News Digest

Fortnightly Magazine - October 1 1998

FERC

GAS PIPELINES. Noting a move toward shorter-term contracts since Order 636, the FERC on July 29 issued an "integrated package" of reform proposals for the natural gas pipeline industry: (1) specific measures in a notice of proposed rulemaking on short-term transportation (transactions shorter than one year); plus (2) an open-ended request for comments in a broader notice of inquiry. RM98-10-000, 84 FERC ¶61,985 [NOPR]; RM98- 12-000, 84FERC ¶61,087 NOI].

The proposals all evoke a single theme - reduce prices and risk in long-term markets, while letting prices climb for short-term deals. The FERC would correct a so-called "asymmetry of risk" - shippers signing long-term contracts face uncertainty in price and supply, but can avoid risk by turning to short-term markets, where they pay no price premium and can actually lock-in rights as long as five years through the right of first refusal.

Proposals in the 190-page NOPR:

• no price cap on released capacity;

• end cost-based regulation in short-term market;

• retain cost-based regulation in long-term market;

• new procedures on nominations and scheduling;

• more flexible receipt and delivery points;

• mandatory auctions for all sales of short-term capacity;

• more flexibility in pipeline-shipper contracts;

• review pipeline penalty provisions and operational

flow orders;

• kill five-year term-matching cap in the right of

first refusal;

• consider term-differentiated rates.

In its 40-page NOI the FERC again seeks to remove bias between short- and long-term markets. It asks whether its own policies led to price distortions in California and Chicago, forcing capacity turnbacks on some pipes, while prompting other fully booked and lower-priced pipelines to build new capacity at higher unit-average costs than for existing capacity. It seeks comments on:

• creative cost-based rates (indexed prices or rates linked to end-use commodity prices);

• mandated periodic rate review for "recourse" rates;

• preconstruction risk sharing;

• reopening the ill-fated 1996 initiative on incentive

regulation;

• linking depreciation lives to contract terms;

• incremental pricing for released or turned-back capacity;

• a "nonbypassable" pipes charge to recover fixed costs.

A petition filed June 26 by the New York Public Service Commission that proposed a shift away from the straight fixed-variable rate design (RM98-11-000) will be rolled into the NOI, though at press time at least one commenter (the Process Gas Consumers Group) had already weighed in, calling the idea "recycled and unsubstantiated." Comments on the full package (NOPR & NOI) are due Nov. 9 - 90 days after the Aug. 11 publication date in the Federal Register.

COMPLAINT PROCEDURES. The FERC on July 29 proposed revisions to procedures for handling complaints, encouraging informal or alternative resolution of disputes. Docket No. RM98-13-000, July 29, 1998.

HYDROELECTRIC RELICENSING. In what FERC Chairman James Hoecker described as the "relicensing case from hell," the FERC (Commissioner Bailey dissenting) issued a 40-year license to the city of Tacoma, Wash., to continue operating the Cushman hydroelectric project on the North Fork Skokomish River in western Washington state, requiring extensive environmental restoration. Docket Nos. P-460-001 and P-460-009, July 29, 1998.

It also relicensed the Kingsley (105.9 MW) and North Platte/Keystone (26.1 MW) hydro projects on Nebraska's Platte River in unanimous settlements signed by the states of Nebraska, Colorado and Wyoming as part of a broader deal to resolve needs for power, irrigation and habitat for migratory birds. Docket Nos. P-1417-053 et al., July 29, 1998.

Congress

PURPA REPEAL BILL. Florida senators Bob Graham (D) and Connie Mack (R) introduced a bill to repeal the Public Utility Regulatory Policies Act of 1978.

The new bill parallels the PURPA reform bill introduced in the House by Rep. Cliff Stearns (R-Fla.) in January 1997. Both bills prospectively repeal PURPA, protect existing contracts, and mandate recovery of PURPA-related costs.

Mergers and Acquisitions

ENRON + WESSEX WATER. Enron Corp. formed a new company to pursue opportunities in the global water utility business. The new company will own and operate strategic water and wastewater assets, such as local distribution systems and treatment facilities. It also will develop related infrastructure.

