Electric Industry Restructuring:
Opportunities and Risks for West Virginia
Interim Report No. 2:
Current Federal and State-Level Actions
on Electric Industry Deregulation & Restructuring
Submitted to:
Director of Operations
Governor’s Office
1900 Kanawha Boulevard East
Charleston, WV 25305
Submitted by:
West Virginia University
Electric Industry Restructuring Research Group
P.O. Box 6064
Morgantown, WV 26506
July 31, 1997
2.0.0 Current Federal and State-Level Initiatives in Electric Industry Restructuring
2.1.0 Federal Energy Regulatory Commission
2.3.0 Utilities and Power Pools
2.3.2 The American Electric Power (AEP) Model
2.3.3 Allegheny Power’s Model of Electric Industry Restructuring
2.4.0 Summary and Recommendations
List of Tables
2.0.0 Current Federal and State-Level Initiatives in Electric Industry Restructuring
The electricity market does not neatly divside along state lines. Regulatory initiatives at the Federal level affect interstate wholesale sales of electricity, which are vital to an exporting region such as West Virginia. Several different bills have been proposed in Congress, including separate bills by Congressmen Schaefer, DeLay, and Markey and Senator Bumpers. These generally repeal the Public Utilities Regulatory Policies Act (PURPA) and the Public Utility Holding Company Act (PUHCA), usually in exchange for mandatory retail access to the transmission and distribution systems. Some have explicit provisions for recovery of stranded costs. Utilities generally support the repeal of PURPA and PUHCA, and are divided with respect to retail wheeling, while large industrial consumers are pushing vigorously for retail access. Prospects for any one of these bills is questionable at present, but most observers expect some electricity restructuring bill to pass within a year or two.
Meanwhile, the Federal Energy Regulatory Commission has taken vigorous action in the form of Orders 888 and 889. These orders, along with its previous and subsequent rulings on utility mergers paint a picture of an activist regulatory agency with an agenda to institute workably competitive wholesale markets that use the transmission system as their delivery route. Many states have reacted to FERC’s initiatives by passing their own legislation or through initiatives of their own regulatory authorities. What follows is a brief summary of some of these recent initiatives by state government and the FERC.
2.1.0 Federal Energy Regulatory Commission
The Federal Energy Regulatory Commission (FERC) regulates interstate electric power transmission and interstate wholesale power transactions in the United States. It sets transmission tariffs and access rules, and evaluates rates for wholesale power transactions carried over interstate high voltage transmission lines between electric utilities and across regions and the nation.
On May 5, 1996 the FERC announced Orders 888 and 889. Order 888 addresses "open access" to transmission lines by electric energy suppliers and consumers. Open access means that the owners of transmission lines have no special rights to use their own lines for transmitting energy that they produce. They must provide access to their lines to others under the same terms and tariffs that they charge to themselves. Order 888 also addresses stranded costs, providing that costs incurred for the purpose of FERC-jurisdictional transactions (a small part of the total), allowing full recovery of stranded costs in most cases. Order 889 sets further rules to open access to transmission line use by generation providers not affiliated with the owners of the lines. In order to make vital information available to all users, the Order 889 requires institution of an Open Access Sametime Information System (OASIS) which will publicly make available information regarding available transmission capacity (ATC) and rates for its use.
Order 888 opens wholesale power sales to competition by requiring utilities owning, controlling or operating transmission facilities to file nondiscriminatory open access tariffs. Goals include:
Under the order all public utilities that own, control, or operate interstate transmission facilities are required to offer service under a pro forma tariff. The pro forma tariff could be replaced by individual utilities with a capacity reservation tariff (CRT). Under the CRT utilities and all providers would reserve firm rights to power transfer between designated points of receipt and delivery.
The order also provides for full recovery of FERC-jurisdictional stranded costs, and endorses a "lost-revenue" methodology for calculating them. Eligible stranded costs for recovery include those with wholesale contract requirements dated before July 11, 1994. For those contracts dated later, stranded cost recovery must be made within the contract. The Commission allowed stranded cost recovery from customers that, given the opportunity to choose, select a different provider of transmission and leave their original provider.
