News Digest

Fortnightly Magazine - April 1 2000


State PUCs

Electric Shopping Credits. The New York Public Service Commission OK'd a proposal by Consolidated Edison Co. to adopt a floating-rate shopping credit for generation supply that would reflect prices published by the New York Independent System Operator. Any difference between actual costs and market-based costs would be shared in a 90-10 ratio between ratepayers and utility stockholders.

The PSC also approved a one-time flat payment of $65 to encourage residential and small commercial customers to switch to a competitive supplier (industrial customers would receive an extra 0.2 cents per kilowatt-hour), despite objections from ConEd that any credit in excess of market price would violate the terms of the utility's 1997 restructuring orders.

The PSC said it would revisit the issue within a year, as it expected market structures to change soon, with the addition this summer of a capacity market at the NY ISO, and other advances regarding competitive metering and a move toward a single-bill format. .

Electric Transition Costs. The Arkansas PSC set guidelines to govern the recovery of transition (stranded) costs by electric utilities that would deny recovery of any costs already reflected in current rate levels, such as for employees now focusing on devising plans to implement retail choice.

However, in a rehearing order, the PSC retreated from an earlier proposed rule that would have forced utilities to seek prior approval of any investment in any long-lived asset subject to stranding but carrying a useful life beyond the end of the stranded-cost recovery period. .

Net Metering. At press time, Virginia had set a hearing for March 29 to consider arguments regarding proposed final regulations governing net energy metering. The rules would apply to customers owning and operating electric generation on the premises using solar, wind, or hydro energy as the sole fuel source, but only for unit sizes of not more than 10 kilowatts (residential customers) or 25 kW (non-residential) that are interconnected and operated in parallel with the distribution grid and intended primarily to offset the customer's own power requirements.

Also, all qualifying on-site generation located within the service territory of the native distribution utility could not be allowed to exceed 0.1 percent of peak-load forecast for the area for the previous year. .

Metering and Billing. The Arkansas PSC opened a generic proceeding to determine whether metering, billing, payment, collection, aggregation, and related services should be offered in a competitive framework. It asked for comments to address market expectations for product differentiation, plus lists of potential product vendors describing their readiness to serve and their willingness to deal with different classes of customers with different economic characteristics. .

DSM Incentives. Massachusetts expanded incentives for utility stockholders in approving final guidelines for demand-side management and energy efficiency programs designed to avoid costs incurred by utilities for electric generation, gas supply, transmission, distribution, and environmental compliance.

Rather than limit performance incentives to reflect only the direct costs of program implementation, the commission broadened the plan to cover costs associated with plan administration, marketing, market research, and program monitoring and evaluation.

As the commission acknowledged, "it is not [our] intention to promote unnecessary outsourcing of services... or to promote shoddy analyses." .

Electric Default Service. GPU Inc. announced Feb. 3 that it had not received any bids to furnish state-mandated default energy supply services in 2000 for as much as 20 percent of its customer base. Seven companies had begun the pre-qualification process, but none submitted bids by the Jan. 31 deadline.

QF Cost Recovery. State regulators allowed Montana Power Co. to continue to defer unrecovered out-of-market costs associated with power from qualifying cogeneration facilities (QFs) and to recover such costs eventually from customers that choose an alternative energy supplier.

It OK'd a $16.7 million interim rate reduction in the same case, reflecting a retirement of regulatory assets after a sale of certain of the company's generating assets had produced above-book proceeds sufficient to amortize the amounts. .

Electric Universal Service. In preparation for a July 1 startup date for electric retail choice, Maryland regulators imposed a 23-tiered fee structure to govern how to raise $24.4 million during the next three years from the state's commercial and industrial (C&I) electric customers (and $9.6 million from residential customers) to support a state-mandated universal service program.

C&I customers will pay from $3 to $3,500 per month, according to the size of the customer's utility bill, while residential users will pay a uniform statewide fee, running about $5 per customer per year. .

Utility-Affiliate Transactions. In a rehearing order the Ohio PUC reiterated that utilities may share information and employees with affiliates for reasons of safety, economic efficiency, and operational stability, but only if such sharing does not impede competition. .

