ELECREST.docx

ELECTRICAL RESTRUCTURING
SUMMARY
Deregulation of the electric utility industry is being debated at the national level and in virtually every state in the Union.  The term “deregulation” is synonymous with the introduction of competition in the traditional monopoly electric industry.
This paper examines the forces prompting deregulation; the structure of Idaho’s electric  industry; the various “stakeholders” affected by deregulation; the regional and national agencies examining deregulation; and, finally, current Idaho activities in this area.
This paper concludes that the radical restructuring of the electrical utility system that has served Idaho well for nearly a century must not take place hastily.  Executive and legislative responses must be based upon hard facts, not just attractive concepts and buzz words.  Idaho should quantify the economic costs and benefits of the various deregulation proposals.  Policies should be formulated only after this information becomes available.
INTRODUCTION
A. Background
The 20th century in Idaho has been the era of Water and Electricity.  Idaho’s free-flowing streams have been harnessed by the state’s three largest electrical utilities as well as other electrical suppliers.  Electrical suppliers, in turn, have used these waters to provide the engine that has driven economic progress in our lifetimes.  The deserts have bloomed, mighty industries have flourished, cities have risen out of the sagebrush—predominantly in the framework of state-regulated monopolies.  Regulation of the electric industry has brought Idahoans what monopoly regulation of utility service is supposed to bring: reliable electricity, non-discriminatory access, quality service and reasonable rates without the economic “waste” of duplicate systems.
Idaho’s three major electrical utilities serve more than 80% of all Idahoans and are regulated by the Idaho Public Utilities Commission.  In addition to the three major electric utilities, there are 15 rural electric co-ops and 12 municipal power systems not under the PUC’s jurisdiction.  While a few of these other suppliers generate their own hydropower, they receive most of their energy from the federal Bonneville Power Administration (BPA).  BPA markets nearly half of the Northwest’s energy from the Columbia River system and controls 75% of the region’s transmission lines.  BPA delivers about 2½ billion kilowatt-hours (11-12%) of the electricity consumed in Idaho.  In a normal “water” year, about 60% of the electricity consumed in Idaho is produced in-state, primarily at hydropower plants.  During drought years, nearly 60% of Idaho’s electrical energy is met from out-of-state sources.
An electric utility system is comprised of three basic parts: (1) generating facilities—coal-fired, gas/oil-fired, hydropower, cogeneration resources;(footnote: 1) (2) transmission facilities—used to transmit generated energy (sometimes regionally) to the major points of distribution; and (3) distribution facilities—the local network actually used to deliver electricity to customers.  Problems with transmission facilities this summer led to service disruptions.  Many utilities and BPA have recently reduced the carrying capacity of some lines by 25%.  This may exascerbate the concerns about transporting power throughout the region.
B.  Factors Promoting Deregulation
The push to deregulate the electric industry originates from a number of sources of internal and external to Idaho.  These factors include:
1. Demise of Monopoly Industries.  Deregulation or the introduction of competition has occurred in several industries traditionally regulated by the states or federal agencies.  Starting with the airline industry in 1978, other regulated industries have experienced various degrees of deregulation including natural gas, trucking (the ICC termination of Act 1995), and telephone (divestiture in 1984 and again in the Telecommunications Act of 1996).  The electric industry is the next logical industry to come under scrutiny.  Deregulation and free-market competition has brought both benefits (lower prices, more choices) and detriments (loss of access, reduced quality) to these industries depending on the location and size of the marketplace.
2.  Large Electrical Customers.  Many manufacturing and industrial processes consume large amounts of electricity and represent substantial operating costs.  Prudent businesses are continually looking for ways to cut operating costs, including the cost of electricity by reducing consumption or lowering rates.  A slight reduction in the rates paid by large customers may result in substantial cost savings.  For example, FMC in southeastern Idaho is a large customer of Idaho Power Company.  FMC accounts for approximately 12.5% of Idaho Power’s energy at a special contract rate of 21.5 mills per kilowatt hour.(footnote: 2)  A reduction of one mill in the contract rate would reduce FMC’s costs for electricity by approximately $1.5 million per year.
3.  Technological Advances.  Another major factor promoting deregulation concerns technological advances in the generation of electricity.  New state-of-the art, dual-cycle gas powered turbines can now generate electricity more efficiently than tradition fuel plants.  When coupled with low natural gas prices and ample supplies in the foreseeable future, new gas turbines may produce power at costs less than many existing generation facilities.
