At the end of May, Consumers Power Co. issued a press release that caught my eye. In four short paragraphs, the company said it had filed an application with the state public service commission (PSC) seeking approval of a private power-supply contract with James River Corp. Consumers Power ranks James River as its 23rd largest industrial electric customer. Under this seven-year contract, the utility would act as sole supplier for the first 20 megawatts of demand sold to James River's Kalamazoo paperboard plant, which makes paper stock for cereal boxes.
But that's not all.
Consumers Power added this comment: "Assuming PSC approval of the application, Consumers Power will have secured long-term energy contracts with more than 87 percent of its at-risk industrial electric load." Note particularly the use of the words "long-term" and "secured."
I congratulate Consumers Power on its success in locking up seven-eighths of the market. But I wonder if that's what Michigan regulators had in mind back in 1994 when they announced their retail wheeling experiment.
Sadly, Michigan's initial five-year wheeling experiment for Consumers Power and Detroit Edison is tied to solicitations for new capacity, conducted through a competitive bidding process with requests for proposals. Without a solicitation, nothing happens.
What we have right now is a market with a modicum of competition at the supply end, but still no meaningful choice in distribution. Those few customers with clout (those large enough to dabble in the generation sector) can compete directly against the utility. They can negotiate rate concessions (em benefits that some suggest will come out of the hides of customers that are not so well-heeled. Meanwhile, the utility gets a headstart against the eventual competition.
It's like what they say about gun control: "If monopolies are outlawed, only outlaws will have monopolies."
A couple of months ago I attended a luncheon where Federal Energy Regulatory Commission (FERC) chair Elizabeth Moler was talking about how to make natural gas markets run more smoothly and temper capacity turnback on the pipelines. One idea involved negotiated rates for natural gas pipelines. As proposed by the Interstate Natural Gas Association of America (see, FERC Dkt. Nos. RM95-6-000, RM96-7-000, Jan. 31, 1996), shippers would negotiate transport rates with pipelines. A default rate would serve as a fallback.
Kathy Edwards, a natural gas lawyer (Travis & Gooch, Washington, DC), asked Moler whether that plan would meet the test of the Natural Gas Act, which prohibits rate discrimination by pipelines. Moler answered, in so many words, that as long as the parties remain free to negotiate, the FERC would assume no further need to protect shippers. The default rate would serve, even though, as Edwards has pointed out on other occasions, pipelines can essentially control the default rate by deciding whether to go in for a rate case, and if so, for how much.
That's what we've got now in electric markets. Horse trading masquerades as competition, but not everyone can take part.
John Hanger, a utility commissioner from Pennsylvania, has questioned this trend, most recently in a case involving special discount rates offered by Duquense Light Co. to its largest industrial customers:
"The industrial customers that are receiving these discounts have been able to obtain them because they now have a form of customer choice. These customers can choose to self-generate."
Hanger notes the obvious inequality:
"This limited choice gives industrial customers bargaining power with their existing electric company. The challenge for this Commission is to give all customers choice, not just the lucky few."
And the problem extends beyond price. It affects how the market allocates stranded costs among customers, as Hanger explains:
"When this Commission grants special discounts as we do now, we violate many of the basic principles that most parties agree must govern recovery of stranded investments. . . . First, the customer receiving the discount is bypassing any stranded-investment recovery to the extent of the discount. Second, costs are being shifted to shareholders [or] other ratepayers. Third, not all customers have equal access to competitive rates." (Pa. PUC Dkt. Nos. R-00963610, R-00963591, R-00963621, April 25, 1996).
The Real Issue
When I talked with officials at the Michigan PSC, they confirmed that both Consumers Power and Detroit Edison have yet to offer wheeling service under the five-year experiment, a fact they attribute to the requirement for a capacity solicitation. In fact, the only wheeling agreement approved in Michigan so far involves Wisconsin Electric Power Co., which has received authority to wheel power over the transmission system of Upper Peninsula Power Co. to reach a mine operated by the Copper Range Co. in Ontonagon County.
That was before the politicians intervened.
In January, Michigan Gov. John Engler took recommendations from the Michigan Jobs Commission and forwarded them to the PSC, which in April directed Consumers Power and Detroit Edison to respond with proposals. One of those recommendations urged the PSC to allow wheeling for new industrial or commercial load. Other proposals suggested 1) a specific transmission charge to buy down stranded costs, 2) replacing rate-of-return regulation with price caps for all statewide electric and gas load not subject to retail choice, 3) negotiated bilateral rate contracts for industrial and commercial load, and 4) no PSC mandates for demand-side management, conservation, or "other similar prescriptive regulatory measures."
On May 15, Consumers Power filed wheeling tariffs with the PSC for "new load customers" (em that is, any customer locating new facilities or expanding existing facilities in the company's service territory (em conditioned on reciprocity rights.
Nevertheless, roadblocks still persist for customers that cannot qualify for the "new load" exemption. In March, a Detroit Edison customer (MasoTech Forming Technologies, Inc.) turned to the PSC for help in gaining wheeling rights. Detroit Edison opposed the request, labeling it a customer "complaint" that did not meet procedural requirements.
The case prompted Michigan Commissioner David A. Svanda to question when the wheeling experiment will ever get off the ground:
"Detroit Edison has chosen to focus only on the deficiencies . . . rather than to address the real issue: How and when will one of Detroit Edison's large customers obtain access to, and the benefits of, the evolving electric marketplace?"
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