News Digest

Fortnightly Magazine - September 15 1999

News Digest was compiled by Carl J. Levesque, editorial assistant, Lori A. Burkhart, contributing legal editor, and Bruce W. Radford, editor. For continual news updates, see Power

Transmission & ISOs

Transco Independence. Granting Entergy's request for a declaratory order, the Federal Energy Regulatory Commission ruled in a case of first impression that a stand-alone transmission company ("transco") would meet the test in Order 888 for independent system operators despite passive ownership by a power producer or other market participant.

Commissioner William Massey dissented, however, preferring to wait and resolve the issue in the pending rulemaking on regional transmission organizations, where the FERC may revisit the issue.

Entergy had proposed that its five operating utility subsidiaries would join with other transmission-owning companies to convey wires assets to the transco, taking back passive ownership interests. It invited the FERC to bypass the comment process and interpret one of the proposals in its pending RTO rulemaking - that electric "market participants" can own no more than 1 percent of a qualifying RTO.

Massey called the ruling premature. He argued that whatever the commission said, the industry would assume the order was "fully intended to send a signal that transmission owners that own generation can form ISOs." He also noted concern from regulators in Mississippi, Arkansas and Louisiana, who all urged the FERC to reject the ruling request. Said Massey, "This level of opposition in the Entergy region should not be ignored." Docket No. EL99-57-000, July 30, 1999, 88 FERC ¶ 61,149.

New York ISO Structure. The FERC OK'd a new tariff for the New York Independent System Operator, dividing ISO functions into two parts: transmission access and market services. The tariff governs locational marginal pricing, congestion rights and pricing, installed capacity requirements and related issues.

Action was still pending on a revision filed July 2 to revamp the ISO's management committee by allocating voting rights among five stakeholder groups - transmission, generation, energy marketers and suppliers, consumers and public advocates - no two of which could dictate committee action. Docket Nos. ER97-1523 et al., July 29, 1999, 88 FERC ¶61,183.

New England Congestion Pricing. Focusing on pricing elements important to the development of the New England power market, the FERC accepted a nodal/zonal congestion management system as an acceptable method for congestion pricing. But it directed the New England Power Pool to consider ways to avoid possible distortions that could emerge under the nodal/zonal approach, due to the averaging effect of zonal pricing, which could lead to biases against using either the ISO's energy market or the bilateral markets.

FERC accepted NEPOOL's offering of financial congestion rights as a hedge against congestion costs, and the initial allocation of the rights to firm-transmission customers, who pay transmission rates that recover transmission fixed costs. Docket No. ER99-2335-000, July 30, 1999, 88 FERC ¶61,176.

Midwest ISO Incentives. A number of parties have filed briefs at the FERC concerning a possible premium on the rate of return on equity to be allowed to provide an incentive for members joining the Midwest Independent System Operator. Parties filing briefs include Blue Ridge Power Agency, Wisconsin Public Service Corp., Consumers Energy, an ad hoc group of state consumer advocates led by Denise Goulet of Pennsylvania, and MISO participants themselves (at least 16 operating electric utilities), represented by attorneys Michael Small and Paul Flynn of Write & Talisman.

The MISO participants urged an ROE of at least 11.5 percent, adding that such a figure was conservative when compared to returns received by the MISO transmission owners for retail transmission assets under state regulation, which it said averaged 12.7 percent, according to statistics gathered by expert witness Jose Delgado, vice president for electric system operations at Wisconsin Electric Power Co.

The consumer advocates argued that MISO already had signed a stipulation accepting an ROE floor of 10.5 percent, adding that any additional upward adjustment would violate ratemaking precedent set by the Supreme Court's notorious 1944 ruling in FPC v. Hope Natural Gas Co. "'Incentive' or 'reward' in this context can only mean a ¼ return higher than necessary to enable the Midwest ISO to attract capital." FERC Docket No. ER98-1438, briefs filed Aug. 2, 1999.

Capacity Benefit Margin. The FERC clarified its method for computing available electric transmission capacity, and directed transmission providers to take short-term measures to make their capacity benefit margin calculations more accurate and more widely available.

It gave the utilities 30 days to (1) post CBM for all transmission paths on OASIS; (2) explain methods for calculating CBM; (3) set procedures to periodically review and update CBM figures; (4) post on OASIS emergency CBM procedures; and (5) allow CBM to be used on a nonfirm, interruptible basis.