4.  Surplus Power.  The last major factor concerns the amount and status of the surplus power in regional markets.  As part of the prudent planning process, most electrical utility must have sufficient amounts of electricity for “peak” periods of demand.  Some utilities have sufficient generation and others must purchase power to meet these loads.  For those utilities that have excess generating capacity, this  power is normally sold “off-system” on the open market.  As the supply of electricity increases, its price will decrease.  The spot market for electricity is currently at its low point of 12-15 mills.  
C.  Stakeholders
There are a number of Idaho stakeholders with different interests and perspectives regarding the outcome of electric deregulation.
1.  Utilities.  Idaho’s 3 major investor owned electric utility serve more than 80 % of all customers.  These utilities are Idaho Power Company, Washington Water Power (WWP) and Utah Power & Light (UP&L), a division of PacifiCorp.  See maps next page.  Idaho Power and WWP are closely ranked as having the least expensive electric rates in the nation because of their extensive hydro facilities built years ago as portrayed below.  For instance, northern Idaho residential customers of WWP pay about 43 mills per kWh while Idaho Power customers pay 48 mills/kWh.  In comparison, UP&L customers pay 63 mills/kWh.  See Attachment C.  
Source of Generation
mills
Operating Costs
        (mills)
Hydro
Thermal
Hydro
Thermal
Embedded
Plant
Idaho Power
59%
41%
2.1
32.3
22
WWP
56%
44%
1.3
29.9
29
UP&L
7%
 93%
National Avg.  Cost
4.5
6.47
24.9
22.97
27
The nations’ highest electrical rates (Hawaii) were nearly 4 times the rates paid by most Idaho residential customers.  The nationwide average residential rate was about 9¢ per kWh, nearly twice that paid by most Idahoans.  The average California residential customer pays approximately 2½ times the Idaho rate.  See Attachment A for the 25 highest and lowest residential electrical rates.
2.  Co-ops and municipal electrical systems.  Idaho has 15 rural electrical co-ops and 12 municipal power systems.  Some generate their own power but most receive their power from BPA at current rates of 26.5 mills per kWh (including a transmission or “wheeling” charge).  They are listed in Attachment B.
3.  Large customers.   Each of Idaho’s electric utilities has a number of large customers.  As outlined in greater detail in Attachment B, Idaho Power’s four largest customers represent approximately 22% of its Idaho jurisdictional load; while Potlatch represents approximately 25% of WWP’s  northern Idaho load.  Most large customers are served by contracts approved by the PUC.  These customers obtain lower rates for several reasons such as interruptible service, lower costs of service, and a fairly constant level of demand.
4.  Irrigators.  Most irrigation power in Idaho is supplied by Idaho Power or UP&L.  Approximately 3% of Idaho Power’s energy is used for irrigation at an average rate of 37.6 mills/kWh, while UP&L’s irrigation load is about 19% at a current rate of 38.2 mills (reduction in the BPA residential exchange credit will bring the rate to 53 mills in June 2001).
5.  Residential and commercial customers.  Overall, Idaho residential and commercial customers enjoy some of the lowest electrical rates in the nation.  As indicated in Attachment A, WWP’s residential rates were the lowest in the nation.  WWP and Idaho Power’s low rates are primarily attributable to the large amounts of hydro generation possessed by both companies.  See the Chart on p. 3.  It is this predominance of vintage hydro generation which has kept rates for most Idaho customers exceptionally reasonable.
6.  BPA.  This agency markets the power generated by the 29-dam federal Columbia River power system.  Currently a comprehensive review task force appointed by the governors of Washington, Oregon, Montana and Idaho are preparing a recommendation to restructure BPA.  The draft proposal—labeled Strawman II—calls for BPA to be legally separated into two organizations.  One would market power generated by the federal power system and the other would carry out transmission functions.  A separate transmission entity could lease its assets to an independent grid operator (IGO) or accept the responsibilities of an IGO and operate other utilities’ lines.  Many believe that combining all transmission under one operator would reduce reliability problems.
Under the proposal as drafted, federal legislation would be required to ensure the security of the $7 billion WPPSS debt guaranteed by BPA and $7 billion in treasury loans.  BPA would not sell power to any retail customer except its present direct service industry (DSI) customers although it could sell to intermediaries whose tranaction would be subject to state jurisdiction.  It would dispose of federal power at cost, selling 5-year and 30-year subscriptions.
BPA would also have substantial fish and wildlife costs.  Salmon recovery measures would be shared by regional customers and the US Treasury with a $500 million cap.  Conservation, renewable resources, and low-income energy services would receive 3% of electric service revenue for 10 years—about 57% of 1995 expenditures.  Following a series of 10 public hearings scheduled for October and November, a final report will be presented to the governors in December 1996.  The report will also recommend states provide for direct access by 2001.