Electric Stranded Costs. The West Virginia PSC issued a revised plan to meet the Jan. 1 startup date for electric utility competition that will not require calculation of stranded costs, but instead will impose a cap on default service rates to balance risks between ratepayers and utility stockholders.

Because the plan would not force electric utilities to divest their generation assets, nor require them to provide below-cost power, the PSC concluded that "the utilities are not forced to sustain stranded costs." .

Electric Restructuring. In a 240-page report, the Texas PUC concluded that it did not have enough information to rule on whether to require electric utilities to create separate corporations for regulated and deregulated functions to implement Senate Bill 7, the state's electric restructuring law enacted last year. The commission will revisit that issue in another docket, along with rate design of nonbypassable competition transition charges. .

Natural Gas Rates. Connecticut regulators rejected a performance-based rate plan proposed by Southern Connecticut Gas Co., explaining that the PBR plan failed to quantify savings anticipated from the company's merger with Energy East.

At the same time, the commission refused to eliminate SCG's purchased gas adjustment clause, noting that state law barred such a move absent proof that gas supply costs are stable.

It denied SCG's request for a 10.56 percent rate increase ($24 million) and instead granted a 0.2 percent hike ($500,000). .

Employee Bonuses. On Jan. 31 the Rhode Island PUC ordered Narragansett Electric Co. to stop paying employee bonuses out of a fund earmarked to aid energy conservation, even though the purpose of the bonuses was to reward utilities for reducing energy usage.

The PUC called for an audit of all the utility's bonus plans and may consider the issue as part of its larger review of the proposed merger between New England Electric System (owner of Narragansett Electric) and Blackstone Valley Electric and Newport Electric.

Merger Savings. The Kansas commission ordered West Plains Energy Kansas (an operating division of UtiliCorp United) to reduce charges by $8.7 million to reflect savings realized by the acquisition of Centel Corp in 1991.

But the commission set return on equity at 10.55 percent, rejecting a lower figure proposed by its staff because it reflected a study that had counted Empire State Electric and St. Joseph Power & Light as proxy companies when at the same time they proposed to merge with UtiliCorp. .

Water Plant Construction. The West Virginia PSC approved a partnership whereby West Virginia-American Water Co. will construct and lease new water utility facilities to be funded and owned by a municipal agency. The utility would collect a surcharge to fund the repayment of bonds issued by the municipality, while adding the leased property to rate base. .

Business Wire

In one of the largest commitments of its type in the history of the U.S. power industry, GE Power Systems has completed a multi-year effort and secured agreements totaling nearly $4 billion to supply power generation equipment and services to Duke Energy North America. The agreements cover the purchase of 84 gas turbines, 17 steam turbines, and long-term services agreements for up to 23 merchant power plants across the country. When completed, the power plants will produce more than 13 gigawatts of power for the wholesale U.S. market.

United American Energy Corp. and Southern Co. Energy Marketing have entered a fuel-for-electricity agreement for United American Energy's 82-megawatt power plant in Lowell, Mass. In what is known as a "tolling" agreement, Southern Co. Energy Marketing will have the exclusive right to supply fuel to and receive electricity from the generating plant, which operates primarily on natural gas. Southern will market and trade electricity from the plant in the New England Power Pool. Exact terms of the deal were not disclosed.

Unitil Corp. has signed an agreement with BusinessEdge Solutions Inc. to further automate the Usource product line for the mid-market segment of small to medium industrial and commercial customers. Usource is Unitil's Internet energy auction system serving large commercial and industrial customers. Under the technology agreement with Unitil, BusinessEdge will design and implement an eBusiness strategy using flow-through processing of transactions in a deregulated energy environment. BusinessEdge will integrate Unitil's enhanced back-office applications with the Enermetrix.com Exchange while providing gateway connectivity to suppliers.

Altair Energy, Public Service Co. of Colorado's solar electric partner, has announced that a Jefferson County, Colo., family has chosen to meet most of its estate's electric needs with a record-sized solar electric system, the largest ever to be installed on a home with existing utility power in the Rocky Mountain region. The system, owned by Jack Rickard, includes a battery bank that provides emergency backup power features and was designed to meet a major portion of the electric needs typically required by his 6,000-square-foot Morrison home and family of eight. Altair installed the system.

