News Digest

Fortnightly Magazine - September 1 2000

News Digest


 

Power Markets

Price Cap Backlash. The Federal Energy Regulatory Commission granted "fast-track" processing to review the complaint filed by Morgan Stanley Capital Group to overturn the $500-per-megawatt-hour price cap imposed in late June by the California Independent System Operator (but see below), but saw no need to force the ISO to rescind the cap.

As the FERC explained, a cap sets the price at which the ISO will buy power, and does not restrict options for sellers, as they can choose to sell into other markets.

Commissioner Hébert concurred in the result, but called on the FERC to investigate the ISO. "Getting to the bottom of the problem, in my view, requires us to begin a proceeding to rescind our approval of the ISO as the operator of the California grid." .

Earlier, on July 26, the FERC had asked its staff to conduct an investigation of price volatility in wholesale U.S. power markets, and to report back by Nov. 1, so that the commission could use the findings in evaluating proposals due from utilities by Oct. 15, regarding FERC Order 2000 and plans for regional transmission organizations.

California. On Aug. 1 the board of governors of the California Independent System Operator voted 15-6 (two abstained) to lower the price cap from $500 per megawatt-hour to $250, effective from Aug. 7 to Oct. 15, in the real-time markets that it administers for ancillary services and congestion relief.

Northeast Region. In separate orders, the FERC imposed temporary caps of $1,000 per megawatt-hour (the same level as PJM's price cap) governing bids by power suppliers in energy markets run by the New York Independent System Operator and the New England Power Pool. But the caps did not escape a dissenting opinion from commissioner Curt Hébert, who accused the majority of rushing in to cover "utility mistakes" that created exposed positions in the market. Hébert likened the majority's concern over using emergency measures to Captain Louis Rénault, the gendarme in the film "Casablanca" who was shocked to find gambling inside Rick's bar. Hébert repeated Casey Stengel's lament: "Can't anyone here play this game?"

  • New York ISO. In New York, the FERC cited a lack of demand-side participation. "If load cannot respond to dramatic increases in prices," said the FERC, "then generators can submit very high bids that the ISO must accept when supply is tight."

    Nevertheless, the majority declined to include "anti-gaming" tariff rules requested by the New York state commission and various intervenors. Such rules would have placed a $24,000-per-megawatt limit on payments to suppliers over 24 hours, to prevent suppliers from attaching conditions to their bids requiring high minimum general levels or long minimum run times, as a way of evading the bid cap. Further, the bid cap will not apply to ancillary services, emergency imports into the region, or to so-called "sink price bids," which set the scheduling queue for exports out of the ISO area, since such bids do not affect prices paid by New York buyers.

    The ISO board had sought the cap (set to expire on Oct. 28), but had suggested a higher bid maximum of $1,300-approximately equal to the highest observed day-ahead locational marginal price seen within the ISO, at least as of the end of June.

    The FERC acknowledged that power supplies were tight, but predicted that the cap would not dry up imports from other regions since the New York ISO still maintained an installed capacity requirement. It said the weak demand-side volume was due, "at least in part, to factors that prevent retail customers from seeing the real-time hour price, rather than because [they] are inherently willing to buy electricity at any price." .

  • New England. The call for bid caps had come from Nstar (holding company for Boston Edison), which had also asked for a study of market power and had cited a general failure of market mechanisms and a resulting lack of confidence by market participants. The ISO itself had opposed bid caps.

    In imposing the cap, the FERC agreed that the New England power market did not operate in a competitive manner: "New England's existing market rules make it profitable for generators to submit very high bids for a small portion of their capacity. ... When OP4 [emergency] conditions are declared ... generators know that virtually all bids will be accepted."

    The FERC observed that New England's "clearing-price" form of auction was designed to encourage bidding at cost, but that the region's "actual experience" had not been "fully consistent with these bidding expectations." It added, "[P]rices in New England are vulnerable to spikes during OP4 conditions that are vastly in excess of prices at other times." .

