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Fortnightly
By Brian Gish Electric Industry Restructuring: The States Forge Ahead
October 01, 1995About 30 states have begun \(em
either through the legislature, the utility commission, informal working groups, or some combination of these \(em to consider issues such as retail wheeling, unbundled utility structures, and alternative rate regulation.1 California's "Blue Book" hearings have drawn the most attention, but significant efforts are also underway elsewhere. Although each state is approaching the issue in its own way, successful industry restructuring will ultimately require coordination across state lines. Ongoing investigations in various states offer a glimpse of restructuring principles in their genesis.
New York
New York's current activities grew out of a previous Public Service Commission (PSC) general inquiry that produced guidelines in July 1994, permitting electric utilities to offer discounted rates to contestable customers (Re Competitive Opportunities Available to Customers of Electric and Gas Service, Case 93-M-0229, 154 PUR4th 19 (1994)).2 In August 1994, the PSC initiated a second phase of that proceeding "to identify regulatory and ratemaking practices that will assist in the transition to a more competitive electric industry" (154 PUR4th 35). To that end, the PSC assigned an Administrative Law Judge (ALJ) to develop general principles that would form the basis for movement to a more competitive marketplace. Throughout the Fall of 1994, various concerned parties submitted proposals and attended meetings, but failed to reach consensus. In December, the PSC put forth for public comment a set of nine proposed
principles (In the Matter of Competitive Opportunities Regarding Electric Service, Case 94-E-0952, 158 PUR4th 252).
Approved in final form in June 1995, the Principles to Guide the Transition to Competition for Electric Service call for increased customer choice and pricing options, continued commitment to environmental protection and energy efficiency, and performance-based regulation for those parts of the industry that remain monopolies (161 PUR 4th, June 7, 1995). The principles also state that utilities should have a "reasonable opportunity to recover prudent and verifiable expenditures and commitments made pursuant to their legal obligations," and encourage "respect for the reasonable expectations" of IPPs. The most controversial principle originally declared that vertically integrated utilities were "incompatible" with effective competition, but was revised to state that the vertically integrated structure "must be thoroughly examined to ensure that it does not impede or obstruct" the development of effective competition.
The June order noted that various restructuring models were under discussion, and declared that the PSC was "particularly interested in the continuation of the collaborative process, which has great potential to lead to innovative public policy solutions." Expressing a desire to move expeditiously, the PSC requested a recommended decision or report on the proposed models by the end of this year.
Rhode Island
Restructuring efforts began in Rhode Island in June 1994, when large industrial consumers petitioned the state's Division of Public Utilities and Carriers (Division), a staff advocacy body for ratepayers, to investigate bundled rates and retail competition. A docket in July 1994 included the state's utilities, environmental groups, consumer groups, and a cogenerators association (Dkt. No. D-94-9). In January 1995, the various parties decided to engage in a "cooperative collaborative process." After open meetings and settlement discussions, the "Collaborative" submitted a consensus document, Set of Interdependent Principles, to the Public Utilities Commission (PUC) on May 12. Its 17 principles were signed by representatives of the Division, utilities, consumer groups, environmental groups, and cogenerators, and after some revisions, supported by the state's Attorney General. The principles were intended to form the basis for a more detailed restructuring proposal:
s Customers should have the option to specify different levels of firmness and power quality, and should be held accountable for their specifications.
s Existing utility commitments arising from the regulatory compact should be honored, and contracts with IPPs and QFs are enforceable in accordance with their terms.
s Utilities should recover legitimate and verifiable stranded costs, but they must mitigate these costs on a net basis by taking into account both above- and below-market resources. Charges to recover stranded costs should apply only to customers within a utility's retail franchise territory.
s Generation must be functionally separated from transmission and distribution, and subjected to increased competition.
s Each competitor's fossil-fueled power plants must meet today's emissions standards for new units on an overall basis through retirements, replacements, controls, or offsets.
s Cost-effective and regulator-approved DSM programs should continue at least during transition, and their costs be included in nonbypassable, nondiscriminatory, appropriately structured charges.
s Costs to support clean and renewable resources, at least during transition, should be included in nonbypassable, nondiscriminatory, appropriately structured charges.