D.  Other Factors
1.  Congress— Schaefer Bill H.R. 3790.  Although the Schaefer Bill has almost no chance of passage this year, the measure will be the focal point of the electric restructuring debate in Congress next year.  The Bill calls upon states to design within six months of enactment plans to install retail competition by December 15, 2000.  If states decide not to implement retail choice in competition, then the FERC is directed to do so.  Although the Bill proposes a 6-month window for states to submit their retail competition plans to the FERC, states may seek waivers for up to two years to complete the regulatory framework.
Recovery of stranded cost is left entirely to states.  FERC will not serve as a back stop for stranded cost.  Electric suppliers must dedicate at least 4% of their loads to renewable resources by the year 2010, and the Bill includes a trading system through which companies can purchase renewable credits.  Once the renewable provision is in place, then utilities which offer open access to their customers are not obligated to purchase power from PURPA qualifying facilities.(footnote: 3)
2.  FERC.  The Federal Energy Regulatory Commission is the agency which regulates the sale of wholesale electricity and the interstate transmission of electricity.  In 1995, FERC issued Order No. 888 which mandated open access to transmission facilities for wholesale wheeling.  The ability to achieve competition in generation markets is in some measure restricted by the transmission “bottleneck.”  More specifically, the inability to wheel power constrains competition.  While transmission owners may no longer arbitrarily restrict access, operational contraints still exist.  Some transmission restrictions already occur in Idaho, particularly with PacifiCorp’s inability to transfer power between the eastern portion of its multistate service area (Idaho, Utah) and the western section (coastal states) of its system.
3.  Utility Laws.  Traditionally, utilities are authorized to provide service to customers after obtaining a Certificate of Public Convenience and Necessity from the state regulatory commission.  These certificates allow a utility to provide service to customers in a specific territory in return for the right to earn a fair return on the utility’s investment.  Although traditionally territories are exclusive, there are service territory overlaps and sometimes friction between adjacent utilities and other electrical suppliers.
To “promote harmony among and between electrical suppliers” providing electricity within Idaho, the Legislature enacted the Electrical Supplier Stabilization Act (ESSA) in 1970.  Idaho Code § 61-332 et seq.  The ESSA prohibited a new supplier from furnishing electricity to a customer already served by an existing supplier without the existing supplier’s written consent.  The Act also implemented a regulatory mechanism to determine which supplier of electricity should serve new customers.  It is the ESSA, which in reality, restricts electric service competition.
4.  PUC Order 26555.  Following a series of informal workshops, the PUC last month issued an Order reviewing recent developments in electrical restructuring and how such developments may affect Idaho.  The PUC cautioned that outright deregulation of Idaho’s electric industry may not be in the best interest of Idahoans.  While observing that large electrical customers (due to their size and buying power) may be able to obtain lower rates through contract sales with non-regulated utilities, the Commission noted that “there is ample evidence suggesting that the majority of Idaho’s customers may experience an increase in rates over the long-term.”  The Commission recognized that on a regional basis, rates for comparable electrical service outside Idaho are higher.  Consequently, in a completely free and open market, Idaho’s utilities could find customers in other states who are willing to pay rates that are considerably higher than those currently paid by Idaho consumers.  While it was not the PUC’s desire to impede any transition to competitive ideals, the Commission determined that neither should Idaho rush headlong to deregulate the electric industry in this state.
The Commission encouraged utilities and large customers alike to explore “innovations” in the industry to the benefit of all and the detriment of none.  For example, the Commission has authorized both WWP and Idaho Power to obtain a portion of their large customers energy needs from a third-party supplier. The Commission also recognized that the ESSA must be reexamined before any form of deregulation can take place.  The PUC suggests that the Act should be revised to provide it with “the explicit authority to determine if and how deregulation of investor-owned electric utilities” should occur.(footnote: 4)
5.  Legal Considerations.  The regulation of intrastate operations of electric utilities has historically been subject to state law.  However, the power of Congress or the jurisdictional reach of federal agencies is not simply confined to the regulation of interstate commerce.  Intrastate activities that have a close and substantial relationship to interstate commerce may be within Congress’ power to regulate if the control of such state commerce is essential or appropriate to protect interstate commerce.  NLRB v. Jones & Laughlin Steel Corp., 301 U.S. 1, 57 S.Ct. 615 (1937).