As the first step in establishing the new business, Enron Corp. offered $2.2 billion ($10.33 per share) for Wessex Water Plc in England, representing a 28-percent premium based on the closing price of Wessex stock on July 23 of $8.08 per share. Wessex provides water services to 1.1 million people and includes 131 treatment plants, 320 pumping stations, 340 storage reservoirs, and 6,800 miles of water mains. It also provides wastewater services to 2.5 million people. Enron initially plans to use its water subsidiary to develop water projects in Europe, Latin America and Asia, where significant water privatizations are occurring.

MCI + WORLDCOM. The Pennsylvania Public Utility Commission rejected requests by several parties seeking a formal investigation of "anti-competitive issues" surrounding the proposed merger of MCI Communications Corp. and WorldCom Inc., noting that under the state's streamlined rules governing telephone competition, it need only review protests contesting the "technical or financial fitness" of applicants. It added that matters such as the effect the merger might have on wholesale rates might be better addressed to federal regulators or through a private lawsuit. A-312025 F.0002, June 18, 1998 (Pa.P.U.C.).

DQE + ALLEGHENY. DQE Inc., parent company of Duquesne Light Co., announced on July 28 that it would terminate its proposed merger with Allegheny Energy Co., citing an unfavorable ruling on stranded cost for Allegheny subsidiary West Penn Power, which DQE termed a "self-inflicted wound." Meanwhile, Allegheny Energy chairman, president and CEO Alan J. Noia insisted his company would still pursue the merger, saying DQE had "no right" to terminate, according to a letter Noia sent to DQE CEO David D. Marshall.

Only a week earlier, the PUC had reaffirmed its merger approval (granted initially on May 29), but had refused to back off from its 100-percent ratepayer allocation of merger benefits, and again had required DQE and Allegheny to join a "fully functioning" independent system operator as a merger condition and otherwise to show mitigation of market power, or else divest 2500 MW of generating capacity by July 2000. (Docket No. A-110150F.0015, G- 00970574, July 23, 1998.)

DQE added that Allegheny would suffer severe financial harm from a $1-billion disallowance of stranded costs. In fact, the PUC had authorized Duquesne to recover $1.332 billion in stranded costs (out of a request totaling $1.916 billion), as it accepted the company's offer to divest generation to determine a market value. (R-00974104, 185 PUR4th 389, entered May 29, 1998.) By contrast, West Penn Power had claimed $1.52 billion in stranded costs, but won authority to recover only $24 million, as the PUC discredited the company's proposed "lost revenues" method of valuation as entailing an improper guarantee of earnings. (R-00973981, entered

May 29, 1998.)

Power Markets

PURCHASED POWER CONTRACTS. An arbitration panel on July 28 ruled that the Bonneville Power Administration breached its power purchase contract with Tenaska Washington Partners II L.P. and that Tenaska is entitled to recover damages.

The panel awarded $160 million in damages plus interest to Tenaska. That ruling is in addition to aggregate payments made by BPA over the last three years of more than $170 million. The $170 million will pay banks that had loaned funds to build the 248-MW natural gas-fired project in Frederickson, Wash., (to supply power to BPA) and to pay other contractors.

Tenaska had filed a lawsuit against BPA in June 1995 after BPA defaulted on a long-term electric power purchase contract. The contract had required BPA to pay about $2.5 billion over a 20-year period for electricity supplied by Tenaska. The court referred the matter to arbitration. But Tenaska isn't happy with the decision, believing it was undercompensated.

Studies & Reports

POWER PRICES - LAST YEAR. The average price of electricity in the U.S. decreased by 0.7 percent during the past year against an inflation rate of 1.4 percent, according to the 1998 National Utility Service International Electricity Price Survey. Even with the slight decrease, the U.S. remains one of the most expensive nations of the 16 countries surveyed.

Analysts at the National Utility Service Inc., which produced the report, International Electricity Price Survey April 1997-April 1998, attribute the slight decrease to deregulation of the U.S. utility market. (For copy, contact Liz Vogel at NUS at (212) 684-6300, ext. 329.)

POWER PRICES - NEXT CENTURY. The American Gas Association has released a report, The Impact of Industry Restructuring on Electricity Prices, which finds that electric restructuring will depress power prices by about 14 percent by 2015.

