WHETHER YOU CALL IT "DEREGULATION" OR "re-regulation," the promised move to competition does not mean less regulation - at least not any time soon. State public utility commissions appear willing to experiment with market pricing and customer choice, but only under controlled conditions where they can protect certain presumed "public benefits."
Federal Energy Regulatory Commission Chairman James Hoecker, for one, sees the energy sector entering an "era of supervised competition." Speaking last summer in San Francisco before the National Association of Regulatory Utility Commissioners, he offered both carrot and stick in describing what PUCs and utilities could expect during his term. He promised a relaxation - through competitive initiatives, regulatory reform and efforts to "de-monopolize" energy markets - but warned of refining methods used to measure market power.
Hoecker's concern about market power underlies the basic problem: PUCs favor deregulation for industry segments where workable competition seems feasible, but workable competition is not yet evident in most traditionally regulated markets.
A review of leading state PUC decisions from 1997 does not offer any final answers. It is not yet clear how regulators will defer to market forces, avoiding the urge to pick winners and losers, and yet preserve public welfare benefits. For now a new triad of interests has emerged with each group seeking protection: (1) customers, (2) utility shareholders and (3) new market competitors.
Electric Choice: Still an Experiment
In 1997 several states concluded long, arduous investigations and began to set up electric restructuring plans. Some states drew authority from new legislation, while other received support from the courts. In New York for example, a state court turned back challenges to restructuring plans initiated by the commission. %n1%n
Perhaps best known is the California plan, %n2%n which imposed a date certain for the start of retail electric competition. The basic elements of the California plan have been mirrored elsewhere, %n3%n such as in Michigan, New Hampshire, Pennsylvania, Rhode Island and Vermont. Rhode Island, %n4%n for example, has required that the state's utilities divest themselves of generating assets, while Pennsylvania, %n5%n Michigan %n6%n and Nevada %n7%n have considered allowing utilities to recover stranded costs - two conditions present in the California plan. %n8%n Unlike California, however, regulators in these other states have not yet required the formation of a power exchange as a spot market or an independent system operator to referee the transmission system. In some areas (most notably in the northeast states) regional power pools have taken steps toward the formation of an ISO.
But not every state has chosen to follow California's lead to move the entire market to retail choice at one time. Other states such as Idaho, Washington and New York are moving more gingerly, choosing to test the waters first with experimental pilot programs. %n9%n In the typical case, the largest utilities have developed the plans, which then go through a commission-led review and a modification process. Some of these states have already found their programs to need reworking as market conditions and customer preferences are revealed.
GPU Energy, for example, introduced an energy-only pilot program for all customers in Monroe Township, N.J., which the utility had to modify before the year was out. Under the pilot, GPU would have selected an alternative supplier of competitive energy through a bidding process. Eligible customers could then have chosen a new supplier or decided to join other residents as an aggregated group to purchase energy. But according to GPU, no alternate supplier stepped forward to join the program that could guarantee savings for participants. GPU had to alter the program to entice Conectiv Energy, a subsidiary of Delmarva Power and Light Co., to join the pilot as a competitor. GPU said Conectiv agreed to join only if it could set up a multi-tiered rate structure to allow residential customers greater cents-per-kilowatt-hour savings than all other classes. As originally approved, the pilot would have provided equal percentage price reductions to all customer classes.
In approving the changes, the New Jersey board found that a multi-tiered market pricing plan should "allow hard-pressed residential heating customers to reap benefits from the program." %n10%n
Public Benefits: Letting Go of Subsidies?
Beyond taking on new tasks of in-market management, regulators are also determined to retain public policy goals familiar to traditional utility regulation, such as universal service, energy conservation, promotion of renewable resources and discounts or payment assistance for low-income customers. Efforts to continue these programs have emerged in particular in Pennsylvania %n11%n and California. %n12%n
Pennsylvania, for example, ordered electric distribution companies to submit comprehensive multi-year plans for universal service and energy conservation. To maintain universal service, utilities will enroll eligible customers (those with household income at or below 150 percent of federal poverty guidelines) in modified customer assistance programs. The programs will include features such as rate discounts and payments plans based on percentage of income, but must remain "competitively neutral."
