With a CTC likely to cover stranded costs,
aggregators must somehow find power cheap
enough to offer real savings.
Retail aggregation: Wherever you stand, it appears 1998 could be the year of reckoning.
By then (em say those watching the future of aggregation in the "leader" states of California, New York, Massachusetts, and New Hampshire (em rulemakings will have sorted out the issues of stranded costs, distribution, and reliability. Widespread blocs of schools, businesses, and residents will start wielding buying power. Or will they?
Trials . . .
New Hampshire is set to begin its pilot program for retail electric competition on May 28.1 However, that start date assumes that the state's franchised electric utilities first will have met requirements set by the state Public Utilities Commission (PUC) to file unbundled tariffs for transmission,
distribution, and charges to recover administrative and stranded costs. (At press time, PUC hearings on the compliance tariffs were set for April 1-5.)
Some 3 percent of New Hampshire's electric load is up for grabs. Residential and small commercial customers may participate in the pilot either individually or as part of an aggregated "Geographic Area of Choice" (GAC). Any GACs participating in the pilot will be selected randomly by their franchised utilities under the oversight of the PUC, along with the names of firms that would procure power on their behalf. After customers are selected, the aggregation of customer loads will be permitted to lower entry barriers for small customers.
In Massachusetts, the future of retail aggregation was to be mapped out in restructuring proceedings that ended February 16. New York, meanwhile, shows a preference for wholesale wheeling "with a commitment to adding retail access as quickly as possible" in its ongoing restructuring effort in its electric Competitive Opportunities docket.2 One onlooker who stands to benefit from aggregation predicts it will be piloted in select areas of the state, then go full-blown in three years or less.
California's December restructuring decision,3 still under a 100-day review at press time, calls for direct access, or direct access via aggregation, for about 4 percent of the state's consumers, beginning January 1, 1998. That percentage would grow over five years. Although the California Public Utilities Commission has yet to set clear rules, consumer groups say customer aggregation is key to delivering the benefits of competition to smaller users. Utilities are supposed to confer with interested parties on direct access until August 30, then submit a plan containing the parties' comments. A month-long review period follows.
Tribulations . . .
Utility officials and aggregation proponents in these states offer divergent attitudes to pooled power loads. To some, they're clearly economic aggravation; to others, fiscal salvation.
Patty Spangler, power pool manager at the Association of Bay Area Governments (ABAG) of Oakland, CA, knows the difficulties of aggregation. On April 1, after a year of effort, her regional planning organization begins a natural gas aggregation of more than 100 municipalities, water and park
districts, and sewer agencies in the nine-county San Francisco Bay area. The pool projects savings of 2.3 percent on gas bills.
Although savings appear small because of maturing competition in the gas market, Spangler says the complicated process was a stepping stone to electric restructuring. The Bay Area utility, Pacific Gas & Electric Co. (PG&E), clearly opposes the idea of municipalities pooling needs for gas and power, notes Spangler: "I think their number one fear is loss of business. They initially asked the local governments to defer any decision on electricity. I think that's still their position, even though we have preliminary rulings saying this is the way the market is going."
Because utilities will be paid a competitive transition charge (CTC) to cover the debt on investments like nuclear power plants, ABAG's job will be to find electricity cheap enough to cover distribution and CTC costs, but still provide savings.
Tony Ledwell, PG&E spokesman, says there's too much up in the air on aggregation for cities to consider it: "We think it's a real possibility in some areas, but we think there are many unanswered questions or issues to be resolved."
Those questions include: What happens if the energy supplier a community buys from suddenly can't serve the community, or has service interruptions, or goes bankrupt? "PG&E still has the responsibility of providing the power to the community . . . so it might as well be our customer," Ledwell argues.
PG&E doesn't think a substantial number of users will flee the system. Surveys show that the company can retain customers, and it constantly examines how to provide cheaper power. "There's concern," Ledwell says of aggregation, "but it's not a significant concern at this time. We just don't think it's going to happen anytime soon."
Across the country, in Long Island, NY, Al Benincasa, vice president of Wheeled Electric Power Co., says the biggest obstacle to advancing aggregation comes from rhetoric on reliability: "That's the ultimate scare tactic. You don't know who you're buying from."
But unlike their peers elsewhere, utilities in the Northeast haven't built good relationships with their customers, Benincasa points out. He also claims his company's proprietary surveys prove that electricity supplied by power marketers is more reliable.
Wheeled Electric Power is active in New York, Massachusetts, and New Hampshire. Its most ambitious aggregation project targets Long Island, NY, where it hopes to pool 127 school districts. A petition has been pending with the New York Public Service Commission (PSC) since 1993.
Benincasa says his company has made progress convincing the PSC to pilot retail-level programs before opening up the market. The market, he says, will dictate the price of power: "We don't believe that prices ever, really, on the wholesale basis, get above 4 cents [per kilowatt-hour]. Then look at the line charges, which range from 3 to 4 cents, then what programs the PSC decides to continue with. ... We still feel you're looking at a dime or less." Long Island Lighting Co. (LILCO), meanwhile, charges 13 to 15 cents per kilowatt-hour (¢/Kwh).
And Hand-to-Hand Combat?
And the lost utility business?