The FERC also directed the North American Electric Reliability Council to work with transmission providers to develop a standard method for calculating CBM by the end of the year. Docket No. EL99-46-000, July 28, 1999, 88 FERC ¶61,099.

U.S./Mexico Link. Central & South West Corp. and Mexico's government-run Comision Federal de Electricidad on July 21 announced plans to install an asynchronous electric tie using a new high-voltage direct current (HVDC) technology. The electric tie will link the transmission system of CSW's subsidiary, Central Power & Light Co., with the Mexican transmission system.

CSW is working with EPRI to develop, install and test the tie, which is expected to become operational by June 2000. The new line will provide strong voltage support to Piedras Negras, Mexico, and Eagle Pass, Texas, while significantly improving reliability between the two electric grids.

The new line will give CPL and CFE the ability to provide emergency service to each other without first having to disrupt power. CPL will operate the tie at Eagle Pass and the tie will be available for use by the other utilities through the Electric Reliability Council of Texas ISO.

State PUCs

Transition Plans. Proposals were due Aug. 20 from consultants seeking to assist the Ohio PUC staff in analyzing the transition costs of eight Ohio electric utilities - Cleveland Electric Illuminating Co., Ohio Edison Co., Toledo Edison Co., Columbus Southern Power Co., Ohio Power Co., Dayton Power & Light Co., Cincinnati Gas & Electric Co. and Monongahela Power Co. - in anticipation of the Oct. 5, 1999 through Jan. 3, 2000, period in which companies can file their transition plans.

The contractor will evaluate each company's transition plan, providing a final analysis that will include a determination of generation asset value. Case No. 99-863-EL-UNC, July 28, 1999 (Ohio P.U.C.).

Power Marketer Licensing. With the start of competition coming as early as Oct. 1 for some customers and no order in the competitive electricity provider certification docket, the Delaware PSC authorized its executive director to issue provisional certificates to applicants until Dec. 31, 1999. Included in the order are the applicant requirements that will guide the executive director's approvals. Applicants must demonstrate financial, technical, managerial and operational ability, among other things. Docket No. 49, July 13, 1999 (Del.P.S.C.).

Retail Electric Suppliers. The Maine PUC continued to set new rules in preparation for the start of electric competition, set for March 1, 2000.

- Supplier/Utility Contracts. It adopted standard form contracts (with a few utility-specific exceptions) to govern the relationship between transmission and distribution utilities and competitive retail providers (other than standard offer service provided to default customers not electing a new supplier). Docket No. 99-170, July 19, 1999 (Me.P.U.C.).

- Standard Offer Service. It also issued requests for bids to allow the PUC to select which suppliers will offer firm electricity service to standard offer customers. Unlike other states, Maine's standard offer prices will be set by the bid process rather than by statute or regulation. See

Environmental Disclosures. The New Jersey board on July 26 adopted an environmental disclosure label to allow consumers to compare fuel mix and emissions characteristics of the electricity offered for sale by suppliers in the newly deregulated market.

All suppliers must disclose their fuel mix and air emissions as compared to the state's benchmarks, as well as energy efficiency, not only in all direct marketing material to solicit customers, but also in semi-annual mailings to all retail customers.

Restructuring Cost Passthroughs. While conceding that small customers would bear a "wildly disproportionate" share of costs, the California PUC nevertheless approved a proposal by the state's electric utilities to use an "equal percentage of marginal cost method" to allocate restructuring implementation costs among customer classes, since state laws required it to avoid any cost-shifting among customer groups.

Ratepayer groups had sought an "equal cents per kilowatt-hour" method, arguing that the EPMC model would have industrial and large commercial users paying much less for restructuring than warranted by their 95 percent share of all direct-access purchased power. A.98-07-006 et al., D. 99-06-058, June 10, 1999 (Cal.P.U.C.).

Utility Billing Systems. Pacific Gas & Electric Co. asked for rehearing of a June order by the California PUC that its billing system was incapable of handling unbundling of electric utility costs and services under the state's direct access plan. The PUC had said that PG&E's failure to meet billing system timetables "may affect the evolution of competitive energy markets and the ability of customers to understand energy alternatives." A.96-12-009 et al., D. 99-06-056, June 10, 1999 (Cal.P.U.C.), petition for rehearing filed July 12, 1999.