In California, the commission set up new "public service programs" to support continuing efforts to maintain energy efficiency and low-income assistance, even as the market moves to competition. Funding for such efforts is provided for through a "nonbypassable surcharge" under the Assembly Bill 1890, the state's primary restructuring legislation. An independent board consisting of regulatory representatives and members of the public will oversee programs designed to privatize its existing energy efficiency efforts. A similar board will oversee the funding and disbursement of public assistance for low-income energy customers.
Elsewhere, regulators are considering portfolio standards, that would require electricity sellers to reserve a portion of the resource mix for renewable energy. Arizona, for example, will require all electricity sellers to maintain a renewable resource portfolio under its proposed rules for introducing retail competition. %n13%n
An Objective View?
The urge to maintain and promote outcomes deemed to be in the public interest has forced PUCs to make judgments on the purpose, intent and efficacy of well-meaning programs, and whether they might work to the advantage of one competitor over another.
In Michigan the commission found that Consumers Power Co. should no longer be required to file integrated resource plans because the information could be used by competitors to create a competitive disadvantage for the utility. Public review and comment on such plans is inconsistent with the competitive industry envisioned for the state, the commission said. %n14%n
The California Public Utilities Commission ruled that two innovative energy-efficiency pilot programs run by Southern California Edison Co. and Southern California Gas Co. might improve energy efficiency in the state, but should not continue beyond the pilot stage. It found that the pilots could create unfair competition in the energy market. %n15%n
In Wisconsin the state commission authorized Wisconsin Electric Power Co. to recover $460,000 for the cost of an advertising program designed to inform ratepayers on issues involved in electric restructuring, but questioned whether the advertisements used by the company represented an "objective viewpoint" on the issues. %n16%n
The unbundling of generation from transmission and distribution naturally forces regulators to draw distinctions in retail markets. In California, the commission barred Pacific Gas and Electric Co. from discounting any part of its current rates, except its distribution charge. The PUC ruled that discounts aimed to avoid bypass of the regulated transmission and distribution network would violate the fundamental goal of its restructuring policy - i.e., promoting competition and separating the merchant function of energy from the delivery function. %n17%n
Unbundling presents another intriguing question: Should PUCs open metering, billing and collection functions to competition?
In California, the PUC unbundled "revenue-cycle services,"deciding that competitive providers of electricity may offer their own consolidated billing, metering and other related services rather than relying on the established electric utilities. But in Pennsylvania, regulators expressed concern over the effect that would have on existing quality of service. Thus, the PUC said that electric distribution utilities must continue to provide certain customer service functions, including consolidated billing and complaint. It also ruled that at least for the time being, allowing distribution companies to continue to control "all physical activity" related to metering would offer the best guarantee of maintaining existing service standards as required under the state restructuring act. %n18%n
Retail Gas Choice: Beware of Price Spikes
While federally inspired reforms such as pipeline rate unbundling and open access transportation requirements have multiplied supply options for large customers, the expansion of customer choice programs into the residential natural gas market is the topic of the day at the state level.
In Ohio, for example, East Ohio Gas Co. %n19%n and Cincinnati Gas and Electric Co. %n20%n promoted new pilot gas programs for smaller customers. Public Service Company of New Mexico launched a major new program to help small-volume customers take advantage of alternate sources of gas supply. %n21%n And in Wyoming, KN Energy Inc. was allowed to expand its year-old retail access pilot, Choice Gas Service Program, after the commission learned that nearly 95 percent of participating customers had saved 7 to 12 percent on their electric bills. %n22%n Other states with new programs include Pennsylvania, Michigan, Florida and New Jersey. %n23%n
A significant issue in opening the retail market concerned utility control over storage facilities and upstream pipeline capacity. This concern was raised in Ohio in late 1996, %n24%n but was met squarely by the East Ohio program, which assigns firm storage and firm pipeline capacity rights to marketers enrolled in the program.