FERC explicitly left it to the states to decide whether or not to allow retail wheeling, and whether and how retail stranded costs would be recovered under states' laws and regulatory actions. The FERC would become involved only if state regulators lack authority under state law to provide for stranded cost recovery. Should retail customers become wholesale customers, the FERC claims jurisdiction is the primary forum for recovery.
Order 889 provides for open access through OASIS and through additional Standards of Conduct which serve to ensure transmission owners do not have unfair competitive advantages through their control of transmission to sell power. The rule requires public utilities to:
2.1.2 Independent System Operator
In order to separate ownership and control functions in transmission, utilities are encouraged to propose plans for an Independent System Operator (ISO). Although ISO's are not required in Order 888, the Commission offers guidelines on how they would be set up and it retains the authority to finally approve any application to establish an ISO. The management and control of ISO's would be completely independent of the generation and transmission owners, and would help ensure fair access to the transmission system.
The FERC claims jurisdiction over interstate wholesale transmission and over the rates, terms and conditions of unbundled retail interstate transmission up to the point of local distribution. It concedes that states have jurisdiction over the delivery of service to end-users. The FERC professes deference to state views on which facilities constitute transmission and which are distribution, but provides a set of guidelines for distinguishing between the two, including voltage levels. It emphasizes that Orders 888 and 889 will not change the fundamental role of state regulatory authorities, including state authority to regulate generation rates, the siting of generation and transmission facilities, and retail distribution territories.
The open access rule (Order 888) refers to an accompanying Final Environmental Impact Statement (FEIS) that indicates no significant environmental impact. In fact, the FEIS asserts that the environment will benefit from reduced nitrogen oxide (NOx) emissions if it is cheaper to generate electricity with natural gas than with coal. The finding of no significant impact was controversial; the Environmental Protection Agency had requested FERC to include specific environmental mitigation provisions in its final rule.
The Public Utilities Commission (PUC) of the state of California approved an electric restructuring plan in December 1995. Under this plan, a non-bypassable Competitive Transition Charge (CTC) will be imposed on utility customers to recover the stranded cost of the electric utilities. However, the electric rates of customers will not increase more than the rates on January 1, 1996 without adjustment for inflation. The determination of the CTC will rely on market mechanisms. Customers will be able to choose their electricity supplier beginning January 1, 1998. The California PUC recommended establishment of the Independent System Operator (ISO) and the Power Exchange for a competitive generation market. The ISO will operate the transmission system and dispatch the generating units to preserve reliability and achieve the lowest operating cost of the transmission system. The transmission system will be owned by the electric utilities and they will be responsible for the maintenance of the transmission system. The ISO will not have any financial interest in Power Exchange or in any generation or load. A nondiscriminatory access to transmission grid will be provided by the ISO for all users of transmission system. The ISO will maintain frequency control and comply with all standards of the North American Electric Reliability Council (NERC) and the Western System Coordinating Council (WSCC). Scheduled nomination of generation by Power Exchange and the bilateral transactions will be coordinated by the ISO.
The Power Exchange will provide a transparent market for generation with hourly or half-hourly price signals. It will have no financial interest in generating sources and the ISO. It will establish nondiscriminatory and transparent bidding protocols. The Power Exchange will match bids submitted by generators with demand bids submitted by utilities, brokers, marketers or any authorized entity on behalf of end-use customers and submit a contingent dispatch to ISO. The commission also recommended that utilities voluntarily divest at least 50% of their fossil generating assets to mitigate the market power due to control of generating facilities.
Many states have already taken action to restructure their electricity markets. In general, states with high electricity prices have felt the most pressure to take action. The most common scenario is that large industrial customers of high-price utilities (usually with significant nuclear power or PURPA-related cost exposure) put pressure on the state regulatory authorities and/or legislature to take action to allow them access to lower cost power. After looking at the list of states that have passed legislation, we examine more carefully the actions in states that are either considered the leaders, or that are located near West Virginia, or both.