Real prices are expected to fall 26 percent for the industrial sector, versus about 10 percent for residential and commercial sectors. In the highest-cost states, price declines will grow markedly once stranded cost recovery ends between 2005 and 2010. In states with either no stranded costs or continued rate regulation, prices will decline until about 2005 but will rise after that as requirements for new capacity offset savings from continuing gains from improving efficiency. The study was prepared for A.G.A. by the Sciences Applications International Corp.

POWER PRICES - UPSIDE-DOWN. The Department of Energy's Energy Information Administration has released The Changing Structure of the Electric Power Industry: Selected Issues 1998, which finds that for the first time since 1990, the retail price of electricity for industrial consumers in 1996 was much lower than the wholesale cost that investor-owned utilities paid for firm power. The average price of firm power purchased by investor-owned utilities in the wholesale market increased to 5.1 cents per kilowatt-hour in 1996, compared with an average retail price of 4.7 cents per kWh for their industrial customers. (The report is available at www.eia.doe.gov/cneaf/electricity/ chg_str_issu/chg_str_issu.pdf.)

State PUCs

ARIZONA RESTRUCTURING. By a 2-1 vote, the Arizona Corporation Commission approved emergency rules for retail choice in electricity (a phase-in starts Jan. 1, 1999 for larger customers, with a final deadline in two years for all others). The rules provide for: (1) competitive metering and billing, (2) utilities as providers of last resort, (3) recovery of stranded costs, (4) a system benefits charge, (5) a solar energy portfolio standard (rising from 0.2 percent in 1999 to 1.0 percent by 2003, but with credits for early installation or in-state investment) and (6) a competitive transition charge assessed only on customer purchases from third parties (not for self-generation or demand-side management). The order "supports" use of scheduling coordinators to aggregate customers. It requires all utilities owning transmission facilities in the state to file an application at the FERC by Oct. 31 for approval of an Independent Scheduling Administrator to work with SCs and to oversee transmission access statewide. Decision No. 61071, Aug. 10, 1998 (Ariz.Corp.Comm'n).

METERING AND BILLING. The California Public Utilities Commission adopted an interim model for unbundled metering, billing and related (revenue-cycle) services, with the utility billing for all costs, and then crediting either the competitive company or the customer. A.97- 11-004, D. 98-07-032, July 2, 1998 (Cal.P.U.C.).

International Markets

OVERSEAS DISCOS. Entergy Corp. reported it will sell its British and Australian electric distribution companies in a plan to focus on core businesses. It also cut its second quarter dividend from $1.80 to $1.20 per share. Entergy, over the next 18 months, will sell London Electricity of Britain, CitiPower in Australia, and in the U.S., a security monitoring company, some telecommunications businesses and an energy management company. Entergy plans to use the anticipated $4 billion from the sales to cut its $10-billion debt.

UTILITY DISCOUNTS. The Michigan Public Service Commission ruled that five of 14 rate discount contracts offered by Consumers Power Co. to large industrial customers failed to meet requirements for fair competition with alternative suppliers under an experimental "direct access program" approved in 1996.

It found that five of the contracts contained items that were not comparable to those that could be offered by competitors, such as contract terms that are much longer than the life of the direct access pilot program and (in one case) transmission rates based on a power factor below the minimum available to competitive suppliers. As a result only 105.7 megawatts submitted by Consumers Power for individual contracts qualified toward the 140-megawatt limit set aside for direct access. Case Nos. U-10685 et al., July 24, 1998 (Mich.P.S.C.).

GAS PILOT PROGRAMS. Regulators in several states recently have promoted greater supplier choice in the natural gas market, either by initiating or extending pilot programs for residential and other customers.

• New Jersey board announced "clear commitment" to open residential market to competition by early 1999. Allowed South Jersey Gas Co. to boost enrollment of its residential transportation pilot and delay expiration date to July 31, 1999. Docket No. GR6010032, June 26, 1998 (N.J.B.P.U.). Allowed Public Service Electric and Gas Co. to provide unbundled residential transport service. Docket No. GR97110839, June 26, 1998 (N.J.B.P.U.).