Nevertheless, this emphasis on customer choice for small users coincided in 1997 with a period of extreme volatility in the natural gas market, dampening enthusiasm for market pricing for both consumers and regulators. With prices soaring during the winter heating season, regulators were quick to step in to see what they could do to cushion the effect on the average consumer. They found that the increasing reliance by distribution companies on a spot market, once highlighted as a positive outgrowth of earlier industry reforms, caused price uncertainty for which the average consumer was unprepared. Ironically, in certain cases, any cost savings to be had by residential customers came only from "fixed-price" options offered by suppliers in pilot programs. %n25%n
In June the New York commission directed all gas utilities in the state to file plans to reduce gas cost volatility and to develop alternative gas purchasing mechanisms. It said that due to "perceptions of another long, cold winter" gas prices had increased to levels not experienced since the mid-1980s. The commission ruled that all gas utilities should submit proposals for fixed-price offerings to consumers for the 1997-98 heating season. It also directed gas utilities to review existing gas procurement practices and develop acquisition strategies built both on cash market and financial transactions designed to increase price stability for New York gas consumers. %n26%n
Motivated by many consumer complaints regarding substantial and unexpected increases in consumer bills for natural gas service, the New Mexico Public Utility Commission fined Public Service Company of New Mexico $2.2 million for knowingly understating gas cost data in prior adjustment clause filings to avoid commission review of an ongoing gas price crisis.
For the past several years, PSNM had been "playing Russian roulette with its portfolio strategy," pointing the gun at its customers rather than itself, the commission said. The commission concluded that "simple common sense and accepted business standards of business conduct" should have led the company to pursue methods such as price hedging to limit the risks to ratepayers. %n27%n
Besides encouraging a return to fixed-price transactions and to reform adjustment clause rules, regulators in several states have directed LDCs to experiment with hedging instruments to protect residential ratepayers from winter heating season price swings.
The New Jersey Board of Public Utilities, for instance, authorized a plan by Public Service Electric and Gas Co. to "lock in" the cost of its residential gas supply portfolio for 12 months with fixed-price transactions with gas suppliers and financial hedging instruments. The board found that while the hedging/lock-in plan proposed by the company would risk the opportunity to save ratepayers money if market prices drop, it would adequately protect customers against price run-ups, such as the ones experienced during the past two heating seasons. %n28%n
Local Phone Competition:
Discounts and Mark-ups
While industry restructuring in the long-distance telephone market has been under way for some time, state regulators are just now beginning to launch carefully laid plans to open the local exchange to competition. With the Telecommunications Act of 1996 federal legislators mandated what many states have been preparing for years.
Among other things, the act requires all incumbent local exchange carriers to make network services available to any requesting carrier on an unbundled and non-discriminatory basis. Local exchange carriers are now required to offer their local exchange services to competitors at wholesale, for resale as a retail service. Also, LECs must allow new market entrants the option of buying a variety of the unbundled network elements that make up local telephone service. The task of identifying a fair rate for each network element, as well as the proper overall "discount" for the resale offerings, has occupied regulators at both the federal and state levels during the past year.
In one of the most closely watched cases, the U.S. Court of Appeals for the 8th Circuit ruled that state regulators rather than the Federal Communications Commission have the authority to set rates for unbundled network services. %n29%n The court found the FCC had exceeded its authority in declaring rules for pricing interconnections, unbundled access, resale of services and for transport and termination of telecommunications traffic. %n30%n
Signaling victory over one of the more complex issues underlying the move to competition in the local telephone market, regulators in several states adopted cost-of-service models and settled many technical issues. This victory cleared the way for development of rate plans for unbundled interconnection services offered by incumbent local exchange carriers in their states.