First, consider the list of states whose authorities have passed some legislation. The legislation in most cases gives the state regulatory authorities direction, and in most cases specific instructions, on how to implement competition. Many of these states have pilot programs either in place or scheduled in the near future offering advice to electric energy generation suppliers and choice to a portion of their customers. Most also have specific time schedules for increasing customer choice a3vailability to more and more customers, plus a date certain at which choice will be available to all customers in the state.
Table 2.1 shows a list of seventeen states that have already studied the prospect of deregulation, made decisions and recommendations for state legislation and have passed legislation governing the process to be used to move to and implement competition. Legislation in most cases specifies the actions to be taken by the state regulatory authority to manage the transition phase and the fully deregulated later phase. In many cases the legislation places specific controls on the process. For example, Massachusetts' prospective legislation under consideration in its Senate calls for retail competition by 1/1/98 and mandates a 10% rate reduction at the onset of competition.
source: Electric Power Supply Association, 1401 H. Street, N.W., Suite 760, Washington, DC 20005
STATE
BILL ID
STATUS
Alabama S.306
Passed House and Senate; signed by Governor, 5/6/96 California A.B. 1890 Passed House and Senate; signed by Governor, 9/24/96 Idaho H.B. 399 Passed House and Senate; signed by Governor, 3/27/97 Illinois H.Res. 32 Adopted by House Indiana S.B 427 Passed by Senate, signed by Governor, 5/6/97 Maryland Legislative Task Force Established to study retail electric competition and restructuring. S.B. 851 Passed Senate, Signed by Governor, 4/8/97 Massachusetts Governor filed legislation 2/24/97 to restructure electric industry allowing choice by 1/1/98 S.B. 1714 Introduced 3/20/97 Michigan Governor issued industry restructuring proposal to Pub. Service Com. calling for retail access. PSC adopted a phased-in transition to competition to bring full customer choice by 2002 on 6/5/97 Montana S.B. 390 Passed House and Senate; signed by Governor, 5/2/97 Nevada A.B. 366 Passed Assembly 6/97. Sent to Senate. Passed Government Affairs Subcommittee New Hampshire H.B. 1392 Passed House and Senate; signed by Governor, 5/96 New York S. 3486 Securitization Bill. Passed Senate 3/19/97 Oklahoma S.B. 500 Passed House and Senate; signed by Governor, 4/28/97 Pennsylvania H.B. 1509 Passed House and Senate; signed by Governor, 12/4/96 Rhode Island H.B. 96 / H.8124 Passed House and Senate; signed by Governor, 8/7/96 Vermont H.B. 105 Passed House and Senate; signed by Governor
The New Hampshire Public Utility Commission recently reaffirmed the position it took in February to deny utilities full recovery of their stranded costs, becoming the first state commission to do so thus far. Other important points in its decision include: distribution companies (discos) must divest their generation and aggregation/marketing services within two years; discos must also sell contracted rights to buy power under existing contracts; utilities must unbundle their rates identifying component costs. Stranded costs may be recovered by a utility only relative to an allowed level of a regional electric price. "Negative" stranded costs (plants which are economic) must be added in to obtain a net value of stranded cost.
Maine's restructuring bill opens the entire state to full retail competition and at the same time requires the state's two largest utilities to divest all of their generating assets by March 1, 2000. The bill also requires utilities to include 30% of their generation in renewable sources. Utilities are, however, allowed to market their power to up to one third of the customers in their own territories. (Utilities questioned why they are not allowed to pursue all customers in all territories.) The legislation allows utilities to recover up to one third of their stranded costs.
Pennsylvania merits special attention because it is West Virginia’s neighbor, and because it has moved ahead of most states in its development of a policy on restructuring. On July 3, 1996 the Pennsylvania Public Utility Commission made recommendations to the Governor and the General Assembly which were acted upon by the General Assembly producing House Bill No. 1509 also in 1996. Electric utilities are required to file restructuring plans with the Commission between April 1, 1997 and September 30, 1997. Each utility's restructuring plan will be subject to review and acceptance, modification, or rejection by the Commission. Through this process the Commission and each individual utility will complete an acceptable plan within nine months from the time of the utility's first filing.