On July 20, 1995, in restructuring Docket 2320, the PUC accepted all the principles, except that which allowed cost recovery of clean and renewable energy resources. The PUC expressed concern that special support for clean and renewable resources would undermine the goals of lower electric rates and reliance on market forces. Although the Collaborative reiterated its support for this principle, the PUC stuck to its decision In re Electric Industry Restructuring, Dkt. 2320, Aug. 16, 1995 (R.I. P.U.C.) It asked the Collaborative to prepare a more detailed restructuring proposal and submit a progress report by February 1, 1996. The Collaborative has agreed to proceed on this basis.
While this Collaborative activity was going on, the Rhode Island legislature, to the surprise of many, passed bills at the end of June to authorize the state's Port Authority to solicit for power purchases and to supply power to any industrial customer in the state. The Governor eventually vetoed the legislation, but only after the state's largest investor-owned utility (IOU), Narragansett Electric, agreed to cut industrial rates and to file a proposal by June 1, 1996, to allow large power customers in the state open access to the retail distribution system.
Massachusetts
In February the Massachusetts Department of Public Utilities (DPU) opened its inquiry into electric restructuring, posing a detailed list of 43 issues for public comment (Re Electric Industry Restructuring, D.P.U. 95-30, Feb. 10, 1995, 160 PUR4th 76). In June, about 20 diverse parties participated in a mediated discussion to reach agreement on a set of core principles to guide industry restructuring in the state. The result, submitted to the DPU on July 17 by a broad coalition, was 18 Interdependent Principles intended to provide a "framework" for utility-specific restructuring negotiations. Original signatories included the state's Office of Attorney General and the Division of Energy Resources; five of the eight IOUs regulated by the state; and groups representing business consumers, environmentalists, and nonutility generators. These Interdependent Principles are fundamentally the same as those submitted to the Rhode Island PUC, with some language differences.
On August 16, the DPU issued a decision in the restructuring docket, concluding that it had the legal authority to order the unbundling of electric rates, and that such unbundling was necessary to provide accurate price signals (Order, D.P.U. 95-30, Aug. 16, 1995). As to stranded costs, the DPU ruled that although the record did not establish a clear legal entitlement to recover stranded costs, "responsible policy must provide electric utilities a reasonable opportunity to recover net, nonmitigatable stranded costs during the transition period." Again, the DPU found that it had the legal authority to implement this stranded-cost policy.
While not specifically adopting the Interdependent Principles, the DPU outlined a set of broad principles consistent with those submitted by the coalition. Seven of these articulated the basic elements of the future industry structure, including the broadest possible customer choice; functionally separated generation, transmission, and distribution services; full and fair competition in generation markets; and support for the goals of environmental regulation. Five additional principles addressing the transition included pledges to honor existing commitments, unbundle rates, and maintain DSM programs. The DPU ordered each state IOU to file restructuring proposals that include sample rates for unbundled generation, transmission, distribution, and ancillary services, as well as a proposed stranded-cost charge. The first three IOU proposals are due by mid-February 1996.
Wisconsin
Wisconsin regulators credit their progressive regulation for the state's relatively low electric rates. To ensure that the state retains its competitive edge, the Wisconsin PSC initiated an investigation last year to examine whether the electric industry's "fundamental structural and regulatory underpinnings" should be changed (Re Electric Utility Company Structure and Regulation, Dkt. 05-EI-114, Sept. 8, 1994, 154 PUR4th 509). Forty-seven parties filed comments in that docket last November.
In January the PSC outlined the objectives and principles that will guide its investigation. The objectives are to create a system "that sends accurate price signals to customers," maximizes "the number and diversity of service offerings," and "provides maximum economic efficiency and environmental stewardship." The principles state that all customer classes should at least be held harmless from any changes, competitive markets are preferred to regulation, and that "regulatory, social, environmental, and financial commitments" made in the past cannot and should not be ignored or discarded in the transition.