In one case setting rates for unbundled network elements, the Connecticut Department of Public Utility Control endorsed most aspects of the carrier's proposed TSLRIC analysis %n31%n and approved rates based on a 25-percent mark-up above costs indicated in the TSLRIC study to account for joint and common costs. The carrier had proposed rates implying a 35-percent average mark-up, a level which the commission said "may yet be too high in a fully competitive environment." %n32%n
At the same time, significant controversy has emerged concerning the calculation of the proper discount LECs must offer to those new market entrants who choose new market entrants who choose to purchased service at wholesale for resale to local callers.
The Michigan Public Service Commission has ruled that for Ameritech Michigan, the resale discount for bundled retail services should be set at 25.96 percent, if the reseller does not require operator and directory assistance services, but only 19.96 percent if the reseller elects to purchase those services from the carrier.
In that case, the local carrier had asked the commission to prohibit an "illicit form of price arbitrage" described by the LEC as "sham unbundling" - i.e., the combination of unbundled network elements to create an end-to-end local service to undercut the higher rates that might apply under a resale tariff. The commission found that such a scenario was speculative and said that the effect of creating two possible avenues of market entry might serve the public by exerting downward pressures on retail prices for local telephone service. It explained that the pricing advantage cited by the LEC would call attention to excessive retail prices and provide "an impetus for further rate restructuring." %n33%n
The California commission also continued with its plan to encourage competition in the local telephone market. It issued a series of rulings governing services established LECs must offer for resale, restrictions on resale activities and how much wholesale discounts should apply. The commission set the wholesale discount for resale offerings at an interim rate of 17 percent for Pacific Bell and 12 percent for GTE California Inc., the state's two largest local exchange carriers.
Generally, the commission ruled that the local carriers must make all retail telecommunications services available for resale, including new offerings. Notable exceptions included inside wire repair and maintenance services, subsidized "Universal Lifeline" service offered to low-income users, and semipublic payphone service. In addition the LEC must make all telecommunications service promotional offerings available for resale by competitors. Where the promotion includes an offer of free service the LEC must provide the service to the reseller at "a wholesale price of zero." %n34%n
New York and Connecticut also have recently approved the wholesale discount rate that the LECs must apply to existing services when offering them for resale by new local competitors. %n35%n
Phillip S. Cross is a contributing legal editor to Public Utilities Fortnightly.
Antitrust: Oversight at the Courts
FRANCHISE RIGHTS. Portland General Electric Co. can't invoke "state action immunity" to defend its intended division of market into exclusive service territories. Columbia Steel Casting Co., Inc. v. PGE Co., 103 F.3d 1446 (9th Cir.1996).
REFUSAL TO DEAL. State action immunity can't protect PacifiCorp against claims that it refused to sell to and transmit power for resale by co-op. Snake River Valley Elec. Asso. v. PacifiCorp, No. CV 96-038-E-BLM, Apr. 25, 1997 (D.Idaho).
RESOURCE PLANNING. Illinois court turns back attempts to force electric utility to include gas cooling program in state-approved least-cost resource plan. Peoples Gas Light & Coke Co. v. Ill.C.C., 675 N.E.2d 246 (Ill.App.1996). Michigan says state PSC wrongfully interfered with management in modifying a utility's demand-side management plan. Ford Motor Co. V. Mich. PSC, 562 N.W.2d 224 (Mich.App.1997).
1 See Energy Asso. v. N.Y.P.S.C., 653 N.Y.S.2d 502 (N.Y.Sup.). For underlying order see, 168 PUR4th 515 (N.Y.P.S.C.1996).
2 Decision 97-05-040, May 26, 1997, 177 PUR4th 1 (Cal.P.U.C.).
3 Case u-11290, June 5, 1997, 177 PUR4th 201 (Mich.P.S.C.) (requires utilities to offer customer choice to 2 percent of load per year until 2002, when all customers gain choice of suppliers); Order No. 22,514, Feb. 28, 1997, 175 PUR4th 193 (N.H.P.U.C.) (adopts plan to restructure as required by R.S.A. Chap. 374-f. Plan contemplates retail choice by June 30, 1998); Docket No. m-00960890, Jan. 16, 1997, 176 PUR4th 1 (Pa.P.U.C.) (approves rules and guidelines for retail access pilot programs and licensing of competitive generation suppliers); Docket. No. m-00960890, F. 0004, Feb. 13, 1997, 176 PUR4th 25 (Pa.P.U.C.); Re Restructuring of the Elec. Util. Industry in Vermont, 174 PUR4th 409 (Vt.P.S.B.1996) (adopts comprehensive restructuring proposal with direct access by January 1998).