Water Utility Returns. Saying it could no longer use gas industry data as a reasonable proxy for the water utility business, the Florida PSC eliminated the gas utility index and gas risk premium models from its formula for calculating return on equity for water and wastewater utilities.

It set ROE for water utilities at 8.14 percent, with a cap at 10.12 percent for all companies with an equity ratio below 40 percent to discourage imprudent financial risk. Docket No. 990006-WS, Order No. PSC-99-1224-PAA-WS, June 21, 1999 (Fla.P.S.C.).

Mergers & Acquisitions

AEP + CSW. Denying a motion to move straight to a final commission order, the FERC instead set a deadline of Nov. 24 for administrative law judge Joseph Nacy to issue an initial decision on the proposed merger between American Electric Power and Central & South West Corp., implying no final FERC action until next year. The next day, Judge Nacy said he would issue a single decision disposing of all related issues, including other dockets that involve the reasonableness of transmission tariffs and proposed system integration agreements filed by the merger partners.

Commissioner Vicky Bailey questioned whether the deadline was quick enough: "I am not enthused with the prospect of commission action next year, even with the pledge [for] action in February or March.

"I certainly understand the complexity of the issues raised and the tenacity of the intervenors ¼ [b]ut I do not view the case as so complex as requiring commission action only after close to two years of review ¼ especially ¼ now that the applicants have entered into negotiated stipulations with [the] trial staff." Docket Nos. EC98-40 et al., July 28, 1999, 88 FERC ¶61,121.

Chugach + Matanuska. Members of Alaska's Chugach Electric Association will vote Nov. 18 on whether to sell out to the Matanuska Electric Association. The two co-ops have been fighting since 1994, when Matanuska first bid for the larger Chugach system, which is based in Anchorage.

Matanuska originally had claimed that it could cut costs by as much as $200 million over 25 years by taking over Chugach (which supplies power to Matanuska) - mostly through debt reductions and economies of scale. However, Chugach lately refinanced some debt, lowering estimates of cost savings on consolidation.

NEES + National Grid. Vermont OK'd the takeover of New England Electric System (NEES) by National Grid Group plc. The board noted that National Grid "may be able to bring experience to the region to assist NEPOOL and ISO New England in providing the infrastructure dispatch and power exchanges necessary for an efficient power supply market." The board also noted that the merger could enhance the ability of NEES to attract capital to fund grid enhancements. Docket No. 6225, June 15, 1999 (Vt.P.S.B.).

Studies & Reports

Natural Gas Projections. The Gas Research Institute identifies a "robust 2 percent annual growth" as a baseline projection for natural gas markets in a new study that tests the projection under five "what if" scenarios. For instance, what would happen if technological innovations remained frozen at 1997 levels, or producers reinvested fewer dollars in exploration and development?

"After analyzing the data from the sensitivities, we see a low probability that any of these five alternatives will occur or be sustained for a prolonged period," said John Cochener, GRI principal analyst. "The robust two percent annual growth we are anticipating in the baseline projection is both optimistic and realistic, offering what we think is the most likely outcome. However, unforeseen events could temporarily alter that view, which is why we assessed the impact of various effects on supply and price."

See "Gas Supply Sensitivities: An Alternative View of Gas Supply Trends" (GRI-99-0148). Contact Kelly Murray, tel. 703-526-7832, or

Generation Adequacy. A report prepared for the Edison Electric Institute suggests that regulators and system operators may continue to impose minimum requirements on load-serving entities for installed generation capacity to satisfy reliability needs, even as the deregulated generation sector makes investment decisions based on profitability.

The report, "Generation and Transmission Adequacy in a Restructuring U.S. Electricity Industry," by Eric Hirst, Brendan Kirby and Stan Hadley, reviews historical trends and future projections on adequacy investments and discusses how adequacy might be managed in the future. See

Stranded-Cost Securitization. Moody's Investors Service reports that Boston Edison's forthcoming $805 million securitization of stranded costs may represent a "model transaction," because of several factors, including (1) legal precedents in Massachusetts favoring bondholder rights, (2) local voter support for electric deregulation, and (3) reliable information on the degree to which BE asset costs exceed market valuations, available because the company is mitigating its stranded-cost exposure by divesting fossil and nuclear plants.

