News Digest

<b>State PUCs</b>
Fortnightly Magazine - April 15 2000

State PUCs

Natural Gas Competition. After reviewing a report prepared by its staff, the Iowa board rejected all plans filed by Iowa natural gas utilities to open the natural gas market to small-volume customers.

"[S]ome of the utilities' plans do not proceed quickly enough and others proceed too quickly by having the regulated utility exit the merchant function," the board said.

The board, while recognizing that some issues might require legislation to resolve, attempted to "move this process forward" by requiring each utility to propose tariff changes that remove barriers to competition in the small-volume sector. Comments addressing the procedural steps for designing the initial tariffs were due April 3.

Board member Susan J. Frye agreed with the rejection of the utilities' plans, but dissented on the commission's attempt at moving forward on the issue without the help of lawmakers. "[L]egislation is a better way to open the small-volume gas market to customer choice than the interim tariff modification approach adopted in this order," she said. .

Demand-side Management. The Kentucky PSC approved a three-year extension of pilot programs for demand-side management administered by Kentucky Power Co., but has encouraged the utility to seek ways to improve the cost-effectiveness of weatherization programs designed to assist its low-income customers. .

Administrative Rules. Interested parties must notify the Iowa board by May 1 if they wish to participate in a comprehensive review of commission rules, as ordered by Gov. Vilsack for all state agencies. However, the board acknowledged that if an electric restructuring bill passes, the review plan would have to be completely revised because restructuring rulemakings may have to be combined with the review. A final report is to be submitted to the governor's office on Dec. 31, 2002. .

PG&E Rates. In a highly contentious rate case, producing a decision longer than 500 pages, the California PUC on Feb.17 granted Pacific Gas & Electric Co. a 13 percent increase ($91 million) in revenues for natural gas distribution service (PG&E had asked for $377 million), plus an 18.9 percent increase ($361 million) in revenues for electric distribution service (versus a $648 million request).

The net impact on electric revenues will be smaller, however (up only $120 million net) because the increase will be offset by the expiration of $241 million in legislatively mandated electric revenues for reliability related activities.

Furthermore, consumer electric rates are not immediately affected by the authorized increases because of the general rate freeze mandated by state law and the 10 percent mandated rate cut for residential and small commercial customers currently in effect under Assembly Bill 1890. On the gas side, the PUC estimated that residential bills would rise $1.56 for a customer using an average of 50 therms per month.

The ruling reflects the authorized cost of capital for 1999 set in Decision 99-06-057, issued last June. .

Rights-of-Way. The Maine PUC OK'd a plan by Central Maine Power Co., an electric utility, to transfer right-of-way easements to, and to share electric corridors with, affiliated natural gas pipeline company, CMP Natural Gas LLC. The arrangement will allow the gas company to construct a pipeline to serve Calpine Corp.'s now-under construction, 540-MW gas-fired power plant. .

Fuel Procurement. The Iowa board initiated a rulemaking to replace the board's annual evaluation of electric utility contracting practices and fuel procurement. Under the proposal, it would notify utilities each year by Jan. 31 on whether they must file a fuel procurement plan, which would be due by May 15. Comments were due March 28. .

Gas Retail Choice. The Florida PSC adopted a rule allowing small businesses to choose their natural gas supplier (an option previously available only to large industrial consumers), and also allowing gas utilities (at their discretion) to offer choice to residential customers.

The rule directs all investor-owned gas utilities to offer transportation service to all nonresidential customers and eliminates volume thresholds ranging from 100,000 to 500,000 therms per year that had governed customer eligibility.

The PSC established base line requirements for each utility's open access tariff, but imposed minimal requirements so that each utility can tailor its tariff to its individual needs. Each tariff must clearly specify that the utility providing transportation service is not responsible for providing the customers with natural gas if the customer's supplier fails to produce. .

Performance-Based Rates. Kentucky Utilities and LG&E have agreed to implement an earnings shared mechanism (ESM) suggested in January by the Kentucky PSC allowing the utilities to keep 100 percent of their earnings up to 12.5 percent return on equity, with any earnings above that ROE shared with shareholders (60 percent) and ratepayers (40 percent). If company profits go below a 10.5 percent ROE, customer rates would increase to account for 40 percent of the loss.

In response to the orders, which impose a $63 million annual revenue reduction ($36.4 million for KU and $27.2 million for LG&E) representing more than 20 percent of the utilities' combined income, Duff & Phelps Credit Ratings Co. has downgraded the credit ratings of both utilities and imposed a negative rating outlook.