 

El Paso + Coastal. The FERC OK'd the merger between El Paso Energy Corp. and The Coastal Corp., finding no significant competitive concerns despite the fact that the two partners would be combining their merchant generation assets with upstream coal and natural gas fuel resources. .

NiSource + Columbia Energy. The Virginia Corporation Commission OK'd the proposed merger of NiSource Inc. and Columbia Energy Group, completing the last of nine necessary state actions required for the merger. .

The FERC also approved the merger. It acknowledged monopoly attributes in some power markets affected by the merger, but said the combining of natural gas properties under the deal would not affect prices much. .

Post-Merger Job Cuts. The New York PSC denied a petition filed by the Communications Workers of America alleging that New York Telephone Co. had violated the PSC's 1997 merger approval order for Bell Atlantic and NYNEX when it transferred certain back-office clerical jobs out of state. The PSC explained that the positions in question had not involved any "major job function." (The transferred employees corrected toll billing errors.)

"A typical benefit of any merger is the improved efficiency by combining redundant job functions," the PSC said. "The Commission expected that Bell Atlantic would take advantage of opportunities to achieve such efficiencies, and that they might include the movement of minor job functions in and out of New York State." .

WPS + Wisconsin Fuel & Light. After announcing in May their intent to merge, Wisconsin Public Service Corp., a subsidiary of WPS Resources Corp., and Wisconsin Fuel & Light confirmed their interest in a combination on July 13 by signing a definitive agreement that would give WF&L shareholders 1.73 WPSR common shares for each WF&L common share, as long as WPSR common stock trades between $27.79 and $33.96.

Florida Progress + CP&L. The Florida PSC on July 7 opened a docket to review the earnings of Florida Power Corp., including the effects of the merger between parent company, Florida Progress Corp. with Carolina Power & Light Co. The review is not expected to delay merger closing, scheduled for the fall. .

The FERC also approved the merger, relying on a letter filed June 30 by Florida Power's Vincent Dolan and CP&L's Frank Schiller, on plans to form regional transmission organizations. The letter promised that (1) a new Florida transco would file an application with the FERC by Aug. 15, and (2) that CP&L had made "significant and substantive progress" toward either forming a new Southeastern RTO or else joining an existing RTO.

But Tampa Electric Co. attacked the merger and asked for rehearing. It claimed that a competitive wholesale power market cannot function in Florida because the state Supreme Court in effect has banned new power plants by out-of-state merchant generators. .

Lyonnaise + United Water. The New Jersey board on July 6 approved the first international takeover of a New Jersey utility by giving the green light to French company Lyonnaise American Holding to acquire United Water Resources. Lyonnaise increased its ownership in the nation's second-largest water services company from 30 percent to 100 percent, marking the water industry's largest transfer of ownership.

The order calls for a rate freeze for United Water-New Jersey for two-and-one-half years, as well as maintenance of present employee levels for one year. The company also agreed not to seek any recovery of transaction costs.

Southern Union. The Missouri PSC allowed Southern Union Co. to acquire three New England natural gas utilities-Fall River Gas Co., Providence Energy Corp., and Valley Resources Inc. Regulators in Massachusetts and Rhode Island still must OK the deals. .

NS Power + Bangor. Canadian company NS Power Holdings, parent of Nova Scotia Power and minority owner of Maritimes & Northeast Pipeline, will purchase Maine-based Bangor Hydro-Electric for $206 million.

 

State PUCs

Electronic Data Interchange. The Pennsylvania PUC instructed electric distribution utilities and competitive energy suppliers to conduct transactions using an approved Internet protocol for electronic data interchange by March 31, 2001, but allowed such companies to ask for relief from the deadline if necessary. The PUC named the Gas Industry Standards Board Electronic Data Delivery Mechanism and EDIINT AS2 as being the "acceptable Internet protocols." .

Gas Capacity Rights. The New York PSC reaffirmed a prior ruling that natural gas marketers no longer need to have firm capacity during the off-peak summer months (), but said it would reevaluate the issue in an upcoming gas rate and restructuring case involving Consolidated Edison Co., which had petitioned the commission for rehearing on the policy.