• New Mexico PUC expanded experimental gas choice program ok'd last year for PNM Gas Services, opening plan to customers using less than 40,000 therms per year. PUC restated concern about relatively low level of participation - only one of three registered marketers had signed up customers. Case No. 2760, July 6, 1998 (N.M.P.U.C.).

• Virginia regulators allowed Washington Gas Light Co.

to offer firm delivery-only service in two-year pilot to 10 percent (20 percent in second year) of eligible residential, commercial and industrial customers taking firm bundled sales service. Balancing service offered to suppliers annually during first year, monthly in second year. Gas suppliers to qualify by aggregating at least 100 dekatherms of average daily contract quantity of sales to customers. Case No. PUE971024, June 18, 1998 (Va.S.C.C.).

GOODWILL ROYALTIES. The Maine Public Utilities Commission adopted a method to calculate royalty payments to be made to Central Maine Power Co. by its new, regulated affiliate CMP Natural Gas (to be formed as a local distribution company) for use of the CMP name, as required by PUC rules. The affiliate will make a one-time payment of $500,000 to Central Maine Power Co., timed according to how soon it succeeds in earning its authorized return on equity. Docket No. 98-077, June 10, 1998 (Me.P.U.C.).

WATER EQUITY RETURNS. The Florida Public Service Commission set the generic range of rate of return on equity for water and wastewater utilities operating in the state at 8.57 percent to 9.85 percent (the midpoint is 63 basis points higher than approved by the PSC in 1997), including a private placement premium of 25 basis points to acknowledge the lack of institutional interest in the securities of small-sized water utilities. Docket No. 980006-WS, Order No. PSC-98-0903-FOF-WS, July 6, 1998 (Fla.P.S.C.).

TEXAS ELECTRIC RESTRUCTURING. The Texas Public Utility Commission approved a transition plan for Texas-New Mexico Power Co. that includes a series of residential and commercial rate cuts totaling 9 percent and 3 percent, respectively, over the course of a five-year transition period. The plan caps earnings at 11.25 percent on equity, with any surplus applied either to recover stranded generation investment or refunded to customers, according to PUC guidelines.

Generating Plants

NUCLEAR PLANT OPERATIONS. The Nuclear Regulatory Commission has identified five nuclear power plants that still require regulatory attention and remain on the NRC Watch List.

Those plants are Millstone Units 2 and 3, operated by Northeast Utilities Service Co.; Clinton, operated by Illinois Power Co.; and LaSalle Units 1 and 2, operated by Commonwealth Edison. Removed from the list are Crystal River Unit 3, operated by Florida Power Corp.; Salem Units 1 and 2, operated by Public Service Electric and Gas Co.; and Dresden Units 2 and 3, operated by Commonwealth Edison. Other plants were removed from the Watch List due to decisions to permanently cease operations. They are Zion Units 1 and 2, operated by Commonwealth Edison; and Millstone Unit 1.

The NRC informed American Electric Power Co. of declining performance at D.C. Cook Units 1 and 2. The NRC also informed Commonwealth Edison it couldn't conclude that the adverse performance trend first identified in January had been arrested at Quad Cities Units 1 and 2.

ASSET DIVESTITURES. Western Massachusetts Electric Co., a subsidiary of Northeast Utilities, has outlined a plan to divest fossil-fuel and hydroelectric assets. WMECO will sell 290 megawatts, including five hydroelectric plants totaling 17.7 MW, the 209-MW oil- and gas-fired West Springfield Station, and three internal combustion units totaling 63.5 MW.

NUCLEAR WASTE DISPOSAL. Thirty-six states with nuclear power plants joined under the Nuclear Waste Strategy Coalition umbrella and petitioned the U.S. Supreme Court to require the Department of Energy to provide a disposal site for their radioactive waste.

They argued the DOE has not complied with a 1982 law requiring the disposal by Jan. 31, and that billions of dollars paid by the utilities into the waste disposal fund have been wasted. The 1982 law required consumers to pay one-tenth of a cent per kWh of electricity generated by nuclear plants into the fund. More than $15 billion has been collected. Federal courts have ruled that the DOE has an obligation to store the waste.