Congress’ reach under the Commerce Clause of the U.S. Constitution is not without limits.  In Laughlin Steel, the Supreme Court warned that the scope of congressional regulation “must be considered in the light of our dual system of government and may not be extended so as to embrace effects upon interstate commerce so indirect or remote that to embrace them, in view of our complex society, would effectively obliterate the distinction between what is national and what is local and create a completely centralized government.”  Id. at 37, 57 S.Ct. at 624.  Thus, there may be a legal question whether the distribution of local electricity “substantially affects” interstate commerce.
ISSUES
With deregulation of the trucking, airline, telephone and gas industries, some electric utility customers and regulators now demand that customers have a choice of supplier for electric service.  The demand for competition seems to be the greatest in those states with the highest electric rates.  Deregulation, simply put, envisions open competition on at least a regional scale instead of the state-by-state basis.  Utilities that previously served customers of a single state would be able to sell power elsewhere.  All customers, in theory, would have the “choice” of obtaining power from a host of suppliers.  Some state deregulation plans even mandate on immediate rate reductions.  For example, California’s new electric restructuring law requires a rate reduction of 10% for residential and small business customers.  With an average residential rate of 125 mills, a 10% reduction still results in a rate more than twice the Idaho Power/WWP rates.
Before abandoning a system that has served Idaho well for nearly a century, the Legislature and the public should have a clear understanding of the advantages and consequences for Idaho.  It appears that the prudent course of action would require a thorough examination of the questions and issues so that various policy options may be examined by the legislative and executive branches of government.  What is needed is a framework or structure for examining restructuring issues.  The following issues bear examination.
A.  Stranded Costs and Benefits
1.  Stranded Benefits and Divestiture.  One proposal under active consideration by various federal and state regulators is that electric utilities should spin off of their generating resources to an unregulated subsidiary and be free to wheel those resources on the open market to the highest bidder.  Such a divestiture of the hydroelectric system may not be in the best interest of the Idahoans who have reimbursed utilities for much of the system and have enjoyed its benefits. Under most scenarios, the deregulated generating company would not have the option of favoring its own in-state customers.  This means that Idahoans would be forced to compete with other markets for power priced at what the market will bear.    
No estimate has been made of the cost to Idahoans, and to the Idaho economy, if the benefits of Idaho’s falling water and hydroelectric system were to be put on the auction block for downstream and out-of-region interests.       
2.  Stranded Costs.  A regulated utility sets the price of power at a stable cost that will bring a reasonable rate of return on the cost of its investments.  An unregulated business will price power at whatever the market price is from moment to moment.  The market price may not be high enough to pay off a utility’s investment in its expensive generating plants, or to recoup the cost of long-term cogeneration contracts the utility was forced to sign under PURPA or to honor regulatory commitments.  The shortfall is called a utility’s “stranded costs.”  
Some believe that utilities should be allowed to pass along 100% of their stranded costs to ratepayers.  Others argue that regulation was always meant to imitate competition, not replace it, and that once competition replaces regulation, utility shareholders should bear the risk of their lost investments.  Still others propose a “sharing” of stranded costs (e.g., 50-50, 80-20) between the ratepayers and the shareholders.
Not surprisingly, some utilities are willing to write off such costs entirely as the “price-tag” for entry into the world of competition if, in turn, they can take their generating resources with them.  To counteract the competitive advantage that an existing electric utility would have when set free to function as a generating utility, some regulatory commissions have proposed that these new generating utilities should divest themselves (sell off) a large portion of their generating resources.
In Idaho, no estimate yet exists as to the amount of “stranded costs” each utility will face in a deregulated environment.  Nor does a partial divestiture option make sense in a hydroelectric system that must be operated as a integrated unit for maximum benefit.  Still, Idaho decisionmakers need to know the extent, if any, to which utilities will expect in-state customers to pay for these stranded costs before the state proceeds toward deregulation.
B.  Low-Price Electricity Rates
1.  Residential and Small Commercial Customer.  Residences and small business customers pay less for their electricity than any other customers served by private electric utilities anywhere in the other 49 states.  There is a significant risk that their rates will go up if they pay a market price based on the cost of electricity in the western states.  There is as yet no estimate of what those rates will be.
2.  Irrigators.  Idaho farmers enjoy a competitive edge in productivity per acre because of relatively low irrigation rates.  This is particularly so for high-lift pumpers and water-intensive crops such as potatoes and sugar beets.  The last decade has been one of remarkable stability in delivering water to Idaho farmlands.  There is no estimate of the impact that increased electricity rates would have on crop yield or on cost per acre of productivity that would result from the deregulation of the electric utility industry.  Nor has there been an examination on the impact of the entire state’s economy if the agriculture economy takes a downturn.