"Yeah, so what," Benincasa says. "That's what competition is all about. ... That's what business is all about. You can't go crying anymore."
The fight for aggregation won't be easy, Benincasa believes. "The utilities are going to say one thing, we're going to say the opposite, and we're going to prove it."
That tactic, says LILCO spokesman Jim Cunningham, will only repeat the history of the Shoreham nuclear power plant, a bitter, litigious struggle with consumer and other groups that simply delayed the plant's opening for six and a half years. Current rates reflect the $3 billion in debt that accumulated while the plant lay idle.
"Our view is, we don't want to have to fight the whole way," says Cunningham.
However, LILCO believes aggregating retail loads is inconsistent with the intentions of the Energy Policy Act. "We think a lot of the benefits of competition can be captured at the wholesale level," Cunningham says.
According to Cunningham, the irony of the Long Island school aggregation is that LILCO's high rates stem from taxes, including school taxes. Without taxes and debt service, he claims LILCO could generate power for between 2.5 and 3¢/Kwh.
Aggregation proposals will have to address fixed costs like taxes, debt, and the costs of running a fourth cable to Long Island to supply power. Cunningham admits that aggregation makes sense and says LILCO is "not opposed to change in the industry" as long as current customers won't be hurt by those leaving the system.
His prediction for aggregation's future: "Anyone who has the impression that this thing is going to happen in a year or two years is wrong."
Lenny Goldberg, a lobbyist for San Francisco's Toward Utility Rate Normalization, is working on a revised plan for aggregation in California. He pulls few punches: "Utilities want no real effective ability for small customers to exercise any power in the marketplace. No effective ability to aggregate on an expedited basis."
It's unlikely that every city will be freed from its utility monopoly in order to cut its own wholesale power deal (see sidebar on page 30). Goldberg insists that cities must be able to form consortia or join with water districts that have significant electric billings. The East Bay Municipal Utility District (MUD), for example, which provides water and sewer services, has about one million people in its territory. "If the East Bay MUD were to take its million people out on the market, they could cut a really good deal," Goldberg says.
His take on aggregation? "I think it's vital that it succeeds. I don't think there's any other way to go." t
Joseph F. Schuler, Jr. is associate editor of PUBLIC UTILITIES FORTNIGHTLY.
E-mail: Schuler@pur.com
Palm Springs Sees the Lite
Long known as a haven for the rich, retired, or notorious (em and perhaps the only American city with a putting green abutting the airport tarmac (em Palm Springs has joined the City of Falls Church, VA, in pursuing the strategy known as "municipalization lite."
In late February, this Southern California city of 44,000 selected five alternative electric suppliers to Southern California Edison Co., hoping to get into the discount power business. The city plans to ask the Federal Energy Regulatory Commission (FERC) whether installing a second set of electric meters at city homes and businesses will qualify the city as an electric distribution utility under the Energy Policy Act of 1992, which allows municipal utilities to choose their own wholesale power supplier. Edison would wheel the electricity and also supply those customers who reject the single wholesaler the city will select from its short list.
The city hopes to undercut Edison's rates, which run 50 percent above the national average. Edison rates range from 12.4 to 14.2 cents per kilowatt-hour (cent/Kwh); wholesale electric is available for as little as 3.5 cent/Kwh.
"I think the FERC likes the idea of competition and creating competition, and the idea we're not just condemning out Edison's facilities," says Harold E. Good, city purchasing manager. "They can still compete. I think it's the kind of marketplace [the FERC] envisions for the future.
"We have pretty high hopes that they're going to like the idea."
Good can hope, but victory remains a question mark, given unfolding changes in federal regulation. Fees for the recovery of stranded costs alone, which federal regulators expect to set this month, could wipe out any projected savings.
What remains unclear is just how much plant a city must operate to qualify as a municipal "utility." But Palm Springs has a toehold because of the 1.2-megawatt cogeneration plant it built in 1983 after a friendly condemnation with Edison.
"The FERC may decide that we're unique because we have a foot in the door," Good says. "Or they may decide this 'freedom of choice' idea is great and make a decision with broader implications."
The purchasing manager says most of the power wholesalers on the city's short list are utility subsidiaries that could provide related administrative services, such as billing. The city's intention isn't to create new infrastructure.
Manager Good estimates conservatively that, given the choice, 70 percent of Palm Springs residents will opt for the second meter.
Palm Springs initially looked at the citywide condemnation, then found the cost (including litigation) beyond its reach. After hearing about Falls Church and its plans, Palm Springs hired the Washington, DC, law firm of Duncan & Allen, which also represents Falls Church. Meanwhile, businesses and residents in Palm Springs have donated thousands of dollars to support the initiative.
"We're very optimistic," says Good.
1. Re Retail Competition Pilot Program, DR95-250, Order No. 22,033, Feb. 28, 1996 (N.H.P.U.C.).
2. See, Case 94-E-0952, Opinion No. 95-7, June 7, 1995, 162 PUR4th 1 (N.Y.P.S.C.).
3. Re Proposed Policies Governing Restructuring California's Electric Services Industry and Reforming, Regulation, Decision 95-12-063, Dec. 20, 1995, modified by Decision 96-01-009, Jan. 10, 1996, 166 PUR4th 1 (Cal.P.U.C.).
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