CROSS THE COUNTRY, CRITICISM RISES FROM INVESTOR-owned utilities as public power agencies are drawn into regional or national markets through power pools and the geographic expansion of power marketing activities. Whether these agencies are seen as federally funded or just indirectly subsidized, the complaints remain the same: tax advantages, no reciprocity, exemptions from regulation.
Who really has power over the power? Do public power agencies enjoy an advantage, as private industry claims? Can they offer cheaper rates on different terms, and could those rates destabilize spot markets or power pools?
These questions are heating up in three of the country's major regions. The stand-offs involve the Northwest and Bonneville Power Administration, the Southeast with the Tennessee Valley Authority and the Southwest with the Salt River Project. Two recent rulings highlight the nature of the conflict. First a federal district judge was asked to interpret the meaning of the TVA "fence." Second, the Federal Energy Regulatory Commission faced allegations of BPA market power in the California Power Exchange. Now comes a letter to the Treasury Department and the Office of Management and Budget, complaining about an alleged diversion of electricity from federal projects to private coffers.
At the same time, special advisory committees have emerged, such as the Bonneville Cost Management Committee (created by the Northwest Power Planning Council), and the Tennessee Valley Electric System Advisory Committee (created by the Department of Energy). Their reports, issued this spring, examine both internal cost management and larger questions of overall mission.
Particular questions address TVA's service boundary, or the fence, created in 1959 when Congress allowed TVA to issue debt to finance its own operations from electric revenues, and "the anti-cherry-picking" rule added in section 212j of the Energy Policy Act of 1992.
The TVA fence bars any "sale or delivery of power" that would make TVA or any of its distributors, directly or indirectly, a "source of supply" outside the area that TVA served on July 1, 1957. TVA enjoys an important exemption, however: it may conduct power exchanges with power generating companies outside the fence with which it conducted such arrangements on the July 1957 cutoff date. On the other hand, the anti-cherry-picking rule exempts TVA from any requirement to transport power from outside the fence into its service area in competition with the power TVA already generates. This exemption to open access will expire on its own terms if the fence should come down. As noted in the DOE report, TVA now seeks authority to sell power at wholesale without restriction. Such authority would appear to complement TVA's core business, since most of its current load is wholesale. TVA serves only a few large industrial retail customers and offers retail service in Kingsport, Tenn. Nevertheless, it claims authority to set retail rates for the distribution utilities that it serves, such as the municipal utilities in Memphis, Nashville, Knoxville and Chattanooga.
At BPA, questions focus on internal costs for research and funding of renewable energy projects, along with possible staff cuts for administrative and power marketing activities. But controversy also attends BPA's participation in the California PX. Does BPA's low-cost hydro resources give it undue market power over commodity prices in the California pool? On the other side, transmission congestion pricing under the California Independent System Operator agreement lies at odds with BPA's traditional pancaked transmission rates, forcing cost shifts in rates among BPA customers, producing winners and losers.
If arguments from both sides are any indication, some of these issues won't be resolved without a fight. Already Tucson Electric Power Co. has voiced extreme opposition to activities of the Salt River Project, particularly the use of SRP's New West Energy subsidiary, incorporated May 1 last year.
A Subsidiary for a Private Use?
"Electricity generated by federal projects is being sold by the Salt River Project, operator of a federal reclamation project in Arizona, on a competitive, retail basis in California's private electricity market," writes Thomas Jensen, attorney for Tucson Electric Power Co., in a letter to the Department of the Treasury and to the Executive Office of Management and Budget.
The letter, dated Feb. 18, claims SRP is acting through its wholly owned, for-profit subsidiary, New West Energy.
"As active participants in California and other state energy markets, we are concerned because retail sales of low-cost federal power distort private markets," Jensen writes, adding, "We believe that the sales are not in accord with federal reclamation, power marketing and property management law."
In a letter to the Department of the Interior and the Department of Energy, Jensen notes SRP "is engaging in private retail sales of federal power" and that profits from these sales are going to SRP's shareholders, not the U.S. Jensen, on behalf of TEP, requested that the Department of the Interior and the Department of Energy:
• Direct SRP to stop any transfer of hydro, fossil and nuclear power that is part of SRP, or the transfer of other federal power to New West Energy and any sales of such power by the subsidiary.
• Require SRP to notify New West Energy's current and potential customers that its legal authority to sell power on a competitive retail basis is in doubt and under federal review.
• Review SRP's records, including its affiliate transactions; determine what financial arrangements SRP and New West Energy have made with Mobil and other customers; determine whether SRP or its subsidiary are leveraging their position in the market with guarantees based on federally owned assets; and determine what disclosures of ownership New West Energy may have offered.
• Require SRP, if it wishes to compete in retail markets with federal assets and if its actions are legal and in the public interest, to offer its "surplus" power at public auction or auction off its generation assets. Profits from those sales should go to federal public purposes, Jensen writes.
