WEST VIRGINIA HOUSE OF DELEGATES

JUDICIARY COMMITTEE

PUBLIC HEARING ON HB 4277

A bill to authorize the Public Service commission, if it determines that it is appropriate to do so, to prescribe and implement a plan whereby retail customers in West Virginia could obtain direct access to competitive markets for their electric power supply.

 

Comments by the WVU Electric Industry Research Group

February 23, 1998

*Comments follow

HEARING ON HB 4277

February 23, 1998

Comments by Carl Irwin
National Research Center for Coal and Energy
West Virginia University

INTRODUCTION/BACKGROUND

1. The issue is competition and restructuring in the electric industry. We are in the middle of a transition period from regulated to largely competitive electricity markets.

Consider 1985, 13 years ago:

• Generation was a regulated monopoly. PSC approved costs were built into the rate base. The Public Utilities Regulatory Policies Act (PURPA, 1978) was not really competition.

• Transmission and distribution were part of the fully regulated monopoly. Approved costs were built into rate base. Transmission access controlled by owners of the lines.

Today in 1998, due to NEPAC 1992 and FERC Rules 888 and 889:

• Generation is competitive nationwide for wholesale transactions. Some states have retail competition, i.e., customers choose their electricity suppliers. Deregulation of generation in some states.

• Transmission and distribution remain regulated, but access is open to wholesale transactions. Open access for retail sales in some states.

In 2010, 12 years into the future, it is very likely that:

• Generation will be fully competitive. All customers—residential, commercial, and industrial—may freely choose their electricity suppliers.

• Transmission will remain regulated, but Independent System Operators (ISOs) will guarantee fully open access to the transmission grid.

Distribution regulated, but in no way impeding open competition.

Governor Underwood’s VISION is that in 2010 West Virginia will be a showcase state for efficient power generation and efficient industrial energy usage. Residential, commercial, and industrial customers, both in and out of the state, will be able to obtain power from the most efficient sources.

2. How do we get from here to there?

Dialog by all stakeholders is necessary. Initiated by the PSC with the May 1, 1997 open hearing and continued with the taskforce meetings up through end of 1997.

Ten principles for a plan stated in HB 4277 are excellent:

• In best interest of all WV electricity consumers;

• Potential benefits for all customers and no customer worse off;

• Preserve universal electric service;

• Maintain safety and reliability;

• Not impede environmental compliance;

• Maintain public benefits of energy, renewables, and R&D;

• Expand use of WV energy resources: coal, oil, and natural gas;

• Provide customer choice and protection;

• Level playing field for buyers and sellers;

• Honor existing commitments made by utilities.

3. Momentum toward full competition

Most all state PSCs and legislatures are discussing restructuring plans and several are implementing them: PA, OK, MT, CA, ¼

Several restructuring bills in the U.S. Congress: Bumpers, Schaeffer, Murkowski,..

DOE is developing legislation for the administration.

$20 billion potential nation savings, according to Betsy Moler, DOE and former chair of FERC. As irresistible as a tax cut. Benefits not evenly distributed around the country.

4. Conclusions

We are in a transition period and there is BIG MOMENTUM toward full competition: Not in third quarter, maybe almost half time. WV must be in the game.

Gut concerns that we have to deal with, such as: costs going up, losing jobs in the state, reliability of the system, etc.

We should also be concerned about TRANSMISSION CAPACITY since we need to be able to EXPORT that low-cost WV power to high-cost states.

THANKS TO THE JUDICIARY COMMITTEE AND TO THE PSC FOR ENABLING THIS DIALOG!

 

HEARING ON HB 4277

February 23, 1998

Comments by Stratford Douglas
Department of Economics
West Virginia University

ECONOMICS ISSUES

A. The old ways are not an option.

In nearby states, rates have been set artificially high to pay for power plants that, in retrospect, were ill conceived and extremely expensive. Customers in those high cost states who wish to purchase power that is produced efficiently in states such as West Virginia drive deregulation of the electricity industry. People currently paying a high price will find a way to do business with low-cost sellers.

Federal regulation has changed, putting pressure on state regulation.

Transmission pricing and control are Federal and regional, not really under state control.

B. We can gain from increased trade

To the extent that West Virginia's power plants are underutilized, we can export power to these out-of-state customers without raising our own rates, and indeed at considerable economic gain to West Virginia through the increase in coal mining.

To the extent that new capacity will be needed, it will be constructed more efficiently if it is done subject to market forces rather than regulation.