Stranded Costs. The Texas PUC tentatively approved a settlement allowing Central and South West Corp.'s subsidiary, Central Power & Light Co., to securitize about $764 million in stranded costs, short of the $1.27 billion CPL had requested in October 1999.

The settlement calls for the securitized amount to be reduced to $764 million in regulatory assets plus other qualified costs estimated at $28 million, and for $290 million of the regulatory assets originally requested to be securitized to be included in the calculation of stranded costs in CPL's April 2000 transmission and distribution cost filing. The PUC would issue a final determination on stranded costs in 2004..

Utility Marketing Affiliates. The Kentucky PSC adopted a code of conduct to govern sharing of information and resources between investor-owned utilities and their unregulated affiliates. .

LDC-Marketer Relationship. The Michigan PSC adopted a set of standards to regulate dealings between Michigan Gas Utilities (a regulated gas utility) and marketers, whether or not affiliated, but rejected a proposal to require the utility to conduct all unregulated marketing activities through a separate corporation. .

QF Purchase Obligation. Citing a new hydro project as too unreliable in its energy output, the Alaska PSC said it would not require the local utility to purchase project power at avoided cost rates, though the hydro project qualified as a small power production facility (QF) under the Public Utility Regulatory Policies Act of 1978.

The case involved South Fork Hydro LLC (the QF) and Matanuska Electric Assoc. Inc..

Gas Unbundling. Massachusetts OK'd a model tariff for the state's unbundling program for consumer choice in natural gas, which was to begin on April 1.

Nevertheless, it warned that the new tariffs could lead to "unacceptable cost-shifting" as the result of deaveraging of LDC-system capacity costs, and that company-specific review of capacity allocators for each class of customers will be reviewed as each utility completes its compliance filings in the case..

Electric Customer Choice. The Vermont board opened an initiative to consider how to implement retail access policies for Central Vermont Public Service Corp. (CVPS) and Green Mountain Power Corp. (GMP), slated for startup in Sept. 2001 on a voluntary basis. .

Mergers & Acquisitions

AEP + C&SW. The FERC approved the merger of American Electric Power Co. and Central & South West Corp., but only upon condition that the two halves of the merged company (AEP East and AEP West) will transfer operational control of their transmission facilities to a fully functioning, commission-approved regional transmission organization (RTO) by Dec. 15, 2001, the date specified in the final rule (FERC Order 2000) for RTO formation.

The FERC reversed an initial decision issued last year by an administrative law judge that had found few problems with the deal. Instead, the FERC said the merger would enhance the potential for market power and thus impose an adverse effect on competition absent the required condition for RTO formation.

The commission was satisfied by plans for the merger applicants to divest about 500 MW of generation in certain key markets, but saw competitive problems even if the deal would not increase market share in generation. It rejected arguments by the merger applicants that, in highlighting the mere enhancement of market power as significant, it was improperly considering pre-merger market power..

Commissioner Curt Hébert dissented, saying the majority's theory wrongly treated the merger as a vertical combination. He noted that just two weeks prior to the commission's order, the International Competition Advisory Committee at the U.S. Dept. of Justice had recommended ending the FERC's role in looking at antitrust issues in the merger context.

"Our claimed expertise leads today's majority to invent market power out of thin air," said Hébert."Congress should remove us from the merger business."

NEES + Eastern Utilities. The U.S. Nuclear Regulatory Commission approved the merger between New England Electric System and Eastern Utilities Associates, according to NEES president and chief executive officer Rick Sergel. The merger still requires approval by the federal Securities and Exchange Commission, as well as Massachusetts and Rhode Island regulators. "We continue our progress toward completing this merger early this year," Sergel said.

LG&E + PowerGen. PowerGen plc would acquire LG&E Energy Corp. at $24.85 per share in cash under a definitive agreement signed in February between the two companies, marking the first entry by PowerGen into the U.S. market. The deal was valued at $3.2 billion. The cash offer would represent a 9.8 percent premium over LG&E's $22.63 closing share price on March 16, the same day the parties said they had filed a joint merger application with the Kentucky Public Service Commission.

LG&E CEO Roger W. Hale appeared confident of approval, noting that on March 15, the U.S. Securities and Exchange Commission had OK'd the merger between the UK's National Grid Group plc and New England Electric System.

"The SEC's approval of foreign ownership of a U.S. utility company clearly helps," said Hale. "Our transaction is very similar to [that] deal."

