Electrical Deregulation and Customer Choice Task Force

not narrowly tailored may create different competitor problems and/or may not correct the original market power issue. FERC's list of potential mitigation efforts that may be used in merger analysis include: 1) required transmission expansion; 2) generation plant divestiture; 3) unbundling; and 4) price sealings and floors.

    B. Panel discussion followed with the following participants: Rick Anderson, Large Industrial Consumers; Steve Walton, PacifiCorp; Gene Coyle, Committee of Consumer Services; Lowell Alt, Division of Public Utilities; Kurt Winterfeld, Utah Rural Electric Association; and Richard Judd, Municipals.

    Mr. Rick Anderson, IND, said there are three potential problem areas: 1) local market power; 2) vertical integration; and 3) horizontal concentration. He also indicated that there are state action doctrines and the Legislature needs to be careful in that expressed exemptions and implied immunities must be removed from these state action doctrines. The Legislature also needs a thorough assessment of market power and its potential in this setting.

    Mr. Steve Walton, PC, said distribution access needs to be mitigated by regulation by the Public Service Commission (PSC) and the PSC should establish codes of conduct and access rules to be applicable to the providers of the distribution services. The price for distribution services should be set by the PSC and the unbundled distribution price should be the same in both urban and rural areas. He indicated that in the transmission area, a preferred alternative is the independent system operator (ISO). In the generation area, PacifiCorp does not believe that it has generation market power when full access to the transmission system is low. If market power is still judged to exist, PacifiCorp needs the flexibility to adjust its ownership in the state either by sale or by trade during the period of a price freeze so it can have a chance to meet that obligation to a participation level or ownership diversity that is judged to mitigate the market power.

    Mr. Gene Coyle, CCS, told the task force that the idea behind looking at this issue of market power is that competition is going to be better than regulation. With that premise, the best way to mitigate market power is to let customers shop if they want to, but reserve for the customers the opportunity to stay on the system at the cost of service rates. He also stated that it is extremely important that the ISO be independent and that divestiture does not seem to be working well.

    Mr. Lowell Alt, DPU, said market power is related to the relevant market that changes with continuously changing loads and congestion. Because of the complexity, computer simulation of the market is recommended for the determination of market power. Effective competition reduces market power, but without effective competition, other methods must be used to mitigate market power. Methods that can be used to mitigate other aspects of market power are: 1) oversight by the Legislature and/or the Public Service Commission with authority to intervene to correct the problems; 2) divestiture of some of the generating assets; 3) use of transmission congestion pricing alternatives; 4) use of price caps during emergencies; 5) regulation of rates for distribution and transmission to prevent cross subsidies to the generation part; 6) regulation of rates for customers

not opting for another supplier during the transition to effective competition; and 7) dedication of generating plants receiving stranded cost recovery to serving the consumers.

    Mr. Kurt Winterfeld, REA, stated that a concern for the task force in going forward with legislation for deregulation is the fact that without some study of deregulating or re-regulating, the issue becomes who will be responsible for ongoing monitoring and correction of the situation as problems arise. He indicated that he feels the ISO would be a great step forward for transmission access and would solve a lot of problems, however, he does not believe that just an ISO is any guarantee of mitigation and market power.

    Mr. Richard Judd, MUN, said that market power, obligation to serve, and stranded investment are the three issues that need to be addressed by the task force. Economic theory dictates that there are a minimum of three conditions that must exist to have competition in any market: 1) the existence of many buyers and sellers; 2) freedom of entry and exist for the competition; and 3) access to available market information. If market power exists, none of these criteria can be fully achieved. The natural order of things is to gain market power. The purpose of the merger with PacifiCorp was to gain market power. He suggested that some kind of divestiture will be necessary to make the market competitive and will also solve some of the stranded investment concerns.

    Task force discussion followed.

4.     Aggregation -

    A.     Background

    Mr. Darren Bush stated that aggregation refers to a situation where a set of electricity customers combine to arrange electricity service. The purpose and goal of aggregation is to amass sufficient buying power to capture competitive benefits. Aggregators can typically be classified under two broad spectrums: geographic and nongeographic. Geographic aggregators combine using the commonality of customer location. Nongeographic aggregators include any group with some common interest. Issues that may arise with aggregation may include: 1) whether barriers to aggregation exist in rural settings and, if so, how these barriers might be eliminated; 2) industrial versus residential due to small transaction costs; and 3) are there barriers to aggregation in general. Barriers may exist for the following reasons: 1) the existing authority structure may create barriers to aggregation due to excessive pricing for backup power, services, or long-term contracts; and 2) customer preferences for informational barriers may exist that preclude aggregation.

    B.     Panel discussion followed with the following participants: Artie Powell, Division of Public Utilities; Doug Larson, PacifiCorp; Gene Coyle, Committee of Consumer Services; Ted Rampton, Municipals; and Ken Winder, Utah Rural Electric Association.