3.  Large Industrial Customers.  Idaho’s large industrial customers have paid remarkably low electricity rates, oftentimes for “interruptible” power that is virtually firm power in reality.  Some of these customers believe they will be able to strike a better deal on the open market if the Electric Supplier Stabilization Act (IdahoCode § 61-332 through 334 B.) is repealed and they have the free choice to shop for power on the open market beyond the geographic boundaries of their own electric utility.  No estimate has been made of the impact on Idaho residential, commercial, and irrigator customers of if these large industrial customers were lost to the system.
C.  Public Benefits
Idaho’s electric utilities have long been good citizens and good neighbors.  They have invested in mitigation of environmental impacts (wildlife, water quality, air) of their generating facilities.  They have graced adjacent lands with parks and amenities.  They have weatherized the homes of the indigent and kept electric power flowing to people unable to pay.(footnote: 5)
The cost of these “public benefits” has routinely been recognized in the PUC’s ratemaking process.  The question looms large as Idaho Power looks down the road to the cost of financing environmental mitigation measures for the relicensing of many of its dams on the Snake River over the next two decades.  It is not clear what incentive there will be under deregulation for any electric utility to continue investing in these local measures that are so beneficial to society if the power is to be sold elsewhere.
D.  Quality and Reliability of Service
1.  Reliability of Service and Long-term Planning.  Electricity is a basic human service in contemporary America.  A black-out can be a health and safety and economic catastrophe.  Regulated electric utilities put the highest priority on reliability of service.  Long-term plans are submitted periodically for review by regulators.  Back-up and redundancy are the name of the game.
The principles of the free market are entirely different.  A prudent business carries as little inventory as possible because a product that is used only rarely is not a sound economic investment.  Customers that need or desire reliability must usually pay for this service quality.
If the electric power industry is restructured, with generation deregulated, and the distribution company subject to the availability of regional suppliers, it is not clear who will have the responsibility of keeping the lights on or the ability to guarantee that the lights stay on.
2.  Quality of Service.  Electric power companies are legendary for their quality of service, whether it be timeliness of installation, reliability of meter-reading, or the speed with which power is restored when a car or a winter storm knocks out a power line.
As many of these functions are separated, it is not clear who would have the overall responsibility of guaranteeing the quality of service that electricity customers require and demand.
CONCLUSION
Idaho must be proactive in addressing the issue of electric utility deregulation, and not simply be the victim of decisions made in Washington, D.C. or in southern California.  Legislative initiatives in Idaho must be based on hard facts.  Some forum should convene proceedings, to quantify the answers to the following questions:
◆Who would receive the benefits of Idaho’s water and its hydroelectric system if the electric utility industry were restructured?
◆Under a restructured electric industry, which entity would be responsible for planning for and providing a long-term reliable supply of power?
◆What would be the impact of electric restructuring on the residential and small business customers of Idaho?
◆What would be the impact of electric utility restructuring on the irrigators?
◆What would be the impact on other customer classes if the Electric Supplier Stabilization Act were repealed and large industrial customers were free to purchase power from suppliers outside of their service territory?
◆What “stranded costs,” if any, should be guaranteed to an electric utility if the utility is restructured and is permitted to retain all of its generating resources?
◆What generating resources should be retained by an electric utility if the utility creates an unregulated subsidiary for the purpose of marketing its generating plants?
◆What steps can be taken to insure that the electric utility’s tradition of providing “public benefits” -- environmental mitigation, park resources, conservation and demand side management programs, relief of low-income customer -- will continue in an era of deregulation?
These and other questions must be answered before deregulation occurs in Idaho.
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FOOTNOTES
1:
Another generating resource is nuclear power plants.  Idaho’s three investor-owned electric utilities (IOUs)  do not possess any nuclear generating resources.
2:
A mill is a billing unit equal to 1/10 of 1¢ per kilowatt hour.
3:
The Public Utilities Regulatory Policies Act (PURPA) requires utilities to purchase power from qualifying facilities (QFs) at “avoided costs” set by state PUCs.  The term “avoided costs” is the incremental cost of energy which the utility would otherwise generate or purchase.  All Idaho utilities purchase power from QFs.
4:
On September 4, 1996, the Commission issued an Order reducing the terms for PURPA contracts from 20 years to five years.  In recognizing the changes incurring in the electric industry, the PUC found that long-term purchase contracts are no longer justified.  The Commission determined that contracts in excess of five years disadvantage ratepayers by locking in purchases for the long-term while current practice is the short-term.
5:
Those persons unable to pay larger winter bills must nonetheless pay the balance in the spring or be disconnected.