NiSource + Columbia Gas. NiSource said on Feb. 28 it had reached a definitive agreement to acquire Columbia Energy Group in a stock deal valued at approximately $6 billion. Columbia shareholders would receive $70 in cash for each Columbia share, plus a $2.60 face value SAILS (a unit consisting of a zero coupon debt security with a forward equity contract). On completion of the deal, the two companies would become subsidiaries of a new holding company.

State Legislatures

Hydro Divestiture. California Assembly Speaker Fred Keeley introduced a bill on Feb. 22 that would allow the state temporarily to purchase the assets of Pacific Gas and Electric Co. so as to remove them from FERC jurisdiction and allow California to impose environmental and financial restrictions. The measure (Assembly Bill 1956) would allow the state's Consumers Energy & Environmental Security Authority to buy the assets, with the backing of Gov. Gray Davis.

PG&E currently has a proposal before the California PUC to divest its hydroelectric generating plants in a competitive auction. In a Jan. 18 letter to Gordon R. Smith, president and CEO of PG&E, Keeley argued that an immediate sale by PG&E to the state would provide the "mandate, time, and money to address the environmental, ratepayer/market power, and other important issues of divestiture at no expense to the taxpayer, ratepayer, or shareholder."

Electric Restructuring. The West Virginia House was considering HCR 27, which would restructure the state's electric industry to allow choice of electric supplier. The West Virginia PSC recently presented a restructuring plan to the legislature, finding choice is needed to ensure West Virginia's future economic viability.

Power Plants

Allocating Sale Proceeds. The Washington commission ruled that ratepayers should receive the excess in proceeds above net book value (up to original cost) on the sale of utility-owned generating plants, and 50 percent of any appreciation above original cost, in a decision that OK'd the sale of interests held by the state's three private electric companies (PacifiCorp, Avista Corp., and Puget Sound Energy) in the 1,340-megawatt Centralia power plant to TransAlta Corp. of Calgary, Alberta.

It added that it would factor in such payments in pending and future rate cases for the three utilities.

Commissioner Richard Hemstad dissented, saying that customers should receive any and all appreciation in plant values "to compensate them for risks they have borne while the facilities were in rate base."

Auction Participants. The New York PSC OK'd Central Hudson Gas & Electric Corp.'s auction plan for the sale of its Danskammer fossil generation facility and its 35 percent interest in the Roseton fossil generation facilities, after accepting the utility's offer to exclude its unregulated affiliate from the auction.

The PSC directed Central Hudson to use the Federal Energy Regulatory Commission's market power guidelines "for selecting bidders that can survive market power scrutiny," and required the company to be able to certify to the commission that the winning bidder meets the horizontal market power guidelines set out in previous auctions.

The PSC noted that the auction plan largely resembles "the process that has been successfully deployed in other auctions," citing the Niagara Mohawk auction order Case 96-E-0-891, April 24, 1998 (N.Y.P.S.C.).

Hydro Relicensing. Hydroelectric project sponsors won one and lost one in a pair of orders issued by the FERC.

  • Collaborative Process. The FERC relicensed two hydroelectric projects owned by Avista Corp. on the Clark Fork River, marking the first successful use of an alternative licensing process that shaved two years off the normally three-year process. Over 40 organizations agreed to the granting of the 45-year licenses.
  • Fish Ladders. On the same day, the FERC rescinded a license granted to Public Utility District No. 1 of Okanogan County, Wash. for the proposed 4.1-MW Enloe Dam, saying that fish ladders required by the National Marine Fisheries Service (NMFS) of the U.S. Department of Commerce would greatly increase costs when the project already appeared to be uneconomical. The Canadian government also opposed the fish ladder, saying it would introduce nonindigenous fish, creating disease risk.

Studies & Reports

Changes to billing systems represent the largest back-office expense for utilities and suppliers preparing for competitive energy markets, according to a study from Xenergy Inc., which notes that billing problems in some cases have led to lawsuits or bankruptcies.

The study says utilities report spending anywhere from $1.22 to $22 per customer, with one utility reportedly spending up to $82 million to make billing system changes needed to accommodate retail access.

"Having the right systems in place is critical to the success or failure of competition," said Jill Feblowitz, XENERGY senior consultant and project manager for the study.