Convergent Group Corp. has filed a registration statement with the Securities and Exchange Commission for an initial public offering of $115 million of its common stock, including an over-allotment option from the company and certain selling shareholders. Convergent Group is a provider of professional services that enable its utility and local government clients to implement Internet-based eBusiness solutions.

Transmission & ISOs

New England ISO. The Competitive Power Coalition, comprised of eight generating companies representing the majority of the installed capacity in New England, said on Feb. 10 that the New England ISO was misapplying market rules, creating serious implementation problems.

Earlier, on Feb. 7, Coalition members had met individually with the commissioners at the Federal Energy Regulatory Commission to elaborate on concerns set out in a complaint filed with the FERC on Feb. 1. .

Coalition members say they are willing to explore an alternative power exchange because "NEPOOL is dysfunctional." The Coalition on Jan. 21 released a white paper explaining perceived problems with the ISO and potential solutions. It is available from the Coalition at 617-248-9772.

RTO Rule Redux. On rehearing the FERC largely reaffirmed its final rule issued Dec. 20 (Order 2000) governing regional transmission organizations (RTOs), but issued clarifications on three points: (1) the definition of the term "market participant" and whether parties meeting that definition are viewed as providing transmission service to an RTO, (2) audits to ensure compliance with tests for independent governance, and (3) the extent to which RTO proposals must document outreach efforts to include cooperatively owned utilities as members.

In particular, the revised rule explains that a firm that functions as a pure transmission company and provides transmission service to an RTO should not be considered a market participant. That change was designed to ensure that independent transmission companies (transcos) can satisfy all legal tests under the RTO rule, yet the FERC cautioned that the change should not imply that a pure transmission company will never affect the governance of an ISO, or preclude the FERC from considering on a case-by-case basis whether a transco meets the independence standard.

Moreover, the FERC reiterated that an independent transco cannot own or operate generation, even if only to serve a non-competitive transmission function, without stepping over the line as a market participant (unless such generation supplies ancillary services of last resort, which is a required function of an RTO). .

ComEd ITC. The FERC granted partial approval of the petition filed by Commonwealth Edison Co., IES Utilities, Interstate Power, and MidAmerican Energy to form an independent transmission company (ITC) that would function as a so-called "binary RTO," holding primary operational authority, but remaining nested within the structure of the Midwest Independent System Operator, which would oversee the ITC.

The ITC would plan and carry out its own transmission additions and upgrades, and file its own rate structures for transmission, congestion management, and ancillary services, with its own scheme of performance-based incentives - factors that have led some to question whether the ITC might overshadow the Midwest ISO.

The FERC acknowledged that ComEd's binary RTO proposal was not yet fully formed, but deflected objections by intervenors who complained that the ITC had not committed to a single system rate, as had the Midwest ISO, but would reduce MISO's regional value by retaining separate tariff filing authority. The FERC preferred to praise the ITC's flexibility and noted that its proposed congestion management system included "many appropriate elements," while the MISO had not yet developed its own market-based system for congestion pricing. .

Line Construction. On Feb. 29 the New York PSC announced that it had authorized the Long Island Power Authority to construct a 22.5-mile underground electric transmission line, set to begin operations at 69 kilovolts, but capable of expanding to 138 kV. .

Public Power

Co-op Support Structure. California's electric industry has formed a new rural electric cooperative, known as Golden State Power, to serve as a statewide support organization for utility cooperatives. The new co-op also will collaborate in California with Anza Electric Co-op and Plumas-Sierra Rural Electric Co-op, and with two newly formed energy buyer cooperatives, the California Electric Users Co-op and the California Oil Producers Energy Co-op.

Studies & Reports

Ancillary Service Pricing. The Oak Ridge National Laboratory has published a study by Brendan Kirby and Eric Hirst providing a more detailed look at some of the ideas regarding pricing of ancillary services that the authors explored earlier in these pages in their article, "Ancillary Services: A Call for Fair Prices," published Jan. 1 in , p. 32.

In their Oak Ridge study (ORNL/CON-474), "Customer-Specific Metrics for the Regulation and Load-Following Ancillary Services," Kirby and Hirst offer a "vector-allocation method" for calculating correlations between loads and requirements for ancillary services. For more detail, see www.EHirst.com.