The PSC appeared somewhat swayed by ConEd's argument that gas marketers might lose capacity rights to electric generators, but saw no need to act immediately "because no plants are currently under construction in the New York City area and utilities still have capacity under contract." But it conceded that in the future, a generator conceivably could opt to take firm off-peak service, affecting service to high priority transportation customers. .

Right-of-Way Leasing. The California PUC OK'd an arrangement whereby Southern California Edison Co. will lease potential sites for telecommunications facilities, including underutilized land parcels, to Pacific Bell Mobile Services.

"It is sensible for California's energy utilities, with their extensive easements, rights-of-way, and cable facilities, to cooperate in this manner with the telecommunications utilities that are seeking to build an updated telecommunications network," the PUC said. "Joint use of utility facilities has obvious economic benefits."

The PUC approved a 90/10 allocation of such lease revenues between utility shareholders and ratepayers. .

Names, Brands, & Logos. Maryland regulators found it "appropriate, in principle," to impute a royalty to regulated gas and electric utilities for the goodwill value and other "unquantified benefits" inherent in the utility name and logo used by an unregulated affiliate (such use is permitted in the state), but will require a disclaimer that the utility and the affiliate operate as distinct corporate entities.

The state commission will open a separate case to calculate benefits and royalties, and has told most energy utilities to file cost allocation manuals no later than Nov. 1 to address cross-subsidies between utilities and affiliates. .

Arkansas Restructuring. The Arkansas PSC approved various measures over the summer to implement the state's electric restructuring law, the Electric Consumer Choice Act of 1999. n Billing and Metering. Introduces competition for production and issuance of bills, payment and collection, and related call center functions. (Metering and dissemination of metering information in "bill-ready" or "rate-ready" formats is still regulated.) .

  • EDI. Adopts standards for electronic data interchange by Jan. 1, 2002 (startup date for supply competition). Will address specific procedures for exchanging data in defined situations at a later date. .
  • Market Power. Requires utilities and utility affiliates to conduct market power analyses for all competitive products and services. .
  • Customer Education. Includes explanations of the standard-offer service package, itemized billing, reliability and safety, customer protections and rights, and confidentiality of customer-specific information. .
  • Utility Affiliates. Adopts an "arm's length" standard for review of deals between utilities and affiliates. .

Interruptible Rates. Responding to unusually high prices and increased demand for electricity, the Oregon PUC on June 30 approved a Portland General Electric pilot tariff that gives the utility's larger customers incentives to cut back on power usage. PGE will pay large industrial users that voluntarily cut their electric loads when prices are high a price that is less than it otherwise would cost PGE to buy power and serve them.

Purchased Power Costs. The Virginia commission OK'd a plan for Conectiv subsidiary Delmarva Power & Light Co. to separate its generation units from its distribution system, subject to a "rate case protocol" to guarantee that the generation component of future rates does not increase above the level it would have been if the utility had held on to its power plants. .

Also, the commission deferred any ruling on whether Delmarva's participation in the PJM Interconnection LLC satisfies a requirement in the state's restructuring law that wires utilities must join a regional transmission group. It will consider that issue in .

Purchased Power Costs. The D.C. PSC, explaining a prior order that OK'd sales of generating plants by local utility, Potomac Electric Power Co., said it was never its intent to force the District's electric customers to buy all their energy through the PJM ISO.

"[I]t was never our intent to extend PJM's rules to local retail transactions, nor were we expressing a view that we lack authority to regulate prices in the retail market," the PSC said.

The prior order had required any plant buyer to operate the facilities in accordance with the PJM power pool rules governing reliability and market power monitoring and mitigation. .

Internet Radio Networks. The New York PSC told Con Ed to file "hybrid" tariffs for low-level electric service provided to Metricom Inc. for radio transceivers to be attached to street lights and utility poles to create a radio network for connecting consumers to the Internet.

It rejected Con Ed's proposal to bill such service under its traditional "SC2" rate for small-volume commercial customers.