To the extent that the West Virginia's regulatory structure prohibits customer choice, it will be a disincentive for future industrial investment in the state.

C. The benefits of competition will be unevenly distributed.

They will go disproportionately to consumers who show flexibility and initiative.

1. Will residential rates rise?

No guarantees from the market.

2. Regional price averaging is a myth.

Downward pressure on WV rates as long as there is EXCESS CAPACITY and VIGOROUS COMPETITION.

3. Options for Protecting Consumers Under a Market System:

The PSC could organize and sanction competitive bids for reticent residential consumers as a group.

Subsidies given to residential consumers through tax breaks or vouchers.

Rate Caps.

D. Monopoly power is a danger if we are unwary.

But that is true under traditional regulation as well.

HEARING ON HB 4277

February 23, 1998

Comments by Muhammad A. Choudhry
Computer Science and Electrical Engineering
West Virginia University

INDUSTRIAL ELECTRICITY USAGE

• Low cost electricity is essential for the economic development of West Virginia. The electricity consumers can be grouped into residential, commercial, and industrial consumers.

• Low cost electricity Manufacturing industries such as aluminum, steel, chemical, glass, and others are big consumers of electricity.

• Cost of electricity is a significant component of production cost in these industries. It is about 25% for aluminum, 10% for steel, and 10% for the chemical industries.

• These industries provide good paying jobs to West Virginians and provide a steady tax base for local communities.

• West Virginia industries have to compete in a national and international market.

• There is increasing pressure on these industries to reduce the cost of their finished products to be competitive in a global market.

• Lower cost of electricity was one of the factors to retain and attract these industries in West Virginia.

• Restructuring of electric industry and retail choice could lower the cost of electricity for industrial customers.

• Competitive electricity markets and customer choice in neighboring states will reduce West Virginia’s low electricity cost advantage and will make other states more attractive for to manufacturing industries.

• Utilities in customer choice states are offering Real Time Pricing programs, where the price of electricity is proportional to the overall demand for the electricity.

• Manufacturing industries, which take advantage of this program, can reduce the cost of electricity and will be more competitive in the global market.

• Compliance with new environmental regulations will increase manufacturing costs for West Virginia companies. Lower electricity costs will help companies meet the cost of complying with the new environmental regulations.

• Can restructuring of the electric industry be done in West Virginia without increasing the electric rates of residential customers in West Virginia? The answer is yes.

• The rates of patient residential customers (residential customers who do not select electric supplier) can be maintained low through competitive bids for this block of customers, i.e., residential customers can aggregate to obtain bargaining power similar to that of the industrial sector.

HEARING ON HB 4277

February 23, 1998

Comments by Ron Klein
Computer Science and Electrical Engineering
West Virginia University

TRANSMISSION ISSUES

• WV is a major producer of electric power in the Eastern United States.

• WV electricity is low cost and therefore competitive in the region largely due to the abundance of coal as a fuel for generation.

• More than 70% of the electricity produced in WV is EXPORTED to out of state customers in the region.

• I would like to address three aspects of transmission important to WV: pricing, capacity, and management.

1. Pricing:

1. Since transmission affects the price of WV generated energy purchased out of state, transmission availability and its price affects WV's electric energy competitiveness in the regional marketplace,

2. Since the availability of adequate transmission is required to achieve a low cost transmission component in the overall price of WV energy to customers in the region, adequate emphasis must be put on achieving low cost transmission as well.

2. Capacity:

1. Adequate capacity to convey electric energy generated in WV to our export customers is essential to position WV to export coal in the form of electric energy as well as the electric energy itself.

2. Adequate transmission capacity is the only way to assure WV access to the regional electricity market.

3. Management:

1. At this time, WV has an opportunity to participate in the establishment of transmission operation independence (Independent System Operator: ISO) as a regional independent operator forms. This participation is in the public interest of WV since all electric energy consumers will be affected by how the transition to such an independent transmission operation occurs and what its final structure is. WV can anticipate and play a constructive role in this process while also protecting its economic interests as affected by transmission.

2. WV needs to participate in how such an independent operation is to be created.

3. WV may want to ensure that all of the state is involved in only one such independent system since, inevitably, being a part of two which could have different prices, would result in higher priced electricity for those customers than if they were supplied by the other entity.

Overall Objective: Maximization of WV's potential to serve customers external to state boundaries via robust provision of adequate transmission capacity at low cost. If adequate transmission is provided for, then WV could experience growth in its electricity exports which could, in turn, contribute to growth in both the coal and electricity industries.

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