Retail Competition. A study released by the National Energy Marketers Association claims that regulators impede energy competition by setting rules that assign default customers (those choosing not to choose) to incumbent utilities.

"A presumption that customers want the utilities to supply competitive services does not exist in the telecom industry and should not exist in the new energy industry either," said NEMA president Craig Goodman.

In its study, "National Guidelines for Designing and Pricing Default Energy and Related Services," the NEMA suggests that the markets are developing quickly where default pricing reflects the true costs of providing retail services, as opposed to where those costs are hidden in distribution rates. It cites Massachusetts and California, where default prices at the start of competition were set at or below the wholesale cost of power (with some generation service costs buried in the distribution rate), spawning few active competitive suppliers and prompting very few consumers (about 1 percent) to choose a competitive supplier.

In Pennsylvania, however, where NEMA contends that shopping credits come closer to matching actual costs, the association says that about 10 percent of customers had switched after one year of competition. See www.energymarketers.com.

Courts

Consumer Privacy. A Pennsylvania court ruled that PECO Energy had no standing to challenge a state PUC order that obliged utilities to release limited customer proprietary data to competitive energy retailers, since a utility "does not represent the interests of its ratepayers." .

Cross-Selling Discounts. A Michigan court ruled that Ameritech violated a state law ban against predatory pricing for telephone service (any charges below the TSLRIC rate, or "total service element incremental costs") when it offered vouchers to customers redeemable for credit against bills either for telephone or cable television service. .

Gas Rate Design. In a natural gas rate order, the North Carolina Supreme Court affirmed use of a "peak-and-average" method over the "peak responsibility" formula to allocate fixed costs, noting that the PR method would give a "free ride" to interruptible customers, who receive uninterrupted service on most days of the year. .

Submetering. A Georgia court upheld a state PSC ruling that let Georgia Power serve a large apartment complex located within the service territory of an electric co-op, since the apartment was a single customer and thus qualified for the "large load exception" under state law. .

Slamming. The Alabama Supreme Court ruled that the state utility commission - not the courts - has exclusive authority to resolve complaints by telephone customers about slamming under a new state law. .

Power Plants

Deferred Tax Normalization. In light of a private letter ruling issued by the Internal Revenue Service on Jan. 6, which concluded that any flowback to utility customers of deferred unamortized investment tax credits (ITCs) or excess deferred income taxes (EDITs) associated with divested generating assets would violate the normalization rules in the federal income tax code, the Maine PUC has OK'd a stipulation that promises no such mandatory flowthrough and allows Central Maine Power to remove from its balance sheets the regulatory liabilities relating to such unamortized ITCs or EDITs.

The stipulation also settled certain issues concerning accounting for gain on the sale of generating assets and how to reflect such gain in standard-offer rates. .

Fossil Unit Divestitures. Potomac Electric Power Co. has begun site tours for prospective buyers of its four power plants and mailed an "information memorandum" to nearly 2,000 interested parties in February to kick off a two-stage auction process expected to be completed by year end.

"We are extremely pleased with the level of interest shown in our generation assets thus far in the auction process," said Bill Sim, group vice president for generation. The company said that large multi-national power producers, independent power producers, and utility affiliates all had expressed interest.

The assets represent over 6,000 MW, including four power plants, five purchased power agreements, and certain ancillary services.

Nuclear Relicensing. Entergy Corp. on Feb. 1 applied to the Nuclear Regulatory Commission for renewal of the operating license for Unit 1 of its Arkansas Nuclear One generating plant, which is licensed to operate until 2014, a renewal that would authorize it to operate until 2034. The request marks the third renewal application to the NRC, behind Baltimore Gas & Electric's Calvert Cliffs plant and Duke Energy's Oconee plant.

Nuclear Unit Sales. The New York Power Authority and Entergy Corp. have reached an agreement in principle for the sale to Entergy of the Power Authority's two nuclear power plants - the Indian Point 3 plant in Buchanan, and the James A. FitzPatrick plant in Oswego County - for $50 million at closing and seven annual installments of about $84 million. In consideration for fuel, Entergy also has agreed to pay seven annual installments of about $24 million.