Transmission & ISOs

RTO Workshops. Philip J. Pellegrino, CEO of ISO New England, Inc., caused a stir on the first day of the FERC's two-day workshop on regional transmission organizations (RTOs) held March 15-16 in Philadelphia, when he acknowledged that in the "mid-term," or between three and five years out, it was likely that the independent system operators (ISOs) for New York, New England, and PJM would combine to form a single RTO in the Northeastern United States. Pellegrino's acknowledgment drew no protest from William Museler (CEO of the New York ISO) or Richard Wodyka (COO for PJM) when they took the podium later in the day.

Pellegrino added that a binary form of RTO was the "ideal structure" for such a mega-RTO, with an ISO serving as a standard-setting group, and a single for-profit company owning all the transmission assets now owned by individual investor-owned utilities.

"So far it hasn't been fun to be in the transmission business," said Pellegrino. "We need a profit motive. The rat has to smell the cheese."

New England ISO. Reviewing market flaws affecting ISO New England and the New England Power Pool, the FERC granted an extension through June 30 for the temporary price cap for the operating reserve market that had been set to expire on Dec. 31, 1999. Commissioner Curt Hébert dissented.

Transco Formation. The Ohio PUC issued conditional approval of a proposal by FirstEnergy Corp. to transfer transmission assets to a wholly owned subsidiary, American Transmission Services Inc., in what it described as an "intermediate and facilitating" step in the formation of a regional transmission organization, despite objections that formation of a private for-profit transmission company might lead to pancaking of transmission rates and deprive consumers of the benefits of electric competition.

The PUC conditioned approval on its later determination that the assets to be transferred will qualify as "transmission" under the FERC's seven-factor test for distinguishing transmission from distribution assets.

A second condition would require ATS to "fully succeed" to FirstEnergy's native load obligations..

Native Load Reservations. In granting a complaint by Aquila Power Corp., the FERC ruled that Entergy violated the commission's pro forma transmission tariff and the comparability requirements of Order 888 by failing to designate the network resources (generation) associated with its reservations for firm transmission import capacity.

Entergy had said it wanted only to serve native load reliably, but the FERC observed that Entergy had reserved virtually all of the firm capacity on four key interfaces, and was essentially using its reservations to keep capacity open to buy off-system power whenever it might prove economical to do so.

Mountain West ISA. The Nevada PUC has refused to issue a guarantee to Nevada Power Co. and Sierra Pacific Power that they can recover losses from ratepayers if the Mountain West Independent System Administrator should default on funding loans from the utilities, but at the same time the PUC ruled that the parties had complied with all requirements for ISA formation that the PUC set earlier as a condition for their proposed merger, so that from a legal standpoint, the PUC had nothing left to do.

The PUC acknowledged the paradox: "The MWISA cannot function without startup funds. However, the funding proposal ... requires a guarantee [that] would constitute an irresponsible risk of consumer funds."

The PUC added that when it required ISA formation earlier as a condition for the merger, it had set no test or conditions for funding. Thus, the PUC ruled it had "no basis for review" of any proposed funding mechanism, and thus no grounds to act further. To move the process forward, the PUC said it would first have to rule that a specific funding mechanism for the ISA was required for the economic and reliable operation of transmission facilities.

Meanwhile, the PUC noted that the MWISA so far had been conducting management activities through an interim stakeholder board and needed to hurry up and form an independent board to legitimize the governing process. Earlier, the MWISA's stakeholder board had selected Automated Power Exchange to provide software support, but the PUC questioned that move when it declared: "The decision as to the selection of a vendor should be left until the independent board is in place."

The Fortnightly questioned Rosalie Day, chairman of the current interim stakeholder board, on how the ISA could form a new board, satisfy tests of independent governance, and conduct another solicitation for a software vendor and operator - all without funding.

She answered, "Has the train left the station without an engineer? Heck, it doesn't even have tracks."


APX Oversight. Noting the "broad language," Congress used in the Federal Power Act, a federal appeals court upheld a ruling by the Federal Energy Regulatory Commission that had claimed jurisdiction to regulate the Automated Power Exchange as a public utility under the Federal Power Act. APX, which had argued that it wasn't a public utility because it will not transmit or take title to power, instead called itself an "information management agent."

The court agreed with the FERC that the software used by APX played a role in markets by assigning a price to bilateral transactions where a gap might still exist between the bid and offer prices submitted by transacting parties.

After the ruling was issued, APX announced that its latest software and product design would not incorporate this feature of automatically setting a price (where a buyer and seller had not yet agreed) for private power exchanges planned in Illinois (working with Commonwealth Edison) and Ohio (working with FirstEnergy).