Gas LDC Bypass. North Carolina regulators OK'd rates and terms for gas distribution service provided to the new 800-megawatt, gas-fired Rockingham power plant, but at the same time took a jab at the FERC for its policy of encouraging plant owners and other natural gas customers to bypass local distribution companies (LDCs) by taking service directly from interstate pipelines.

"The FERC's policy ignores an ancient and immutable law of commerce," said the state commission. "You cannot compete retail against wholesale." According to the state commission, FERC bypass "undermines" state efforts to bring gas service to unserved areas.

In the case in question, the Rockingham plant (a Dynegy affiliate) sought direct sales from Transcontinental Gas Pipe Line Corp., bypassing NUI North Carolina Gas (the LDC). The FERC in fact had allowed Transco to build the necessary delivery facilities, but the parties eventually settled on LDC service. .

Purchased Gas Costs. Citing an "unprecedented increase" in summer-period natural gas prices of more than $1.40 per Mcf, the Ohio PUC approved a major increase in natural gas cost recovery rates for Dayton Power & Light Co., a natural gas local distribution company. (The PUC recently had approved similar increases for two other LDCs, Cincinnati Gas & Electric and East Ohio Gas.) .

Gas Universal Service. The Pennsylvania PUC took a step in implementing the state's Natural Gas Choice and Competition Act, signed by Gov. Tom Ridge in 1999, by setting standard reporting rules for gas utility programs for universal service and energy conservation. .

Manhole Explosions. After a series of explosions that propelled manhole covers into the air on crowded city streets, the District of Columbia PSC told Potomac Electric Power Co. to inspect its low-voltage distribution cables and to consider developing a program for replacing cables older than 20 years. It also asked Pepco to consider the feasibility of separating primary and secondary underground cables as well as transformers. .

 

Transmission & ISOs

Congestion Management. Utilities, power producers, and transmission owners and operators still were fighting among themselves over the future design of markets and rules in the New England region, even after the FERC a month earlier had OK'd a new congestion management system for the New England ISO.

As of late July, parties were calling for rehearing on the FERC decision, raising complaints on numerous issues, running the gamut from generator scheduling and congestion contract rights, to capacity requirements, transmission planning and the division of authority between the ISO and the New England Power Pool.

Even so, the ISO admitted it would take two years to implement the new model, during which time the region would continue to "socialize" congestion costs, spreading them among all buyers and sellers. Commissioner William Massey termed the delay "bad news," and urged the ISO to save time by buying the same software already used by the PJM ISO. The Maine PUC, one of those urging a rehearing, asked the FERC why it had not turned to the alternative proposal of the "Anti-Subsidy" coalition for immediate relief, since the FERC had found in effect that continued cost socialization qualified under the Federal Power Act as an unjust and unreasonable rate.

  • The ISO attacked the FERC for requiring a second category of fixed congestion rights (FCRs) that would operate like hedging options, so that holders would not have to pay even if congestion occurred in the opposite direction as assumed by the FCR. "An option-type FCR is a worthwhile product," the ISO admitted, "but like many new concepts, it involves considerable complexity and implementation challenges."
  • The ISO also opposed the FERC rule allowing power producers to "self-schedule" by submitting essentially a zero bid, to guarantee dispatch and avoid any ramp-down despite the ultimate clearing price. Instead, it suggested a system of negative decremental bids, as permitted in New York and proposed in PJM.
  • Enron asked the FERC why it denied authority to the ISO to eliminate its installed capacity (ICAP) requirement, even though the commission agreed that the existing auction process could inflate prices in a way unrelated to the problem of capacity deficiency. Enron termed the ICAP rule a "second-best" determination of need, "when market prices can do so much better." It touted testimony from Maryland economics professor Peter Cramton, who called ICAP a holdover, and attacked opinions offered generators who "make money from the ICAP obligation."
  • National Grid, NSTAR, and several others opposed the new model because it "strips" NEPOOL transmission owners (TOs) from direct decision making in regional planning for transmission expansion, other than fulfilling a backstop role in case the ISO committee cannot reach a consensus, on the assumption that TOs, the FERC said, would "bias the plan in favor of their own competitive interests." National Grid argued that TO participation jointly with the ISO would "in no way hinder" others from proposing their own projects.
  • NEPOOL attacked language in the FERC order, saying it could be read to suggest that the ISO now would assume authority for bringing tariffs and market rules into compliance with the new congestion system. NEPOOL argued that despite its past problems in decision making (some actions require a two-thirds vote of its members) it is the only agency that can amend its own agreements and tariffs. Docket Nos. EL00-62-000, et al., 91 FERC 61,311, June 28, 2000, petitions for rehearing filed July 28, 2000.