"The NYPA plants are a good fit for Entergy's growth strategy and its environmental leadership commitment," said Entergy chief executive officer Wayne Leonard, referring to his company's growth strategy in the Northeast.

Power Markets

Electronic Trading. The New York Mercantile Exchange was to switch electricity trading from an "open outcry" mode to its new ACCESS electronic trading system following the close of business on March 2. The new system initially would keep trading open for 22 1/2 hours a day, and then move to a 24-hour system.

"I could see [24-hour trading] happening by the end of this year," said NYMEX president R. Patrick Thompson, who says the electric industry has shown the greatest level of acceptance of electronic trading. Thompson also acknowledged that while NYMEX would have "many of the same-looking products" as HoustonStreet.com, the longer-term goal of the electronic system was greater integration of physical and derivatives markets, allowing for the creation of new products.

"In electric power... the level of information that can be delivered about those markets on an equal-footing basis is quite significant," Thompson said.

Energy Imbalances. Saying the utility's plan did not go far enough, the FERC expanded Commonwealth Edison Co.'s proposal for automated trading in energy imbalances to allow both wholesale and retail energy suppliers to participate. Trading would be conducted via a secure Internet site owned and operated by Automated Power Exchange..

Commissioner Curt Hébert predicted that the program would reduce penalties to be paid by retail customers: "I wonder why the FERC didn't think of it."

Retailer Licensing. The Maine PUC granted a license to Enron Power Marketing Inc. to operate in the state as a competitive energy retailer, serving commercial and industrial customers. .

State Legislatures

Idaho Merger Review. Responding to criticism that regulators were too quick to approve the merger between ScottishPower and PacifiCorp, Idaho legislators have proposed a bill aimed at giving the Idaho PUC more power in approving or rejecting energy company mergers. The bill would change Idaho code to require that ratepayers be "positively impacted" by a merger, rather than the present requirement that ratepayers not be "adversely affected." See .

Virginia Electric Restructuring. On Jan. 17 the Legislative Transition Task Force, formed to implement Virginia's recently enacted electric restructuring law, proposed a final draft for new legislation to amend the state's restructuring law. The new legislation would require the state commission to develop a code of conduct governing transactions between incumbent electric utilities and any affiliates conducting unregulated activities.

The bill also would allow distribution utilities to construct and operate generating facilities, as long as that would have "no material adverse effect" on reliability. It would guarantee the preservation of territorial rights for distribution service by incumbent electric utilities. See .

Nuclear Power - NRC Jurisdiction Questioned for Antitrust Reviews

By Carl J. Levesque

For once, The IOUs like what they see at the NRC. Comments filed in the Nuclear Regulatory Commission's proposed rulemaking that would rid it of responsibility to conduct antitrust reviews for nuclear asset license transfers show a clear split between investor-owned utilities, who favor the initiative, and public power entities, who want the NRC to review the license transfers for market power issues.

At issue is whether Section 105 of the Atomic Energy Act calls for NRC antitrust reviews of asset transfers. While both sides generally agree that that Section expressly calls for antitrust review for plant construction approval and, subsequently, for operating license issuance, the IOUs argue that the statute does not stipulate that NRC jurisdiction goes beyond those two instances.

"Section 105 simply does not mention, nor contemplate antitrust reviews for post-operating license transfers," noted FirstEnergy Nuclear Operating Co., operator of FirstEnergy Corp.'s nuclear plants. Siding with FirstEnergy is a group of utilities including Western Resources Inc., Kansas Gas & Electric Co., Wisconsin Electric Power Co., Public Service Electric & Gas Co., and Rochester Gas & Electric Co.

"Section 105 does not contemplate Commission review of antitrust issues upon a license transfer after the initial operating license is issued," the group of utilities said in their jointly filed comments. The Nuclear Energy Institute also favored the rulemaking, citing, as the IOUs did, the Wolf Creek Generating Station, Unit 1 license transfer proceeding in which the NRC "appropriately reconsidered its past practice of reviewing antitrust issues in license transfer proceedings."