Business Wire

PUBLIC SERVICE COMPANY OF COLORADO joined with Altair Energy to offer Solarsource, which will allow customers to buy photovoltaics to meet a portion, or even all, of their electric needs. PV systems produce solar electricity that can be used by a home or business, or sold back to Public Service Co. Through net metering, a customer's meter can run backwards when more electricity is generated from their PV system than is used by the building. This gives customers a credit on their meters for electricity supplied to the electric grid.

Sithe Energies Inc. plans to build 750 megawatts of merchant generating capacity at its 1,040 MW Independence Station in Scriba, N.Y. Sithe is filing a preapplication request with the New York State Public Service Commission. Sithe expects to spend about $400 million over the next three years to build the facility.

DTE Energy Services Inc., a subsidiary of DTE Energy Co., purchased the no. 1 coke battery and related assets at Bethlehem Steel Corp.'s Burns Harbor Division in Indiana. The no. 1 coke battery produces about 830,000 tons of coke annually. Sonat Energy Service Co. and Calpine Corp. announced a joint venture to develop a 680-megawatt natural gas-fired peaking power plant near Columbus, Ga. The Cataula Power Plant is scheduled for commercial operation by June 2000. The Cataula facility will connect to the Georgia Integrated Transmission System, providing direct access to Georgia Power Co., the Municipal Electric Authority of Georgia, Oglethorpe Power Corp. and the city of Dalton. Sonat Energy Services will provide natural gas to fuel the plant in addition to being responsible for marketing the plant's output capacity to wholesale customers.

The Modesto Irrigation District filed a complaint against Pacific Gas & Electric Co. and Destec Power Services Inc. alleging that the companies conspired to deny MID access to potential customers within PG&E's service territory, thereby illegally restricting and eliminating MID's ability to compete for retail electric customers. The complaint was filed in federal district court in San Francisco and seeks more than $25 million in damages.

Courts

FUEL COST ADJUSTMENTS. By a vote of 3-2, the Connecticut Supreme Court denied charges that state regulators unlawfully saddled ratepayers with the risk of inefficient managerial performance when, in 1996, they eliminated a fuel cost adjustment clause used by Connecticut Light & Power Co., along with CL&P's generation utilization clause, in favor of a new single, combined energy adjustment clause that billed customers for increases in fossil fuel costs arising from nuclear plant shutdowns.

Two justices issued a caustic dissent, citing regulators for hiking bills to boost CL&P's credit standing: "This might create savings," they noted, "as ratepayers pay the costs of restoring CL&P's nuclear power facilities, all closed as a result of highly efficient neglect." Office of Consumer Counsel v. Conn. Dept. of Pub. Util. Cont., No. 15823, 246 Conn. 18, Aug. 4, 1998 (Conn.).

RECORDS DISCLOSURE. The Washington state appeals court ruled that a public utility district need not grant a demand by ratepayer advocates to turn over technical specifications for a gas-fired combustion turbine it proposed to build, saying the document was owned by General Electric, the manufacturer, and not the utility. Concerned Ratepayers Asso. v. Clark County Pub. Util. Dist. No. 1, No. 21759-7-II, 1998 WL 473048, Aug. 14, 1998 (Wash.App.).

EMISSIONS MONITORING. Ruling the case unripe for

review in the absence of any governmental enforcement action, the U.S. Court of Appeals for the D.C. Circuit denied an appeal attacking rules adopted by the Environmental Protection Agency allowing use of anecdotal credible evidence to prove violations of the Clean Air Act. The EPA rule allows evidence beyond that taken from engineering analysis of results from enumerated performance tests. Clean Air Implementation Proj. v. EPA, Nos. 97-1117, et al., 1998 WL 471562, Aug. 14, 1998 (D.C.Cir.).

TELCO COMPETITION. The 8th Circuit has upheld a ruling by the Federal Communication Commission that explained which services ("network elements") local exchange carriers must unbundle and make available to competitors at cost-based rates under the 1996 Telecommunications Act. The FCC had required local carriers to unbundle and open access to all shared transmission facilities connecting LEC switches, including all combinations of end-office and tandem switching arrangements. It described such a combination as a single network element. SW Bell Tel. Co. v. FCC, Nos. 97-3389 et al., 1998 WL459536, Aug. 10, 1998 (8th Cir.).


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