    Mr. Artie Powell, DPU, indicated that economic theory suggests that the structure of an industry influences the behavior of the firms within that industry which, again, influences the outcome or the performance of the industry itself. If the industry is structured in such a way that it is conducive to competition, then firms are likely to act as competitors. On the other hand, if the rules are indifferent to competition, then firms will have the ability and the opportunity to manipulate the market to their advantage. In general, the presence of power marketers and the ability to aggregate power itself is likely to increase competition in a restructured industry. Some of the rules the Division of Public Utilities would establish governing the participation and behavior of power marketers, aggregators, and the utilities might include: 1) registration and licensing requirements of all participants; 2) licensing renewal and revoking procedures; 3) dispute resolution procedures; 4) penalties governing anti-competitive behavior or other undesirable behavior; 5) customer protection standards; 6) disconnection and other service restrictions; 7) informational filings regarding costs, loads, and other relevant data; 8) affiliate transaction restrictions; and 9) extent of unbundling for services other than energy.

    Mr. Doug Larson, PC, stated that aggregation is the combining of two or more customers into a group to form some kind of buying power. Large industrial customers have a sufficient load that they can already establish buying power due to their size which makes aggregation a process that allows small commercial and residential customers to aggregate and come to a similar size or larger and to also exercise buying power. He indicated that one of the things that is encouraging in the PacifiCorp proposal is a stability commitment related to restructuring that will allow a period of time to work out the details of aggregation. He also stated that aggregation should be voluntary and that a customer should not be required to go with a specific aggregator.

    Mr. Gene Coyle, CCS, stated that the electrical industry has heavy capital costs. The electric power profit margins are 16 percent of sales so electric power does not make as much profit margin on capital. If you have that big capital investment, you need to run the capital and use it at a high capacity factor so you will get price discrimination in the industry. He stated that customers are going to face price discrimination and that leads to the necessity for aggregation to protect small customers from the price discrimination. The CCS wrote a paper that discusses "cream skimming" and "redlining" and he thinks the task force should be aware that the marketers and the utilities are going to know everything about the customers and who to avoid.

    Mr. Ted Rampton, MUN, indicated that the municipalities believe aggregation is a proper way to deal with consumer protection issues. Aggregation can be a generator, a broker, a municipality, an agent, a cooperative, a buying club, or almost any grouping that could facilitate aggregation. UAMPS believes that the principle of diversity, which is the difference between loads that occur with customers, needs to be explored as part of the aggregation issue. Individual customers have a demand charge and if groups of customers can ban together and are billed under one demand, there is a significant savings that would occur through diversity of the load. UAMPS believes that aggregation is a way to mitigate market power and favors aggregation over forcing

utilities to see their generation or divestiture. He summarized by saying that aggregation would provide more kinds of players in the market.

    Mr. Ken Winder, REA, said that there is strength in that diversity or aggregation of rural cooperatives. For that system, he can plan, work, and invest in those customers and that system. He indicated that Moon Lake Electric has a very high load factor and by diversity, they have a great aggregation there. A lot of their load is commercial and industrial and there is an interest in taking those loads from them. As those loads are taken from them, what is left is a skeleton that is very high cost and difficult to deal with the customers that are left. As they have been able to aggregate this diversity, their rates have come down to where they are reasonable and fairly competitive with those of other utilities around them. This task force is going to take the industry we have in the system today and rebuild it. He stated that he feels there will be some real technical challenges to be able to do that. He also believes that competition is good and he thinks their customers understand and desire it.

    Task force discussion followed.

    The task force took a short break and reconvened at 11:15 a.m.

    Rep. Fox reviewed the agenda for the September l1th meeting. She also indicated that Utah Power & Light has extended an invitation for all of those involved in the task force process to tour their Huntington Plant and Deer Creek Mine on September 22nd..

5.    Obligation to Serve and Connect -

    A.     Background

    Mr. Darren Bush said the obligation to serve is either a statutory or common law duty to serve anyone who requests service within the utility service area. The goal and purpose of the obligation is to provide universal service. This policy sense is so strong that typically utilities may be compelled to provide unprofitable service provided that the utility as a whole is not operating at a loss. The obligation to serve is most important in these unprofitable areas. In instances where providing the service is profitable, the firm has a clear incentive to provide such service. In a profitable case, the unregulated firm, without an obligation to serve, would raise the price of the service or drop it completely. Raising price would preclude some customers from obtaining the service thus thwarting the goal of universal service. Thus, the obligation to serve is typically coupled with the price sealing.