The SRP claims it isn't violating any laws.
"Let us be very clear about TEP's false and irresponsible accusations about SRP's purchases of preference power," writes Kenneth Sundlof Jr., SRP counsel, in response. "The benefits of preference power do not flow through SRP to its subsidiary, New West Energy, and do not flow to New West Energy's customers in California. SRP is in full compliance."
In a March 2 letter to the Department of the Treasury, SRP General Manager Richard Silverman explains the federal power agency's position.
"While voluntarily opting to treat New West Energy as a taxpaying entity, SRP has also been careful to assure that New West Energy is not a private business user of bond-financed assets," Silverman writes. "SRP is not selling power to New West Energy from the tax-exempt financed portions of its generating system.
"SRP has, and will, carefully monitor projected sales to New West Energy, as well as any other power marketing arrangements, to ensure that no private business use of the tax-exempt bond-financed portion of the system is expected."
Charles Bayless, president of TEP parent Unisource Energy, compares the situation with New Energy Ventures, or NEV, its own subsidiary. "Okay, so you have a tax-paying entity. That still, in our mind, doesn't address the question."
"With our [TEP's] little subsidiary, New Energy Ventures, the California utilities rightfully say NEV will be billing their customers for everything: distribution, generation and transmission," the CEO says. "Then we will turn around and pay Southern California Edison, or PG&E, or whoever, for the transmission and the distribution. So we're going to be holding millions, tens of millions, of dollars of their money. And so they're saying, 'New Energy Ventures, you're a very small company. You've got to put up a bond under the affiliate interest rules under Arizona.'
"But we cannot guarantee NEV¼ It's illegal."
SRP, he says, doesn't operate under these rules. "They can just go in and guarantee their subsidiary," Bayless says. "So we're out paying millions for bonds. And they aren't."
As explained by an SRP media spokesman, Salt River is essentially an agricultural improvement district, set up under federal reclamation law, "owned" by landowners within its water utility service territory. It's governing board and council are elected on a the basis of "one acre, one vote." SRP has voluntarily complied with FERC Orders 888 and 889, but remains exempt from regulation by the Arizona Corporation Commission, including rules governing utility marketing affiliates, though it provides electric service to much of the Phoenix region.
Bayless isn't through, however. He notes that TEP has to earn an equity rate of return. "They don't," he says. "And¼ I'm not directing these comments to SRP - there's always room for mischief here. Say you set up a tax-paying subsidiary. SRP goes out and buys power for one cent. Now, let's say the California market is three cents. They buy it at one. They turn around and sell it to New West for three. New West then sells it for three. And New West says, 'Oh well, we pay taxes on our income.' Well, they don't have any income. They had all the income hit the tax-free entity. So effectively, the tax-free entity is out attacking the market, but still shielding all the income by taking all the gain."
In Washington, D.C., the issues are under review by different administrative teams. Jensen describes the group of attorneys from DOI and DOE as "basically doing 'an archeological dig' on this thing." He says there has been no written announcement on a deadline for resolving the problems.
Dominant in the California Pool?
As of April 1, the Bonneville Power Administration in Portland, Ore., began selling power into the California pool. Arguably, its task was made easier after the Federal Energy Regulatory Commission refused to approve a special rule that would have restricted the price at which BPA could sell electricity into the California PX.
In its order of July 30, 1997, the FERC rejected the so-called "Special Settlement Rule," proposed by the trustee for the ISO and PX. The rule would have placed a ceiling on certain power sales through the PX, linked to comparable bilateral sales at arm's length. The rule was proposed ostensibly to deal with the potential exercise of market power by large sellers - and the BPA in particular.
In a March 31, 1997 letter to FERC, the PX had explained its proposal. It would apply "to any entity within the Western Systems Coordinating Council that actually supplies 24 percent or more of the non must-take or must-run energy sold through the PX in a given hour, either through direct deliveries to the PX or through sales to intermediaries of energy which the intermediary then resells through the PX."
Several northwest entities, including Public Power Council, PacifiCorp, Public Generating Pool, Direct Service Industrial Customers and BPA objected to the rule.
FERC rejected it and required the PX to eliminate that section of the tariff. "The provision is primarily targeted at BPA," FERC writes. "And the Commission has addressed BPA's rates, including the rates that would be applicable to BPA sales through the PX, in other dockets¼" Docket Nos. ec96-19-003, et al., July 30, 1997, 80 FERC ¶ 61,128.
According to C.A. Ball, BPA spokeswoman, the California exchange thought BPA had the market power due to its low-cost hydropower.
"They were claiming that we had market power," she said. "We have said we have no market power. We sell our power at cost-based rates. We don't even make a profit. BPA is a participant. We're a bidder. It's not a BPA power pool. It's a California power pool."