Pennsylvania's legislation sets down the rules and regulatory guidelines for accomplishing deregulation and competition. Chapter 28 of Pennsylvania House Bill No. 1509 governs the electric utility industry. Chapter 28 addresses each of the following aspects of Pennsylvania's deregulation policy: policy statement, definitions of terms, standards, regionalism, pilot programs and performance based rates, duties of electric distribution companies, the Competitive Transition Charge, electric generation supplier requirements, revenue neutral reconciliation, market power remediation, transition bond approval and severability. Some of the most important of these aspects are summarized below.
Policy. The Pennsylvania General Assembly's stated new policy to permit retail customers direct access to a competitive generation market recognizes the following factors:
Especially relevant to West Virginians is the following provision:
Definition of Terms. A few of the terms defined by the Pennsylvania legislation are included here for ease of understanding/reading by the reader. A more complete Glossary, generated by the Consumer Education Staff of the Pennsylvania PUC, is available from The Consumer Education Staff, Bureau of Public Liason, Pennsylvania Public Utility Commission, Commonwealth & North Streets, North Office Building, Harrisburg, PA 17120.
Aggregator or Market Aggregator. An entity licensed by the PUC that purchases electric energy and takes title to the energy as an intermediary for sale to retail customers.
Broker or Marketer. An entity licensed by the PUC that acts as an agent or intermediary in the sale and purchase of electric energy but that does not take title to the energy.
Competitive Transition Charge. A nonbypassable charge applied to the bill of every customer accessing the transmission or distribution network which (charge) is for the recovery of an electric utility's Transition or Stranded Costs.
Direct Access. The right of electric generation suppliers and end-use customers to utilize and interconnect with the electric transmission and distribution system on a nondiscriminatory basis at rates, terms and conditions of service comparable to the transmission and distribution companies' own use of the system to transport electricity from any generator to any end-use customer.
Securitization. The act of pledging assets to a creditor through a note, lien or bond.
Standards. The PUC will use certain standards to evaluate and approve electric utility plans for restructuring, to perform oversight of the transition process and to regulate the restructured industry. Some of the most prominent of these standards (See H.B. 1509, Nov. 20, 1996; Section 4., Chapter 28, p. 28) abbreviated here are;
- Ensure continuation of safe and reliable electric service, including maintenance of generation reserve margins and transmission and distribution facilities according to existing standards.
- The PUC shall allow customers to choose among electric generation suppliers in a competitive generation market through direct access. Customers should be able to choose among alternatives such as firm and interruptible service, flexible pricing and alternate generation sources, including reasonable and fair opportunities to self-generate and interconnect.
- The PUC shall require the unbundling of electric utility services, tariffs and customer bills to separate the charges for generation, transmission and distribution.
- Rate caps on distribution, non-generation services, (excluding the CTC and intangible Transition charge) and generation, with some exceptions.
- The PUC may permit but shall not require an electric utility to divest itself of facilities in order to reorganize its corporate structure.
Securitization in Pennsylvania. Under the state's new deregulation legislation Philadelphia Electric Company (Peco) was allowed by the state Public Utility Commission to securitize $1.1 billion of its $6.7 billion of generation assets. (See "Some Definitions of Terms" above for a definition of securitization)
The status of other states potentially important to West Virginia's electricity future but in which no legislation has yet been put into place are briefly described in the following.
Connecticut's Legislative Electric Industry Restructuring Task Force released its report last December (1996). The Task Force was unable to reach consensus and therefore did not recommend either the state move to retail choice (competition) or not move in that direction. It also was not decisive regarding the important issue of whether or not utilities should be allowed to fully recover their stranded costs. This leaves Connecticut in a potentially vulnerable position since retail competition in neighboring states (including New Hampshire, Rhode Island and Massachusetts) is scheduled to begin next year.