NOx Emissions. A federal appeals court rejected a claim that the Environmental Protection Agency has not explained adequately what volume of nitrogen oxide emissions flowing from one state to another contributes "significantly" to NOx nonattainment under Section 110 of the Clean Air Act.

The appeal was based on last May's decision in , which ruled that the EPA had interpreted the Clean Air Act so loosely that the power delegated to it by Congress was unconstitutional. Yet the court sought to limit the consequences of that ruling.

The court noted that "a mass of cases" had upheld delegations of "effectively standardless discretion," even where the scope of agency power was narrow.

It said the EPA need only do three things to show a significant contribution to nonattainment: (1) identify emissions activity within a state, (2) show evidence that emissions migrate to another state, and (3) show that the emissions contribute to nonattainment.

QF Certification. A federal appeals court affirmed a ruling by the Federal Energy Regulatory Commission that had upheld certification for a qualifying cogeneration facility (QF) even though the QF's corporate voting rules allowed electric utility affiliates (controlling a 45 percent ownership interest) to block significant corporate action, a feature that had led to complaints alleging a violation of QF rules regarding utility ownership. .

Business Wire

DTE Energy Technologies, an unregulated subsidiary of DTE Energy Co., has reached a distribution agreement with GENERAC Power Systems, a manufacturer of prepackaged standby power systems for homes and small businesses, for DTE to market the Generac GUARDIAN product, which provides fully automated standby power systems for homes and small businesses in Southeastern Michigan. DTE also will market custom-designed engineered systems for larger commercial and industrial customers. "The addition of the Generac product line to our portfolio represents a key step toward attaining our vision of DTE Energy Technologies as a preeminent supplier of distributed generation products and services," said Paul Horst, president of DTE Energy Technologies.

Consumers Energy and Chubu Electric Power Co. of Nagoya, Japan have signed what is believed to be the first-ever agreement to form a purchasing alliance between an American and Japanese utility company. The agreement supports an objective of the Japanese and U.S. governments to promote increased exports of U.S.-made utility equipment to Japan. The goals of the agreement are to examine product cost, productivity standardization, new product development, electronic technology, resource and knowledge sharing, and procurement process improvement and streamlining.

United Energy of Australia has signed a multi-year, multi-million dollar contract with CES International, a provider of real-time infrastructure reliability solutions, for the deployment of its Centricity operations resource management suite of solutions. With the agreement, CES becomes United Energy Distribution's prime contractor, systems integrator, and project management services provider for its electric and gas distribution management systems project.

Public Power

Las Cruces-El Paso Elec. Dispute. A settlement that would end the long-running dispute between the City of Las Cruces and El Paso Electric Co. over municipalization of EPE's electric distribution system in the city would give EPE a seven-year franchise to serve the city.

EPE would pay the city an annual 2 percent franchise fee (about $800,000/ year) and a lump sum of $21 million, and after seven years, Las Cruces would be able to buy EPE's distribution system for book value plus 30 percent.


Reliability & Restructuring. Without calling it an electric restructuring bill, Senate Energy and Natural Resources Committee Chairman Frank Murkowski (R-Alaska) on Feb. 24 introduced legislation that would repeal the Public Utility Holding Company Act of 1935 and the mandatory purchase requirement in Public Utility Regulatory Policies Act of 1978, in addition to allowing for stranded cost recovery.

The measure, Senate Bill 2098, addresses reliability by calling for eminent domain to construct new interstate transmission lines, and for the North American Electric Reliability Council to file with the Federal Energy Regulatory Commission proposed reliability standards, over which the commission would have approval authority. Cosponsored by Sen. Mary Landrieu (D-La.), the bill also allows for FERC oversight of regional transmission organizations. See

Electric Rates

Oregon Electric Rates. Finding the request inconsistent with a previous rate-setting agreement, the Oregon PUC rejected a request by PacifiCorp for a 12.6 percent residential rate hike, and told the company it must correct the deficiencies and extend the period of investigation of its filing by two months or the request would be dismissed.

PacifiCorp had argued that the filing was sufficient because it assigned the same 30 percent to distribution and 70 percent to generation and transmission as was used in the previous agreement. But PUC Chairman Ron Eachus pointed out, "Our previous agreement applied to the distribution function, not to a specified percentage of revenues. If the company wants an increase for generation and transmission, it has to break those costs and revenues out separately."

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