Steve Oliver, BPA's bulk power and marketing manager, adds that there is no advantage for BPA.
"The price is all set to a marginal clearing price offered to everybody that bids," he says. "The way the bidding is set up, it's a West Coast-wide opportunity for all parties to bid in¼ we used to market directly to the investor-owned utilities in California. The system set up now is fairly similar.
"All power is bid in and taken. We're given a price based on market-current price. It's a blind bid. We bid in with everybody else - there were approximately 40 companies that signed the power exchange participation agreement."
Score one for BPA on commodity sales. Regarding transmission, however, BPA has proven unsuccessful in swaying the FERC or the power exchange from the latter's zonal pricing plan to handle congestion, a policy that could end up shifting costs among BPA's customers.
On July 30, 1997, in the same order in which it rejected the "Special Settlement Rule" for BPA, the FERC approved in principle a two-part transmission pricing regime for the California ISO and PX. That two-part rate included usage charge (based upon adjustment bids by scheduling coordinators) and a congestion charge to account for constraints on interfaces between transmission zones. The congestion fee was to reflect the marginal value on the congested interface, defined in terms of hypothetical redispatch costs that would be incurred to boost the scheduling limit for the interface by some small incremental amount.
According to Jim Kritikson, PX scheduling director, the ISO conducts an auction for use of the transmission in which everyone, including the owner, bids for use of the capacity. The bids for use of the transmission capacity are provided through a complex process of adjustment bids associated with initial preferred schedules submitted by each auction participant.
The initial preferred schedules indicate how the generators would be scheduled to supply the energy they have sold in an energy auction, and where and how the buyers of the energy would like to take delivery. The transmission auction awards use of the transmission to the highest bidders. The lowest winning bid establishes the auction price for winning bidders.
The auction, price, or congestion charge, as it is also called, produces a congestion revenue for the ISO. The revenues collected by the ISO in this manner are credited against the transmission rate base revenue requirement of the transmission owner.
As the FERC observed, the congestion pricing regime was expected to create incentives to locate new load on the low-cost (export) side of transmission constraints, and new generation on the high-cost (import) side. But a more important question was: What would congestion pricing mean for BPA customers?
The FERC gave final approval for the California ISO and PX last fall, but not before at least one BPA customer, San Francisco's Bay Area Rapid Transit, had sought unsuccessfully to win an exemption from paying congestion fees for transmission.
In fact, several municipal customers had questioned congestion pricing. The cities of Santa Clara, Redding and Palo Alto argued that congestion pricing could create "improper cost shifts among customer groups." BART had argued that it had entered into long-term take-or-pay contracts for preference power from BPA in reliance on transmission pricing based on average embedded costs. It added that California restructuring law (Cal. Public Utilities Code Sec. 701.8) gave it a special protected status as well. The FERC, however, would not budge. It made room for further negotiation, but stuck to its congestion pricing idea: "Rather than order the ISO to conform its tariff to fit BPA's historical practices, [we support] the ongoing collaborative process as the best alternative." 81 FERC ¶ 61,122, Oct. 30, 1997.
Lately the PX has continued to fine-tune its congestion pricing model. Recently the FERC approved amendments filed on March 18 to address a "potential gaming problem" that the PX said could occur in applying the ISO default usage charge to PX market-clearing prices. See 82 FERC ¶ 61,328, March 30, 1998.
Spokesman Ball notes that BPA has eyed other power pools with mixed results. According to Ball, BPA joined the Alberta, Canada, power pool in March 1997, but isn't active because it's too expensive.
And recently BPA's expected participation in the Northwest project, IndeGo, was cut short due to the entire project falling through. "'IndeGo' is 'IndeGone,' as we say here,"according to Dulcy Mahar, another BPA spokeswoman. "It died because of what it would cost versus the benefits." She added that the Northwest is looking at a smaller version of an ISO. In 1997, the four Northwest states' governors asked the Northwest Power Planning Council to set up a committee to review the Bonneville Power Administration and its financial situation. The 11-person Bonneville Cost Review Management Committee included representatives from NPPC and BPA, and five corporate financial experts. According to committee chairman Todd Maddock of Idaho, who also serves on the NPPC, there were some challenging recommendations made, such as reducing personnel and improving coordination with other federal agencies that operate the Columbia hydro-system. Other issues include addressing Washington public power system debt and the operation of nuclear plants there.
In March, the committee submitted its recommendation summary to BPA's administrator and the four northwest states' governors. (See sidebar, "Saving BPA.")
According to Mahar, the BPA was planning to allow a month for comments on recommendations. The BPA's new director, Judi Johanson, will oversee decisions on implementing recommendations.
"But not all recommendations can be implemented without legislation," Mahar stresses. The BPA has several upcoming rate cases on power supply contracts, which means some cost recommendation issues must be addressed by the fall.