New Jersey Board of Public Utilities was scheduled to deliver recommendations to the Legislature in May 1997. Utility reform plans are due to the board by July 15, 1997.
The PUC of Ohio issued its Restructuring Principles approximately one year ago. Since that time it has been sponsoring workshops and public hearings on deregulation, attempting to generate public participation in forming policy. Legislation establishing state policy and promoting competition and customer choice (H.B. 220) was introduced February 13, 1997 and assigned to the House Public Utilities Committee. The Committee planned weekly meetings through April 1997 and is scheduled to release its report in October.
Kentucky: No formal investigation into deregulation has been undertaken by the Kentucky PSC. The PSC was scheduled to brief the Interim Special Subcommittee on Energy in April 1997.
2.3.0 Utilities and Power Pools
2.3.1 PJM Independent System Operator (ISO) Model
The following companies of the Pennsylvania - New Jersey - Maryland Interconnection (PJM) filed a revised proposal for ISO on June 2, 1997 with the Federal Energy Regulatory Commission: Atlantic City Electric Company, Baltimore Gas and Electric Company, Delmarva Power & Light Company, Jersey Central Power & Light Company, Metropolitan Edison Company, Pennsylvania Electric Company, Pennsylvania Power & Light Company, Potomac Electric Power Company, and Public Service Electric and Gas Company. The proposal for the ISO tries to satisfy the following FERC principles.
The PJM Pool was organized as a limited liability corporation with an independent Board of Managers (called the PJM Board). The members of the PJM Board will be elected by a Members Committee, composed of all the parties to the Operating Agreement. The committee members will represent generation owners, other suppliers, transmission owners, electric distributors, and end-use customers. The Office of Interconnection under the supervision of the PJM Board will be responsible for day-to-day operation of the PJM control area, the PJM Interchange Energy Market, and analysis for reserve sharing. The Office of Interconnection will announce each hour the unconstrained market clearing price. The market clearing price will be equal to the cost or bid price in dollars per MWh of the highest-priced increment of energy to meet the load demand during each hour. The concept of locational marginal pricing will be used to dispatch under transmission constraints in the PJM Control Area. The Office of Interconnection will operate the Open Access Same-Time Information System (OASIS). The available transmission capacity will be posted on the OASIS.
2.3.2 The American Electric Power (AEP) Model
American Electric Power proposes the creation of an Independent Transmission System Operator (ISO) to oversee reliable operation of electric power system. Transmission service will be provided at a postage stamp rate. A Regional Power Exchange (RPX) will be created to establish a competitive market for the generation at the start of full customer choice. The RPX and the ISO will be two independent organizations. The ISO will be responsible for generation dispatch and operation of the transmission system. The RPX will be responsible for creation of a competitive energy market and will determine the market price of electricity for every half hour of the day. The RPX will accept bids from electric generators to meet the load demand. Although the bid prices will be different for the electric energy, all generators will receive the same market clearing price for their capacity. The AEP model would also allow bilateral contracts between electric generators and the electric energy distributors. The generation sector will be deregulated but the transmission and distribution sectors will be regulated.
2.3.3 Allegheny Power’s Model of Electric Industry Restructuring
Allegheny Power recommends deregulation of the electric generation sector and regulated transmission and distribution sectors. Ownership of generating sources will be retained by the utility and other power produces. The availability of non-discriminatory comparable transmission service will create competition in the generation sector, according to the Allegheny model.
2.4.0 Summary and Recommendations
Order No. 888 addresses "open access" to transmission lines for electric energy suppliers and consumers. It also addresses stranded costs, allowing full recovery of stranded costs in most cases. Order 888 refers to an accompanying Final Environmental Impact Statement (FEIS) which indicated that Order 888 contains no significant environmental impact. The FEIS asserts that the environment will, in fact, benefit from reduced nitrogen oxide (NOx) emissions if it is cheaper to generate electricity with natural gas than with coal. The finding of no significant impact was controversial; the Environmental Protection Agency had requested FERC to include specific environmental mitigation provisions in its final rule.