Return on Equity. Citing "significant differences" between electric utilities and interstate natural gas pipelines, the FERC OK'd an 11.6 percent return on equity (ROE) for Southern California Edison Co. for electric transmission service provided over lines under the control of the California ISO, rejecting the 9.8 percent return rate set earlier for SoCal Ed by an administrative law judge.

The FERC said it would use a "constant growth" variation of the traditional discounted cash flow (DCF) method to set ROE for the electric transmission business. By contrast, the ALJ had adopted the same method used for gas pipelines, with a two-stage model of dividend growth that assumes that long-term growth at pipelines will mirror the gross domestic product. The FERC explained that ongoing industry restructuring puts the transmission business in a different category from pipelines, as electrics feature higher payout ratios, meaning less growth. (SoCal Ed's ratio was 55.38 percent.)

"This distinction is critical," said the FERC, "because retained earnings are a key source of dividend growth." It added that Prudential Securities treats electric utilities differently from all other industrial companies when estimating growth rates, even though it does rely on GDP data to judge long-term growth for gas pipelines. .

OASIS and RTOs. In spite of Commissioner Curt Hébert calling the initiative "a waste of time," the FERC issued an advance notice of proposed rulemaking seeking detailed proposals by Feb. 15 for certain communications protocols and standards to implement open access same-time information systems (OASIS) phase II.

OASIS phase II will incorporate electronic scheduling and apply to the communications and related business practices between customers and transmission providers, including regional transmission organizations.

Commissioner William Massey said the FERC had opened the case to help OASIS nodes evolve into RTOs, and that it wants a "common look and feel" to OASIS websites. Hébert, though voting for the order, said that Order No. 2000 already applied OASIS to RTOs. Docket No. RM00-10-000, 92 FERC 61,407, July 14, 2000 (F.E.R.C.).

 

Gas Pipelines

Independence/SupplyLink. The FERC granted certificates to Independence Pipeline and ANR Pipeline Co.'s SupplyLink Project, after the two companies filed precedent agreements to meet the requirement that they each have contracts with nonaffiliated shippers for at least 35 percent of proposed capacity. Before construction may begin, however, the companies must submit firm agreements with no "out" clauses. .

Business Wire

The Midwest Independent Transmission System Operator Inc. has signed a contract with the RTO Alliance, which consists of ALSTOM ESCA Corp., Open Access Technology International, Perot Systems, and TenFold Corp., to deliver an integrated control center system that will provide $50 million in infrastructure for the MISO, the largest independent transmission system operator in the United States. The hardware and software will support MISO's operational functions including transmission planning, reservation, scheduling, real-time monitoring and control settlement, and billing.

SCT has signed a contract with IBM to integrate SCT's Banner customer relationship management software with IBM's technology solutions for The New Power Co., a recently announced utilities venture spearheaded by Enron Corp. Under an agreement between IBM Global Services and SCT, the SCT Banner customer information system will be integrated into numerous back-office information technology solutions under development by IBM for The New Power Co. These solutions include customer care, electronic data interchange, billing, and a variety of other functions.

PowerTrust.Com, an Internet-based energy company for homeowners and small businesses, has unveiled PowerInternet, the first free Internet service provider available from an online energy company. The service (www.PowerInternet.net) is available through a partnership between PowerTrust.Com and MillionEyes.Com, which develops marketing solutions and brand equity for companies and organizations in the form of private label, premium Internet service.