The PSC then established a 22-member Advisory Committee, including representatives of diverse
interests, to develop recommended actions. The Advisory Committee decided to address transmission, generation, and distribution issues separately. In May, the Committee submitted an interim report that set forth three transmission system alternatives:
Statewide TransCo. An independent, regulated monopoly that would acquire transmission assets from current owners at embedded cost.
Shared System with Independent Operator. Functionally equivalent to a statewide TransCo, without divesting utilities of facility ownership.
Individually-owned System. Similar to the existing structure, but emphasizing equal access and fair pricing on a regional basis.
In August, the Committee submitted its interim report on generation, which also set forth three alternatives:
Flexible Regulation Model. Existing generation would remain subject to regulation; new generation would be determined through competitive bidding.
Incremental Change Option. Existing generation could remain subject to regulation or be placed in a separate company under contract to the utility, subject to cost-based regulation; new generation would be built by unregulated business entities.
Commercial Model. All generation would be subject to deregulation following a controlled transition period.
The Advisory Committee planned to complete its distribution system recommendations in September, and submit a final consolidated report to the PSC by the end of October, which would allow the PSC to make recommendations to the legislature by the end of December.
The Wisconsin PSC also directed its staff to prepare an environmental impact statement (EIS) as part of the restructuring docket. A draft EIS, released in July, focused on two scenarios considered to define the boundaries of possible action: 1) the status quo alternative, and 2) the "plausible extreme" alternative (which represents the deployment of competitive market forces to the maximum realistic degree). Under the plausible extreme alternative, utilities would divest generation, which would become market driven; a privately owned statewide TransCo would own all transmission as a price-regulated monopoly, and would build all transmission facilities that would provide economic benefits; the distribution system would be owned and operated by a regulated "LineCo"; and retail service would be provided by unregulated "RetailCos." The draft EIS concluded that implementation of the plausible extreme alternative could cause electric prices to fall in the short term, rise in the long term and become more variable and unpredictable; energy conservation and DSM would likely decrease, but load
management would remain stable or increase; increased electric imports into Wisconsin would cause a net short-term decrease in air pollution from instate generators; and more transmission lines would be built, with resulting environmental impacts. The final EIS is due at the end of October.
Michigan
Restructuring efforts in Michigan have followed several paths. The Public Service Commission (PSC) staff has been preparing an analysis, Proposal M, of what should be done to eliminate excess regulation and promote customer choice. The draft was circulated for comments during the summer, and a final proposal was expected at the Governor's office in early September. The PSC was not directly involved in this effort.
Another effort involves state IOU proposals of specific actions to deal with competition for their customers. The Detroit Edison Co. proposed, and the PSC approved, contracts with the Big Three auto manufacturers that make Detroit Edison their sole supplier in return for discounted rates (The Detroit Edison Company, Case No. U-10646, March 23, 1995, 160 PUR4th 132 (1995), reh'g. denied, Re The Detroit Edison Co., 162 PUR 4th 163 (Mich. P.S.C. 1995)). Consumers Power Co. filed a competitive rate tariff in January 1995 that would allow it to negotiate charges within a certain range for customers able to demonstrate access to a less expensive power source (Consumers Power Co., Case No. U-10787, May 9, 1995, 161 PUR 4th 1).3 This case is proceeding before an ALJ.
For its part, the PSC, in response to a request by businesses, issued an Interim Order in April 1994 requiring Detroit Edison and Consumers Power (the state's largest IOUs) to conduct a retail wheeling experiment (Asso. of Businesses Advocating Tariff Equity, Case Nos. U-10143, U-10176, April 11, 1994, 150 PUR 4th 409). Detroit Edison sought a declaratory judgment in Federal district court challenging PSC jurisdiction to order retail wheeling, but this action was dismissed as premature (Detroit Edison Co. v. Strand, 1995 U.S. Dist. Lexis 7262 (W.D.Mich.1995)). That Interim Order affirmed the PSC's authority under state law to require a utility to provide retail wheeling, concluding that the PSC's jurisdiction was not preempted by federal law and that any supplier proposing to sell power to a retail wheeling customer would be subject to state utility law. The PSC emphasized that its action was strictly an experiment to inform future deliberations \(em not a finding that retail wheeling is in the public interest. The five-year experiment is limited to 60 megawatts (Mw) of delivery capacity for Consumers and 90 Mw for Detroit
Edison, and will begin only when each utility next solicits for new capacity. At that time, the utilities must submit a proposed retail delivery tariff that will be subject to a contested proceeding.