Order 889 provides for an Open Access Sametime Information System (OASIS) which will make available publicly, in real time, information regarding available transmission capacity and rates for its use.
Orders 888 and 889 will not change the fundamental role of state regulatory authorities, including state authority to regulate generation rates, site generation and transmission facilities, and determine retail (distribution) territories. FERC explicitly left it to the states to decide whether or not to allow retail wheeling and whether and how retail stranded costs would be recovered under states' laws and regulatory actions. The FERC would become involved only if state regulators lack authority under state law to provide for stranded cost recovery. Retail customers who become wholesale customers come under FERC jurisdiction. The FERC has jurisdiction over interstate wholesale transmission and over the rates, terms and conditions of unbundled retail interstate transmission up to the point of local distribution.
Seventeen states have already taken action to restructure their electricity industry. The California Public Utilities Commission approved an electric restructuring plan in December 1995. It recommended the establishment of an ISO and Power Exchange for a competitive generation market. The ISO would have no financial interest in the Power Exchange or in any generation or load, but would help ensure fair access to the transmission system. The Power Exchange would provide a transparent market for generation with hourly or half-hourly price signals. It would have no financial interest in generation sources and in the ISO. The Commission also recommended that utilities voluntarily divest at least 50% of their fossil generation assets to mitigate their excessive market power due to control of their generating facilities.
Massachusetts' prospective legislation calls for retail competition by 1/1/98 and mandates a 10% rate reduction at the onset of competition. The New Hampshire Public Utility Commission denied utilities full recovery of their stranded costs, becoming the first state commission to do so thus far. Distribution companies (discos) must divest their generation and aggregation/marketing services within two years. Maine's restructuring bill opens the entire state to full retail competition and at the same time requires the state's two largest utilities to divest their generating assets by March 1, 2000. The bill also requires utilities to include renewable sources as 30% of their generation.
Pennsylvania has moved ahead of most states in its development of a policy on restructuring. Electric utilities are required to file restructuring plans with the Pennsylvania Public Utility Commission between April 1 and September 30, 1997. Each utility's restructuring plan will be subject to review and acceptance, modification, or ejection by the Commission. The PUC is empowered to determine the level of stranded costs for each utility and to provide a mechanism called the Competitive Transition Charge (CTC) for recovery of an appropriate amount of these costs.
Especially relevant to West Virginia is the Pennsylvania provision stating that under federal and state clean air laws, states to the West and South of Pennsylvania are not subject to as stringent requirements as is Pennsylvania. Competition among electric generators located in different states could make demonstration of attainment of federal and state air quality standards more difficult.
On June 2, 1997, a group of companies in the Pennsylvania - New Jersey - Maryland Interconnection (PJM) filed a revised proposal to become an ISO with the FERC. This group of companies does not include the two main utilities serving West Virginia: American Electric Power (AEP) and Allegheny Power (AP). This potential ISO is the closest one to West Virginia, but does not include West Virginia serving utilities, West Virginia’s future with respect to ISOs and the corresponding importance of transmission and ISOs to WV's future electricity exports remains open at this time. In hearings before the West Virginia Public Service Commission, AEP has proposed the creation of an ISO to oversee reliable operation of the transmission function.
We recommend creation of an Independent Transmission System Operator (ISO) and a Regional Power Exchange (RPX) for generation dispatch, reliable operation of the transmission system, and for the creation of a competitive energy market. The ISO should cover a large geographical area and a number of generating entities to produce a competitive market. The transmission grid system should be divided into zones and the cost of using the transmission system should be same within a zone. However, the transfer of energy between zones should reflect the cost of the transmission system in addition to transmission zonal charge. ISO and RPX should be truly independent and should have no financial interest in generation or load. Participants in the generation market should provide reserve margin for reliable operation of power system. Policies should be established to eliminate market power abuse for market clearing prices in the RPX. The ISO should conduct transmission planning studies and make recommendations for removal of transmission constrains. Bilateral contracts should be allowed between generating sources and the customers. All classes of customers should have choice for their energy supplier at the same time.