A retiree from Kansas writes the FERC to ask why it lets utilities "punish" their customers.

When senior citizens with time on their hands start taking an interest in utility regulation, you just know that's big trouble for bureaucrats. Ask James Hoecker, chairman of the U.S. Federal Energy Regulatory Commission.

Last month Hoecker opened his email box to find a short message from one Hersch Davis, a retiree from Wichita, Kan. Davis wrote the chairman on Sept. 8 to ask him why he lets utilities foist high rates on some customers without any rhyme or reason - but spare others simply because of where they live. Isn't that redlining?

In his email to Hoecker, Davis complains of high electric rates in some parts of Kansas - a disparity made even more glaring by the upcoming "Westar" merger. That deal would combine Western Resources with Kansas City Power & Light Co., but would lock in high rates for Wichita residents - prices much higher than in Topeka or Kansas City. Why, you ask? It's all because Wichita takes service from Kansas Gas & Electric, which invested heavily in the high-cost Wolf Creek nuclear plant before it was taken over by Western Resources in 1991 and reorganized as a wholly owned subsidiary.

Today, however, KGE has no employees to call its own. It is operated by employees of Western Resources. And the Westar merger would run the combined KGE/KPL/KCP&L properties as a single integrated system, providing even less reason to segregate costs incurred more than a decade ago by a then-independent KGE utility. Yet the Westar deal would leave Wichita residents living in the past, forced to continue to pay for the Wolf Creek misstep, even while handing over any surplus capacity from costly investment to the holding company, at bargain basement rates set at less than arm's length, according to some.

Moreover, in its order of last month approving the Westar merger, the Kansas Corporation Commission froze rates at current levels for four years but did nothing to lessen the rate disparity. It attributed the disparity to "cost of service factors" existing before 1991. As the KCC explained, its approval plan for the Westar merger "does not present an opportunity to directly address differences in rates." (Docket No. 97-WSRE-676-MER, Sept. 28, 1999.)

But I digress. Instead, listen to Hersch Davis. I could never hope to explain it as beautifully as he did in his email to the FERC chairman:

"I understand their argument that the old KG&E built Wolf Creek nuclear plant with over capacity [and] is charging a penalty to local users for that. ¼ What I do not understand is when summer comes and I use my air conditioning and in turn use some of that so-called 'over capacity,' I am charged an additional premium or penalty.

"How much must I be ¼ punished ¼ before the [Kansas utility commission] and the FERC take appropriate action? ¼ Where is the governor while this is going on?"

ON PURELY LEGAL GROUNDS, HOECKER GETS OFF THE HOOK. The answer is simple: The FERC cannot set retail rates for consumers. It has no jurisdiction. How convenient.

Under its current policy, issued in 1996 in Order 592, the FERC examines monopoly market power in wholesale markets before approving an electric utility merger, but typically chooses not to sully its hands with such mundane matters as the real price that consumers pay.

In April 1997, for example, when it OK'd the merger (later abandoned) between Baltimore Gas & Electric and Potomac Electric Power Co., the FERC discounted testimony by its own staff witness David Patton, who had identified possible distortions in retail markets under a future regime of direct access for the BG&E or PEPCO service territories. It said it would leave it to regulators in Maryland to mull over retail market effects, but the Maryland PSC then dodged the issue.

According to attorney Sara Schotland, representing ELCON (the Electricity Consumers Resource Council), the Maryland commission "flouted its implicit commitment" to examine retail market power. (And hasn't Kansas now done the same thing?) That omission, she argued, showed why the feds should step in: "FERC cannot duck the effect of this or other mergers on retail markets given its statutory mandate to assure that mergers are consistent with the public interest."

WILL THE FERC TAKE ACTION THIS TIME, despite its apparent lack of retail jurisdiction? If not, who else will?

Back in 1976, in FPC v. Conway, the U.S. Supreme Court said the old Federal Power Commission could regulate at the interface of retail and wholesale markets - that it could ease a wholesale price squeeze threatening municipal utilities when they sell at retail. But that idea suffered a setback earlier this year, in Northern States Power v. FERC, when the 8th Circuit nixed the FERC's attempt to equalize the effect of rules for transmission line relief (TLR) between interchange (wholesale) and native-load (retail) transactions, saying Conway didn't apply, since the FERC's TLR remedy fell on the retail side of the interface.

Mindful of the commission precedent in merger cases against reviewing retail matters, Wichita has now opened a second front. In its ingenious new complaint filed on Sept. 7 (Docket No. EL99-90-000) the city argues rather convincingly that Western Resources has violated a capacity sharing agreement by taking surplus Wolf Creek (and other) capacity from its KGE subsidiary at less than embedded cost. With this argument, Wichita asks the FERC not to adjust retail rates so much as to equalize wholesale power allotments among divisions within the same interstate operating system.

When I asked Hersch Davis about all of this, he said he had never worked for a utility company, or studied utility regulation, but that he counted Wichita Mayor Bob Knight "as a personal friend of mine." He adds: "I am sure there are many other reasons why some regulatory agency should be scratching their heads, but this is one of the most obvious."

Does Jim Hoecker read his mail?

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