Even the FERC's own lawyers urge a new rule when a customer leaves a utility that already has too little capacity.

In a brief filed Aug. 18, staff counsel Theresa Burns and Diane Schratwieser urged the Federal Energy Regulatory Commission to rethink its policy on wholesale stranded costs when a customer threatens to leave but the utility is so short of generating capacity that it can easily make up any lost revenues by reallocating the reserves to other native load customers at prevailing, regulated embedded-cost retail rates.

Burns and Schratwieser thus have asked the FERC to modify an order issued July 16 by the commission's own administrative law judge, Judith A. Dowd, concerning the dispute over wholesale stranded costs between the city of Alma, Mich., and Consumers Energy Co. See Docket No. SC97-4-000, July 16, 1999, 88 FERC ¶ 63,002.)

However, the case also raises questions about whether the FERC can award compensation for a utility distribution system that becomes stranded by a municipalization effort.

ALJ Dowd had ordered the city to pay $14.7 million to CECo, representing revenues lost over the period that CECo had a reasonable expectation that it would continue to serve Alma, which decided to leave CECo and form its own municipal utility.

But as FERC lawyers Burns and Schratwieser said in their brief, "Consumers Energy is capacity deficient and hungry for more resources." Under such circumstances, they argued that the FERC should rethink its stranded cost policy and how to measure the utility's expectation that it would continue to serve a customer.

The Clock Running. Judge Dowd chose to follow the FERC's precedent set in the Las Cruces case, that a utility has a reasonable expectation of continuing to serve a customer at the date it commits resources. (See Opinion No. 438, May 26, 1999, 87 FERC ¶ 61,201.)

Thus, for the purpose of calculating how much revenue CECo might lose after the city of Alma formed its own municipal utility, Dowd started the clock running on Jan. 1, 1996, when Alma signed a long-term power purchase agreement with CECo. Dowd continued to measure the hypothetical revenues lost by CECo over 10 years - the same period of time as the utility's planning horizon.

But Burns and Schratwieser noted two key differences between the Alma and Las Cruces cases. First, as they explained, CECo in 1995 (before it signed the contract with Alma) had funded an advocacy group to oppose Alma's bid to "municipalize," undermining its claim the next year that it expected to continue to serve the city:

"Any argument by Consumers Energy that it did not take the threat of municipalization seriously is contradicted by the fact that it spent this much money and employee time to protect less than 1 percent of its load from a municipalization threat. In no other city of this size has Consumers Energy formed a ballot committee."

Second, CECo was capacity-deficient, so that it could readily sell resources previously committed to Alma at high retail prices to its own native load, meaning CECo in effect would lose no revenues immediately from Alma's defection. By starting the clock a year earlier, the two attorneys in effect would have the FERC reduce the stranded-cost award when it reviews the ALJ order. As the two attorneys explained:

"The facts are completely different here. From 1999 to 2001, Consumers Energy's other customers will need to use all the capacity released by Alma's departure. Therefore, the potential for cost-shifting [by taking account of load growth], which concerned the commission in Las Cruces, does not exist here."

Quoting from the record, Burns and Schratwieser saw not so much a stranding as an opportunity: "Consumers Energy will be able to sell all of the released capacity no matter when Alma departs, and at the market price."

A Ridiculous Demand? Consumers Energy filed its own brief Aug. 13, alleging that ALJ Dowd erred by not also considering CECo lost revenues through a stranding of its distribution system, on the grounds that Alma would not connect its new municipal system to any other transmission provider after municipalization. It discounted suggestions by Alma that it might reach some kind of distribution "brokering" or sharing arrangement, either by regulatory order or negotiation.

"The [ALJ] concludes that if Alma built its own distribution system, CECo's distribution facilities would only be uneconomic assets, not stranded as envisioned in Order 888.

"Given that holding, focusing on CECo's Alma distribution system, as the [ALJ] does, for purposes of determining its status and usage after municipalization is an asset-by-asset review of stranded costs inconsistent with the revenues lost formula [in] Order 888."

Consumers Energy, adds Judge Dowd, erred by using only a 10-year period to calculate stranded costs, rather than a 30-year term.

Nevertheless, a group of Alma businesses continues to argue that the utility itself is at fault for any stranded costs by campaigning against Alma's municipalization. In a brief filed Aug. 16, attorneys Clark Hill and Thomas Maler wrote: "It was CECo's demand for a ridiculous $105.6 million [later revised to $56 million] which prevented the city from moving toward in a timely fashion."

They added, "Where Alma does not seek to take anything from CECo except customers - and only those customers which voluntarily choose the municipal utility based on price and service - Alma will not have been the cause of 'stranding' anything of CECO's ¼ this type of conduct by incumbent monopoly utilities is not what the Commission intended when it issued order 888."

Bruce W. Radford is editor-in-chief of Public Utilities Fortnightly.

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