Contact study author Bruce Fabrikant, Moody's vice president and senior credit officer, at 212-553-3609.


Consumer Education. The Maine Supreme Court overturned a state PUC rule that had forced electric utilities to file advance copies of educational literature on retail choice prior to distribution, calling the rule an unconstitutional prior restraint on core free speech.

However, it left standing a rule allowing the PUC to order corrections in misleading or inaccurate materials after their dissemination to customers. Central Me. Pwr. Co. v. Maine PUC, Docket No. PUC-98- 290, 1999 WL 550034, July 29, 1999 (Me.).

Merger Review. In two companion cases, the Indiana Supreme Court struck down two state commission orders on proposed mergers between (1) Ameritech and SBC and (2) GTE and Bell Atlantic, saying that regulators lack authority to review transactions involving only utility holding company stock, rather than a direct transfer of utility assets. Indiana Bell Tel. Co. v. Ind. URC, No. 93S02-9906-EX-350, 1999 WL 553724, July 30, 1999 (Ind.); GTE Corp. et al. v. Ind. URC, No. 93S02-9907-EX-370, 1999 WL 553723, July 30, 1999 (Ind.).

Price Cap Plans. A Maryland appeals court upheld a price cap plan for Bell Atlantic, saying the plan need not guarantee a reasonable return on fair value in order to meet a state law authorizing alternative telephone regulation as long as rates are "just and reasonable."

It held that a price cap plan would meet the J&R rate standard if it provided "affordable and reasonably priced" telephone service. Office of People's Counsel v. Md. PSC, No. 120 (Sept. Term 1997), 1999 WL 540195, July 27, 1999 (Md.App.).

Property Tax Refunds. A New York appellate court allowed the Long Island Power Authority to recover property tax overcharges on the defunct Shoreham nuclear plant in Suffolk County that it acquired in 1989 for $1 from Long Island Lighting Co., but only those taxes accrued after 1986 (when the state created LIPA), as the law had exempted Suffolk County from refunding Shoreham property taxes accrued to that date.

The court said that the legislature must have intended that the power authority collect on tax refund judgments in order to produce the "ratepayer savings" envisioned at the time of the plant takeover. Suffolk County v. LIPA, 1999 WL 540852, July 26, 1999 (N.Y.App.Div.).

Telephone Universal Service. On review of funding support for universal telephone service, a federal appeals court upheld a rule by the Federal Communications Commission offering assistance to schools and libraries for Internet access provided by firms other than telephone carriers, but said the FCC could not assess intrastate services for such subsidies.

It also struck down FCC rules that (1) barred local telephone carriers from disconnecting low-income callers for unpaid toll charges if they received support from the high-cost fund, and (2) barred state PUCs from service quality rules on those same telcos. Texas Office of Pub. Util. Counsel v. FCC, No. 97-60421, 1999 WL 556461, July 30, 1999 (5th Cir.).

Nuclear Power

Y2K Policies. An interim enforcement policy issued by the Nuclear Regulatory Commission allows for "enforcement discretion" during three delineated Y2K transition periods, allowing a nuclear power plant to continue operating without being in compliance with its license conditions if continued plant operation is deemed necessary to help maintain a stable electrical grid and there is minimal potential impact on safety.

The three transition periods cover Dec. 31, 1999 through Jan. 3, 2000; Feb. 28 to March 1, 2000; and Dec. 30, 2000 to Jan. 1, 2001.

Nuclear Decommissioning Fees. A federal claims court ruled that the fee imposed under the Energy Policy Act of 1992 for cleanup and decommissioning at federal uranium enrichment facilities was not an unconstitutional taking of property, saying it was not excessively retroactive or burdensome in comparison to the potential liability, and could not have come as a surprise to utilities. The decision contrasts a 1998 high court ruling (Eastern Enterprises v. Apfel) that struck down a retroactive surcharge to cover health benefits for coal industry workers. Maine Yankee Atomic Power Co v. U.S., No. 97-28 C., 1999 WL 54524, July 26, 1999 (Fed.Cl.Ct.).

