revenue erosion" attributable to the discount agreements prior to the conclusion of a base rate case. Discount agreements are limited to a period of seven years. Re Standards for Off-tariff Rate Agreements, Docket No. EX95070320, Oct. 27, 1995 (N.J.B.P.U.).
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