Public power entities, however, didn't see it the same way. Comments filed jointly by the American Public Power Association, the Antitrust Institute and various municipalities claimed that the NRC's conclusion that Section 105 does not authorize it to conduct an antitrust review for asset transfers "is clearly erroneous." A transfer of an operating license to an entity that was not previously a licensee, APPA said, should be considered an initial application for an operating license "not preceded by a construction permit, and therefore an antitrust review is necessary." A group called the Citizens Awareness Network agreed, claiming that the rulemaking would be an "[a]bdication of Congressional charge."

The IOU comment letters called the NRC antitrust reviews duplicative, since at least three other federal bodies - the Federal Energy Regulatory Commission, the Federal Trade Commission, and the U.S. Department of Justice's Antitrust Division - review nuclear power plant license transfers as well. "The NRC's primary mission is to protect the public health and safety, not to economically regulate utilities," the comment letter from Western Resources and other utilities said.

But in the long run, the outcome of the NRC rulemaking could be irrelevant. On Feb. 28, the Department of Justice's Antitrust Division received from the DOJ-appointed International Competition Advisory Committee a report calling for regulatory agencies to be relieved of antitrust review responsibility in mergers so as to consolidate the federal merger approval process. The report's primary purpose was to address international antitrust and competition policy issues, but it concluded that "federal antitrust authorities" are better able to conduct antitrust reviews than "federal sectoral regulators." A majority of the committee recommended "removing the competition policy oversight duty from the sectoral regulators and vesting such power exclusively in the federal antitrust agencies."

To view the report, see www.usdoj.gov/atr/icpac/icpac.htm. For information on the NRC proposed rulemaking, including comments filed, see http://ruleforum.llnl.gov/cgi.bin/rulemake. F

Carl J. Levesque is associate editor at Public Utilities Fortnightly.

Plant Divestiture - No More Winner's Curse?

By Bruce W. Radford

On March 31, with assistance from the energy consulting firm Charles River Associates, the Alberta Department of Resource Development was scheduled to open the season for qualification of bidders for an auction of generating assets that will differ from the typical plant sale conducted in the United States. The Alberta procedure will auction off power purchase agreements (PPAs) rather than the plants themselves.

CAPACITY RIGHTS. Buyers will acquire rights to capacity for up to 20-year terms. They may sell those rights at market prices to marketers, customers, the Alberta Power Pool (APP), or the independent transmission administrator. They accept the risk of a fixed monthly lease payment owed to TransAlta Utilities, which will remain the nominal owner of the generating units and enjoy certain incentives for exceeding target ratios for plant availability. However, bidders may submit a negative bid. If a negative bid should win, the PPA owner would actually receive a monthly payment from APP's balancing pool. A negative price might reflect the bidder's expectation that market revenues from plant output will fall short of lease payments owed to TransAlta to cover operating costs.

ASSETS AVAILABLE. The auction will cover rights to 32 thermal generating units (6,558 MW), grouped into 13 tranches of PPAs, plus a single PPA tranche for hydro facilities. The hydro PPA will be transferred to the Power Pool, with net proceeds allocated to the APP's balancing pool, and TransAlta retaining dispatch control to ensure proper coordination of hydro plant operation with water resource management. No one buyer may acquire more than 20 percent of total PPA capacity, nor an unbalanced combination of rights from plants with low and high marginal costs.

AUCTION FORMAT. The format is called a transparent "simultaneous ascending auction," opening all 13 thermal PPAs for bidding at the same time (and all remain open as long as bidding continues on any one PPA). Bidders are informed of the standing high bid and required minimum bid to remain active at the end of each round. An activity rule prevents bidders from sitting on the sidelines and then jumping in; bidders lose in successive rounds if they fail to submit valid bids in current rounds.

NO OVERBIDS? According to Jan Paul Acton and Douglas R. Bohi, each a vice president at Charles River, the unusual auction format was made possible because most generating resources in the province operated at or below market rates, posing no problem with stranded costs and thus giving little incentive to the plant owner to sell the bricks and mortar to guarantee recovery of transition costs.

Acton and Bohi add that under Alberta's transparent format, bidders should be able to discern true market valuations, avoiding the "winner's curse" of bidding more than needed to win the day, or the fear of the winner's curse, which by contrast encourages bidders to underbid and curtail auction proceeds.

For more detail, see www.resdev.gov.ab.ca/electric/index.htm, and www.auctionppa.com.