4 Re Narragansett Elec. Co., Docket No. 2515, Sept. 4, 1997 (R.I.P.U.C.); Re Eastern Utilities Association, Docket No. 2514, Sept. 4, 1997 (R.I.P.U.C.) (OK's electric restructuring divestiture plans as state prepares for direct access by July 1998).
5 See also, Re PECO Energy Co., Docket No. r-00973877, May 22, 1997, 177 PUR4th 417 (Pa.P.U.C.) (authorizes recovery of nearly $1.1 billion in stranded costs and transition expenses out of total claim of some $2.4 billion).
6 Re Consumers Energy Co. et al., Case Nos. u-11290 et al., Oct. 29, 1997 (Mich. P.S.C.) (defers decision on recovery of stranded costs, sets rates and conditions of service for customers choosing direct access).
7 Docket No. 95-9022, Mar. 10, 1997 (Nev.P.S.C.) (PSC proposes rebuttable presumption favoring full recovery of all stranded costs for Nevada utilities).
8 Re PG&E, Decision 97-09-046, a.96-11-020, Sept. 3, 1997 (Cal.P.U.C.); Re So. Calif. Ed. Co., Decision 97- 09-049, a.96-11-046, Sept. 3, 1997 (Cal.P.U.C.).
9 See also, Re Idaho Power Co., Case No. ipc-e-96-25, Order No. 26872, Apr. 7, 1997 (Idaho P.U.C.) (approves market-based pricing tariff); Re Wash. Water Power Co., Order 26884, Apr. 10, 1997, 177 PUR4th 194 (Idaho P.U.C.) (approves direct access pilot program); Re Dairylea Co-op. Inc., Case 96-e-0948, Feb. 12, 1997, 175 PUR4th 428 (N.Y.P.S.C.) (OK's multi-utility retail access pilot program for commercial farms and food processors); Re Dairylea Co-op., Inc., Case 96-e-0948, May 22, 1997, 178 PUR4th 319 (N.Y.P.S.C.); Re PECO Energy Co., Docket p-00971170, Aug. 21, 1997, (Pa.P.U.C.) (approves pilot program).
10 Docket No. eo96120856, Jul. 7, 1997, 179 PUR4th 321 (N.J.B.P.U.).
11 m-00960890, f. 0011, Jul. 11, 1997, 178 PUR4th 508 (Pa.P.U.C.).
12 Decision 97-02-014, Feb. 5, 1997 175 PUR4th 436 (Cal.P.U.C.) (energy efficiency); Decision 97-05-039, May 6, 1997 (Cal.P.U.C.) (low-income assistance).
13 Re Competition in the Provision of Elec. Servs., 175 PUR4th 1 (Ariz.C.C.1996).
14 Case No. u-9172, Jan. 28, 1997, 175 PUR4th 61 (Mich.P.S.C.).
15 Decision 97-08, r. 91-08-003, i. 91-08-002, Aug. 1, 1997 (Cal.P.U.C.). See also, Re Idaho Power Co., Case No. ipc-e-96-22, Order 26753, Jan. 13, 1997 (Idaho P.U.C.).
16 6630-ur-109, Feb. 13, 1997, 175 PUR4th 532 (Wis.P.S.C.).
17 Decision 97-09-047, Sept. 3, 1997 (Cal.P.U.C.).
18 m-00960890, f. 0010, Jul. 11, 1997, 178 PUR4th 469 (Pa.P.U.C.).