HoustonStreet Exchange has entered into a memorandum of understanding with Enron, under which North American electricity and natural gas prices posted on EnronOnline automatically will be posted on HoustonStreet.Com. Traders will be able to act on the EnronOnline prices via either platform. The addition of EnronOnline pricing will correspond with the launch of HoustonStreet's natural gas platform in September.

Otter Tail Power Co. has announced the sale to Retx.Com, an e-business provider to the retail energy industry, of a model for an Internet-based software technology designed to facilitate and ensure robust customer choice in the retail electric market. The sale gives Retx.Com exclusive rights to the technology, with Otter Tail retaining certain royalty rights on product sales for five years. "The technology provides customer switching, scheduling, and imbalance accounting in a deregulated electric utility industry," said John MacFarlane, president and CEO of Otter Tail.

 

Studies & Reports

Electric Competition. On July 21 the U.S. Federal Trade Commission issued a staff report on electric utility restructuring, calling the industry the "latest and largest" in which extensive regulation has been made "obsolete" through advances in technology, most notably the combined-cycle natural gas turbine. It called on restructuring efforts to focus on market power that could lead to predatory pricing:

  • The report implies that utility mergers may have gone too far in concentrating ownership of generating resources: "Current antitrust laws are not designed to address the mere possession of market power or the legitimate acquisition of or increase in market power through lawful regulatory processes."
  • Citing fuel cells and distributed generation as likely alternatives to the transmission grid, the report urged regulators to insist on independent control and operation of the transmission grid. The FTC predicted that owners of transmission (and now distribution) assets still have profit incentives to deny grid connections to power producers. .

 

Electric Reliability

Statewide Standards. Addressing power outages at Delmarva Power & Light Co. back in July 1999, the Delaware PSC declined to initiate a generic docket to consider implementing state reliability standards, but directed the staff to study and report back on "the most appropriate manner" to tackle the issue.

"[W]e do not believe that a generic proceeding involving a host of participants is the most appropriate manner in which to proceed at this point, even though the issues on a general level might be similar for all distribution companies subject to our jurisdiction," said the PSC.

Needs Forecasts. As the Wisconsin PSC on June 29 issued a draft of its "strategic energy assessment" and set a public hearing for Sept. 18 to review the draft (comments are due Sept. 28) it also found on its plate proposals for both a major power plant and a 240-mile transmission line. The draft assessment, which offered forecasts through 2002, found that while the regional bulk power market provided "an adequate and reliable" source of capacity and energy between 1995 and 1999, current needs required "further study," as energy sales in the state were growing at an annual clip of 2 percent, while no new base load generating units had achieved commercial operation since 1985. See www.psc. state.wi.us/cases/sea/index.htm. .

Previously, on June 12 the PSC had issued its final environmental impact statement on the 1,050-MW natural gas-fired, combined-cycle power plant proposed to be built by Badger Generating Co. LLC in either Pleasant Prairie or Sturtevant, finding no major environmental concerns for either site. If approved, the facility would be the state's first true wholesale merchant plant that is not dependent on any preexisting power purchase arrangements with public utilities. .

Meanwhile, the Citizens Utility Board, a consumer advocate group, has come out against a proposed 240-mile transmission line that would connect Minnesota Power Co.'s Arrowhead substation, near Duluth, Minn., to Wisconsin Public Service Corp.'s Weston substation near Wausau, Wis. A May 2000 draft environmental impact statement for that project is available at www.psc.state.wi.us/cases/05CE113/deis.htm.

 

Courts

Standard Offer Prices. The Maryland Court of Appeals on July 20 lifted a stay in force since June 30 that had put electric retail choice on hold for Baltimore Gas & Electric Co. owing to claims by the Mid-Atlantic Power Supply Association that standard offer prices for the BG&E territory were set too low to allow other suppliers to compete.

Railroad Mergers. A federal appeals court upheld a move by the U.S. Surface Transportation Board to place a 15-month moratorium on the filing of applications for railroad mergers. The STB said it needed time in a changing world to revaluate its methods for analyzing effects on competition and the public interest. .

Charitable Contributions. A New Jersey court upheld a state PUC ruling that allowed a water utility to bill ratepayers for 50 percent of its charitable contributions.


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