    Another feature of the obligation to serve is the nondiscrimination requirement. Regulated firms typically cannot charge customers within a particular class different rates, although they may charge different rates among different classes. In an unregulated market, prices will fluctuate based on cost. The highest cost customers may not have competitive options. Alternatively, prices may

rise to a level where some Utah customers cannot afford electricity. In this unbridled market place, there is no guarantee that everyone will be able to have the commodity. Only those that can pay the market price will have electricity. Thus, deregulation raises many issues concerning universal service. First, the most likely candidate for continued regulation is the local distribution company. When the generation market is deregulated, the question remains of what utility's obligation to serve is in the capacity of a local distribution company. Second, if the market is incapable of providing universal generation service, what options exist to promote universal generation service. Third, are there market incentives available to create universal service or is more legislation necessary to promote universal service.

    B. Panel discussion followed with the following participants: Doug Larson, PacifiCorp; Gene Coyle, Committee of Consumer Services; Lowell Alt, Division of Public Utilities; Margie Spencer, Utah Rural Electric Association; and Richard Judd, Municipals.

    Mr. Doug Larson, PC, stated that currently, all customer classes pay essentially the same generation costs in the state. The transmission and distribution pieces of the business are currently regulated and that will continue in the future. The PSC currently regulates distribution services based on a postage stamp rate which is that every residential customer in the state pays the same and it is PacifiCorp's intent that the distribution services will continue to be regulated by the PSC. Since all customers are currently paying the same costs in their bill for generation and the concept is looking at competitive prices for generation, there is really no difference in serving a customer in a rural area or in an urban area or a large customer or small customer for generation services. PacifiCorp believes that the local distribution company has the obligation to serve all customers in its certificated service territory. PacifiCorp accepts that responsibility to be the provider of last resort to those customers who think that they might be unwanted by an aggregator or do not want to choose to go that route.

    Mr. Gene Coyle, CCS, said he wants to separate the obligation to connect and the obligation to serve into two pieces. The obligation to connect is easy in that PacifiCorp says they will keep providing the poles and wires. One additional thing the task force needs to think about is the question of whether the distribution utility that currently runs the wires down the street is also going to be able to be the vendor of the energy. Are they going to then try to sell the PacifiCorp energy to the customer with a marketing advantage. The offer from PacifiCorp to be the default provider is a generous one but it needs to be set up in a way that will make it work. One of the options that is being talked about in other states is to have a state agency hold an auction to get bids for whoever wants to provide that service. This would make it a little more competitive than just handing it to the incumbent utility.

    Mr. Lowell Alt, DPU, said that in a restructured electric industry, the obligation to serve would still exist in a modified form for the local distribution company. The distribution utility must still be obligated as a consequence of the continuing transmission and distribution monopoly to connect and to deliver electric energy to all the customers in the certificated service area. If it is

decided that the local utility would be able to be a power marketer or aggregator for their customers, the customers would continue to choose the public utility as their electric energy provider and then the utility would have an obligation to connect, supply, and deliver electricity to those customers. If the customer has chosen an alternate electric energy supplier, then the utility would only have an obligation to connect and deliver the energy to those customers. The Division of Public Utilities believes that during the transition to choice of electric suppliers, utilities must offer a price regulated energy supply service to customers who do not have a choice or have not chosen an alternate supplier. In recognition that electricity is an essential service, the division feels that each electric distribution company should act as a provider of last resort for those customers that either have chosen another supplier, or feel that they are not being adequately supplied by the market.

    Ms. Margie Spencer, REA, said that under a deregulated scenario as customers choose their provider of electricity, providers will also be looking to choose the best customers. Most of the members she represents would not fall into the category as being the prime accounts sought after by energy providers. Therefore, obligation to serve becomes important for them to continue receiving the service they now enjoy. Under deregulation, rural customers could return to a time when they were bypassed by other utilities and consequently, created their own electric cooperatives to meet their needs. Obligation to serve in contemplating deregulation implies an obligation to supply energy and an obligation to have facilities available to adequately transmit that energy. To ensure adequate facilities are available to transmit the energy, the obligation to serve must leave in tact the certificated service territory. This will prevent duplication of poles and wires and, moreover, the utility must have the ability to collect sufficient revenues to maintain and upgrade facilities to ensure safe and reliable electric service. The Legislature must ensure that the rural electric cooperatives remain financially viable to meet the future obligations to serve as they have done for over 50 years.

    Mr. Richard Judd, MUN, said that when a group of customers lose the diversity factor and are also low factor customers, their cost of service will have to go up for even the generation side. State law and constitutional provisions provide that the municipality has to see that somebody maintains the obligation to serve and that it will be at the same cost. In a competitive market, especially for vertically integrated companies, some of the generation costs are moved over into the distribution cost to rebuild those areas. Once that is gone, all the distribution cost burden is by itself and there is no kind of transfer to upgrade the system and rural Utah will suffer from it.

    Task force discussion followed.

     MOTION: Sen. Waddoups moved to adjourn at 12:30 p.m. The motion passed unanimously. Reps. Evans and Garn were absent for the vote.