State Legislatures

Electric Retail Choice. On July 23 Oregon Gov. John A. Kitzhaber signed state senate bill 1149, which introduces retail electric competition for industrial and commercial customers no later than Oct. 1, 2001, and requires the state PUC to report to the legislature by 2003 on whether retail electric competition would benefit residential customers. However, no later than the 2001 commercial customer start date, residential customers would be able to choose from among a portfolio of rate options under the bill, which would include at minimum a renewable option (hydro would be included) and a market-based rate option. See

Net Metering. A week after passing an electric deregulation bill (Senate Bill 1149, signed into law on July 23), the Oregon legislature continued its reshaping of the industry in the state by passing House Bill 3219, which would require utilities to provide net metering services for customers with on-site solar, wind, fuel, fuel cell or hydroelectric generators having capacity of up to 25 kilowatts. The governor had not signed the bill as of Aug. 12, and in an earlier press release said that state law allowed him until Sept. 3 to act. See

Merchant Plant Tax Breaks. After an inquiry from state representatives Mary Ann Middaugh and Mark Schauer, Michigan attorney general Jennifer Granholm ruled that a merchant power plant owned by someone other than a regulated electric utility would not qualify as industrial property eligible for certain personal and real property tax exemptions allowed under state law for certain industrial rehabilitation and development districts. Opinion No. 7027, Aug. 5, 1999.

Business Wire

New Energy Ventures Inc., which is becoming NewEnergy Inc., will provide electricity to California Steel Industries Inc.'s Fontana facility, which consumes almost 30,000 megawatt-hours of electricity per year. Under the terms of the agreement, NewEnergy will procure electricity for CSI, and CSI has the option of purchasing site generation products from NewEnergy. Meanwhile, the New Jersey Board of Public Utilities has issued a business license to NewEnergy, making the company one of the first providers able to sign customers in the state.

GE Power Systems of the United States and BP Amoco of the United Kingdom have received final approval from the British government to construct a $500 million, 500-megawatt power plant at the Baglan Energy Park in South Wales that will be the world's most efficient gas-fired power station when it enters service in 2002. The new plant will be based on GE's advanced technology H System(, which is designed to reach 60 percent fuel efficiency in combined-cycle operation, long considered the "four-minute mile" of the power generation industry.

Idaho Power has chosen SPL WorldGroup Inc.'s CIS PLUS(r) software product to replace its 20-year-old legacy customer information system. Idaho Power serves 700,000 people in southern Idaho, eastern Oregon and northern Nevada.

Gas Research Institute and Energy International Inc. have formed a joint venture to provide international technology transfer of natural gas distribution products to and from North American markets. The new company, TplusSM, initially will focus on global technology transfer activities for natural gas distribution utilities. Tplus will offer technical and business assessments of distribution technology, expertise in transferring technology in the international arena and management of investment capital to bring energy-related technologies to commercial application.

To aid in the development of promising and efficient emission-reduction technologies for itself and the electric power industry, Carolina Power & Light is testing two evolving systems at coal-fired power plants in Buncombe and Robeson counties. On an 80-MW boiler at its Weatherspoon Plant near Lumberton, NC, CP&L is witnessing 35 percent reductions of nitrogen oxides using a technology developed at the St. Petersburg Polytechnic Institute in Russia and brought to the United States by the Research Triangle Institute in North Carolina.


Transmission Profits. Chief executive officers from 35 electric utilities on July 16 sent a letter to FERC commissioners urging them to set aside a March 31 initial decision (Docket No. ER97-2355- 000, 86 FERC ¶63,014) issued by administrative law judge Michael Levant. That order had set a return on equity for electric transmission assets for Southern California Edison Co. at 9.68 percent - about 2 percent below what SoCalEd earned under PUC regulation.

The CEOs wrote: "Because this is a case of first impression involving transmission assets that became FERC-jurisdictional through a state restructuring, we are concerned about its industry-wide implications and the message it conveys to the industry."

Also writing the FERC was U.S. Rep. Chip Pickering (R-Miss.): "As we actively consider transmission policy options, it would be most helpful to have a timely decision which explains the Commission's current view of appropriate risks and rewards for owners of transmission dedicated to an ISO or other RTO."

Michigan's Muddle: Choice Left Stranded, But What About Costs?