19 Case No. 96-1019-ga-ata, Jul. 2, 1997 (Ohio P.U.C.).
20 Case No. 95-656-ga-air, Jul. 2, 1997, 178 PUR4th 451 (Ohio P.U.C.).
21 Case No. 2760, Aug. 18, 1997, 179 PUR4th 406 (N.M.P.U.C.).
22 Re KN Energy, Inc., Docket Nos. 30004-gt-95-37, et al., Apr. 24, 1997, 180 PUR4th 298 (Wyo.P.S.C.). Program was first approved by PSC in early 1996. See, Re KN Energy, Inc., 169 PUR4th 1 (Wyo.P.S.C.1996).
23 Re Pa. PUC v. Nat'l Fuel Gas Distr. Corp., r-00973974, June 12, 1997 (Pa.P.U.C.); Re Pa. PUC v. Columbia Gas of Pa., Inc., r-00973997, June 12, 1997 (Pa.P.U.C.); Re Mich. Consol. Gas Co., Case No. u-11273, Dec. 20, 1996 (Mich.P.S.C.); Re Consumers Power Co., Case No. u-11249, Dec. 20, 1996 (Mich.P.S.C.); Re Peoples Gas Sys. Inc., Docket No. 961236-gu, Order No. psc-96-1515-fof-gu, Dec. 13, 1996 (Fla.P.S.C.); Re Pub. Serv. Elec. & Gas Co., BPU Docket No. gt96080619, Apr. 21, 1997 177 PUR4th 60 (N.J.B.P.U.).
24 See, Re Cincinnati Gas & Elec. Co., Case No. 95-656-ga-air, Dec. 12, 1996 (Ohio P.U.C.) (The PUC had found that restrictions on the ability of a marketer to arrange for upstream transportation and storage could hinder development of realistic competition.)
25 Re KN Energy, Inc., Docket Nos. 30004-gt-95-37, et al., Apr. 24, 1997, 180 PUR4th 298 (Wyo.P.S.C.).
26 Case 97-g-0600, Jun. 5, 1997 (N.Y.P.S.C.).
27 Case 2752, Feb. 13, 1997, 175 PUR4th 393 (N.M.P.S.C.); Case No. 2774, Jun. 27, 1997 (N.M.P.U.C.). See also, Order psc-97-0216-fof-gu, Feb. 24, 1997, 176 PUR4th 314 (Fla.P.S.C.); Docket 97-noi-1, Mar. 24, 1997 (Ill.C.C.); Re N.C. Nat. Gas Corp., Docket No. g-21, Sub 355, Jun. 13, 1997 (N.C.U.C.).
28 Docket No. gr96070554, Jul. 30, 1997, 179 PUR4th 326 (N.J.B.P.U.); See also, Re Roanoke Gas Co., Case No. pue970420, Jul. 24, 1997, 179 PUR4th 364 (Va.S.C.C.).
29 Iowa Utils. Bd. v. FCC, No. 96-3321, Jul. 18, 1997, 120 F.3d 753 (8th Cir.).
30 The FCC had required prices based on "total element long-run incremental cost" (TELRIC), along with a reasonable allocation of forward-looking common costs.
31 " Total Service Long-run Incremental Cost," a variant of the TELRIC method.
32 Re So. New Engl. Tel. Co., Docket 96-09-22, Apr. 16, 1997, 177 PUR4th 340 (Conn.D.P.U.C.). See also Re AT&T Communications of N.Y., Inc., et al., Opin. 97-2, Apr. 1, 1997, 177 PUR4th 110 (N.Y.P.S.C.).
33 Case No. u-11280, Jul. 14, 1997 (Mich.P.S.C.).
34 Decision 97-08-059, r.95-04-043, i.95-04-044, Aug. 1, 1997 (Cal.P.S.C.) See also, Docket No. 96-01331, Jan. 17, 1997 (Tenn.Reg.Auth.).
35 See Re AT&T Communications of N.Y., Inc., 173 PUR4th 274 (N.Y.P.S.C.1996); Re So. New Engl. Tel. Co., Docket No. 95-06-17, Mar. 25, 1997 (Conn.D.P.U.C.).
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