In June, the PSC gave final approval to the experiment, and addressed the novel issue of appropriate rates unbundled for retail transmission (161 PUR4th 441, June 19, 1995). The approved rates include the following elements:
s A $3,000/month customer service charge, plus $500/month for each additional location served
s A capacity-reservation charge based on the embedded costs of the transmission system and a
12-CP allocation method, which resulted in charges of $1.23 and $1.18 per kilowatt for transmission facilities, and $1.81 and $1.96 per kilowatt for subtransmission facilities
s Provisions for ancillary and line-loss charges
s A substantial "unauthorized use" charge when a wheeling customer's usage exceeds its scheduled or actual power deliveries
s Surcharges for some preexisting regulatory costs, including SFAS-106 amortization, nuclear decommissioning, and amortization of certain previously approved plant construction costs
s No surcharges for DSM, conservation, and PURPA capacity costs
s No charges for stranded investment or opportunity costs, due primarily to the limited nature of the experiment.
The states listed here offer a representative cross-section of the issues of greatest concern across the nation. Although each reached a somewhat different conclusion, all in some way addressed the environment, stranded cost, contracts with independent power producers, and the ultimate separation of generation, transmission, and distribution. We can expect more of the same from other state inquiries. t
Brian R. Gish is an independent attorney who specializes in energy and utility law in the Washington, DC, area.
Report Gives Thumbs Down
Citing lack of broad support plus uncertainty over service reliability, a Pennsylvania PUC staff report has given a thumbs down to retail wheeling. It adds that gains for retail wheeling customers would come at the expense of shareholders and those who elect to retain local utility service.
The PUC, which began its investigation of electric restructuring in April 1994 (Dkt. No. I-940032), calls the report an "interim step" and plans hearings on the issues for later this year.
Competing From the Bottom Up
A new-breed supply broker, two-year-old Wheeled Electric Power Co. (WEP), is pushing true electric retail competition in Massachusetts and New York.
WEP has asked the MA DPU to approve a five-year pilot program allowing New Bedford electric consumers to choose their electric suppliers. WEP would use New Bedford as a test case to acquire data on potential savings for consumers and to gauge impacts on the area's monopoly utility, Commonwealth Electric Co. (CE).
In New York, WEP has proposed to manage electric supply for the Suffolk County school districts, served by Long Island Lighting Co. (LILCO). The districts have sought authority to aggregate electric load and shop around for a supplier. WEP president John O'Brian plans to file a supplemental request in the LILCO rate proceeding, while launching a separate lobbying campaign. WEP believes the PSC has the authority to order retail wheeling and will not rest with the schools. It plans a pilot program on Long Island similar to its New Bedford scheme.
Wisconsin Uncensored
Statements [excerpts] of Scott A. Neitzel, Commissioner, WI PSC, and chairman, Advisory Committee on Electric Utility Restructuring in Wisconsin, on the PSC staff's draft environmental impact statement (EIS):
What, I believe, the Draft EIS is not:
-an excuse to derail what has been an extremely worthwhile and productive process
What, I believe, the Draft is:
-extreme by design, to meet [state law] requirements
The Final EIS should be
-a balanced presentation of the potential impacts.
Source: Wisconsin Power & Light Co.
1 Summary of Each State's Restructuring Activities. The National Council on Competition and the Electric Industry (July 17, 1995).
2 The permitted discount rates were subject to a specified floor price, and to the condition that revenues lost through discounting be shared by both ratepayers and shareholders, as determined in individual rate cases.
3 The PSC determined in that case that it has legal authority to approve negotiated rates, and may consider other types of competitive tariffs.
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