By Carl J. Levesque

"The Legislature, not this court, is the body that must weigh the economic and social costs and benefits of restructuring."

So said the Michigan Supreme Court in late June when, in granting an appeal filed by the state's major investor-owned electric utilities, it overturned an attempt by state regulators to mandate retail choice in electricity without authorization from the state legislature.(fn1)

So what comes next? The Public Service Commission responded by asking interested parties for answers to that very question when it requested legal briefs addressing the impact of the court order.(fn2)

Then, on Aug. 17, the PSC determined that it has the authority to implement its electric restructuring orders issued in 1998 on a voluntary basis with participating utilities. Once customers have begun taking open access service, the commission ruled, that service is no longer a new service under the Supreme Court decision and the commission therefore can regulate the service.

UTILITIES CAN PROCEED VOLUNTARILY. The court had struck down the PSC wheeling plan because it was mandatory. That left open the question of whether utilities could proceed voluntarily to offer choice to customers.

Among the briefs filed, the utilities appeared to say "yes," while the state attorney general gave an unequivocal "no." Meanwhile, other key players echoed the sentiments of the court: Take the matter to the legislature to get competition rolling again, they urged.

Detroit Edison claimed the right to implement voluntary retail access. So did Consumers Energy. In its noticeably short four-page brief, Consumers asked that the commission "not take any action which would interrupt the substantial progress already made in making retail open access available to customers." The Supreme Court decision may have nullified a comprehensive deregulation initiative, but according to the company, the opinion contained nothing "which prevents a voluntary retail open access program from going forward."

But state attorney general Jennifer Mulhern Granholm disagreed. She argued that the Supreme Court decision means that the PSC lacks jurisdiction to implement voluntary programs because "it would not be just and reasonable for the MPSC to take action to approve service and tariffs on terms unilaterally controlled by [Consumers and Detroit Edison]."

In the end, however, the PSC sided with the utilities, allowing them to proceed voluntarily.

WHITHER STRANDED COSTS? With all of the PSC restructuring orders suddenly in question, a familiar controversy resurfaced following the court decision: stranded-cost recovery. What is the fate of PSC orders authorizing stranded costs if retail choice - the reason for stranding - is no longer in effect?

Consumers Energy Co. and Detroit Edison Co., the two major public utilities in the state, sought protection for what they thought they already had won - the recovery of 100 percent of their own stranded costs. Detroit Edison emphasized that the PSC "has the authority (and duty) to permit utilities to recover their stranded costs." The utility said it wanted to protect the sanctity of the PSC orders accelerating amortization of the Fermi 2 nuclear plant and setting rates that allow for stranded-cost recovery. Those orders, Detroit Edison said, are "undiminished by the Supreme Court's decision."

The Association of Businesses Advocating Tariff Equity, which represents the biggest industrial electricity consumers in the state, didn't think so. The association made a point of saying in its brief that the Fermi 2 order should be reversed.

As a result of the Supreme Court decision, "any justification for accelerated amortization ¼ has vanished," ABATE said. The association grounded its anti-stranded-cost recovery opinion in simple "if ¼ then" reasoning: "If the PSC had no authority to require open access, then it goes without saying that there are no reasonable and prudent implementation costs and no stranded costs." On the same side of that issue was the state attorney general, who stated that the PSC has no jurisdiction over the stranded-cost issue.

CHANCES FOR COMPROMISE? While ABATE asked the PSC to cease any efforts to implement competition, it also called on the governor and legislature to develop and enact legislation giving the PSC broad authority to implement choice. Unicom Energy Inc., which sells natural gas in Michigan and wants to provide electric service in the state, agreed that state legislation is needed to institute supplier choice, and it used its brief to express a desire to help craft that legislation.

Meanwhile, at the governor's office, spokesperson Susan Shafer said that while Gov. John Engler officially backs the original PSC restructuring orders, at press time he was contemplating alternative ways, such as legislation, of implementing electric retail choice.

"The next step is to codify those orders into law," the governor said.

Carl J. Levesque is an editorial research assistant for Public Utilities Fortnightly.

1 Consumers Power Co. et al. v. Public Service Comm'n et al., Nos. 111482-3 et al., June 29, 1999 (Mich.Sup.Ct.).

2 Case No. U-11290 et al., June 30, 1999, (Mich.P.S.C.).


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