TVA: A Hole in the Fence?
Meanwhile, in the Southeast, the DOE received in April the Tennessee Valley Electric System Advisory Committee's final report on TVA's future role in the competitive electric industry.
Unlike the Bonneville Cost Review Committee, which was teamed with financial experts, the TVA advisory committee was made up of TVA representatives, TVA competitors and consumer groups who generally pose adversarial positions toward TVA.
According Barbara Martocci, TVA spokeswoman, issues addressed include: transmission and wholesale rate jurisdiction; antitrust and labor status; tax status; retail regulation; TVA's mission; the fence and anti-cherry-picking provisions; wholesale power contracts; the retail/wholesale position of TVA; and stranded costs. What makes the task more complicated, is that TVA's prime mission remains flood control and navigation on the Tennessee River, with power production as a third priority.
"Basically we don't believe that the fence that limits TVA sales ought to come down unless and until TVA is on a competitive equal footing with everybody else in the region," says Bruce Edelston, resource policy and planning director for Georgia Power. "That means several things: First of all is their tax-exempt status. Second is the implicit backing of the federal government of all of their debt.
"Third is their preference for federal hydropower. And fourth is the fact that they have long-term contracts with their distributors which would preclude anybody else from selling inside the fence, at least until those contracts are up. And most of those run, I think, through 2007. If the fence comes down, it has to come down both ways."
Bill Museler, TVA executive vice president of transmission and power supply, and a member of the advisory committee, objects to that perspective, partially based on history.
"One of the reasons we were created was as a counterbalance to these huge private entities that were monopolizing the business," he says. "There is a role for federal public power agencies for many of the same reasons that they were created¼ there do need to be changes for federal power agencies like TVA to be able to compete in the new energy market. We can't do that the way we are because there really are some things that mitigate against a fair playing field."
When asked about removing fence and anti-cherry-picking provisions even if retail competition is delayed, Museler says TVA doesn't "disagree because it's going to hurt TVA."
"What that does is increase the stranded investment in the valley, which would mean that ratepayers would pay a higher stranded investment."
The authority has been grappling with fence issues for some time. In 1996, the TVA got its hand slapped by a U.S. District Court of Alabama for contracting with Louisville Gas & Electric Co. to sell power through that company's subsidiary, Louisville G&E Power Marketing Inc. (See Alabama Pwr. Co. v. TVA, 948 F. Supp. 1010 [N.D. Ala. 1996].) In its final judgment, the court declared the contract "is illegal and void under the provisions of the TVA Act, 16 U.S.C. 831 et seq."
The court's ruling left one question open: Was the sale objectionable because the subsidiary LG&E Power Marketing did not exist in 1957, when the law preserved certain grandfathering rights for TVA for power "exchanges," or because the transaction was more like a power export than a traditional exchange?
Commenting on the outcome, Museler says "the court made a decision. We interpreted the law to say that if they were a subsidiary of the same company we were allowed to sell to, we should be allowed to sell to the subsidiary as well. The court said 'no,' even though it's part of the same holding company, that doesn't mean by extension you can sell to that subsidiary."
Nevertheless, the court's ruling left room for other interpretations. On the one hand, the judge hung his hat on corporate structure: "The very fact that TVA continues to sell to LG&E [the parent] under one contract and to LPM [the subsidiary] under another contract suggests that the two contracts are not with the same 'organization.' Whatever the holding company and its subsidiaries are now, they are not the same 'organization' which existed in 1957."
But the judge also questioned the motive for the sale: "The defendants' [TVA] answer seems to be that TVA is not 'selling' power to LPM but is 'exchanging' power with LPM. This seems to be another 'stretch' of realism."
Can the DOE offer anything to solve these problems in its draft legislation for the Clinton Administration?
Leon Lowery, assistant on special assignment to the deputy secretary of energy, explains: "We've drafted legislation here at the department. It's out for inter-agency review now. We have already put together a comprehensive plan that took a year or more through the interagency task force and this is legislative language to implement that plan.
"Whether we will send the legislative language to the Hill or not is a decision that hasn't been made yet. There's no timetable for the conclusions of that¼ When you're trying to pass legislation to bring electric competition to the entire country, that's the primary objective."
Lowery explains that interagency review means input from numerous other agencies including the National Economic Council, Council on Environmental Quality, the EPA and the Department of Defense, the largest buyer of electric power.
These are controversial environmental issues, very complicated technical issues and tax issues he says. "In our plan, we have a space-holder that says that this TVA process is going on."
When we get through with the bigger bill - that's the highest priority - then we can turn and address the TVA issues."
Courtney Barry is a freelance writer in Austin, Texas. She formerly worked for the general counsel of the Public Utility Commission of Texas.
Articles found on this page are available to Internet subscribers only. For more information about obtaining a username and password, please call our Customer Service Department at 1-800-368-5001.