Electrical Deregulation and Customer Choice Task Force

participate in the process of preparing legislation to bring competition to the Utah electric market. He provided task force members with printed copies of his slide presentation.

     Mr. Jay Bowcutt, Vice President and General Manager, Nucor Steel, said that Nucor has competitors and sister divisions that are buying retail power from various utilities throughout the country that are not located in a specific service territory. He emphasized that electrical deregulation is coming to this country and Nucor urges the task force to take action now as it will take several years to put deregulation into place and get it to work. He concluded by saying that if the task force does not take action now, consumers will be forced to take action and in two or three years large industrial loads will leave the system.

5.    Panel Discussion - Electric Power Marketers/Aggregators - The panel included the following participants: Bill Birnel, Illinova; Steve Levine, Duke Energy; Paul Kaufman, Enron; Jim Olsen, Utah Food Industry Association; and Leland Hogan, Utah Farm Bureau.

    Mr. Steve Levine, Duke Energy, stated that the benefits of competition are: 1) the customers will have freedom to choose their electricity suppliers from among competing companies; 2) the customer's ability to choose based on price, service, or any other factors changes their position from recipients of monopoly service to customers empowered with the ability to choose among a variety of services and providers; 3) the suppliers must respond to customer demands or face a loss of business; 4) meeting customer demands creates downward pressure on prices, spurs the creation of new products and services, and places a high value on excellence in customer service; 5) the suppliers must provide customers with a level of service they desire; 6) commercial relationships with customers must be established; and 7) marketers will have the ability to sell energy services directly to customers. He concluded by saying that customer choice and open-access is a proposal that can fundamentally change the electric industry in a way that gives customers more control over the products and services they buy.

    Mr. Bill Birnel, Illinova Energy Partners, explained that Illinova is a pure marketer and does not own any transmission or generation, but purchases power and resells it to the end users. He indicated that Illinova would like to be a major player in Utah and the bottom line of what Illinova would be looking at is customer choice. He stated that, as a marketer, Illinova would like to have the opportunity to be able to serve the end users, whether they be residential customers, industrial customers, or aggregators.

    Mr. Paul Kaufman, Enron, presented an overview of Enron's background and some key electric issues Enron is concerned about. He said restructuring is about the ability to choose a variety of services and providers by price, source of energy, or any factor that the end user thinks is important. Competition can benefit all classes of consumers; it can produce innovative, efficient energy suppliers and supplies; and it can improve the overall economy and society in general. He explained that it is important in creating a market to eliminate the incumbency advantage. Eliminating the incumbency advantage does not mean the existing utility cannot participate in the

market; but that it must operate through an affiliate where the relationship between the affiliate and the regulated wires company is governed by strict standards of conduct. He stated that Enron would support an idea called "standard offer service." He concluded by saying that the key is developing a market that unbundles all services that can be unbundled. He provided the task force with printed copies of his slide presentation.

    Mr. Jim Olsen, President, Utah Food Industry Association (Association), said that as commercial class users of utilities they have a high utilization of electricity. The Association anticipates that power deregulation is coming and is trying to position itself appropriately. He indicated that the Association's goal, as it proceeds toward power deregulation, is to make sure that there are no hurdles or major obstacles put in its way to hinder its ability to aggregate.

    Mr. Leland Hogan, Vice President, Utah Farm Bureau Federation (Bureau) and Chair, Utah Farm Bureau Irrigation Pumpers Committee (Pumpers Committee), indicated that neither the Bureau nor the Pumpers Committee have positions supporting or opposing electrical deregulation in Utah. They are actively monitoring the task force discussions and look forward to being players in this issue as it continues to unfold. He emphasized that the Bureau wants to make sure that if deregulation does go through that there is nothing that would stand in its way of being an aggregator. He identified six factors that would influence the Bureau's decision to pursue aggregating as a group: 1) reliability; 2) excess versus shortages of power; 3) how broad will competition be at the generation and transmission levels; 4) municipalities and rural electric companies; 5) peak demand loads; and 6) stranded costs.

    Task force discussion followed.

    At 11:00 a.m., Chair Blackham called for a break. The committee reconvened at 11:20 a.m.
6.    Municipal and Rural Cooperative Strandable Costs

    A.    Utah Rural Electric Association (Association)

    Mr. Mike Brown, Director, Dixie-Escalante, Board of Rural Electric Association, discussed the structure and operations of a rural electric cooperative emphasizing that the equity in a cooperative system belongs to the members. He indicated that the Association has some concerns about a recovery of stranded costs, adequate rates, and aggregation.

    Mr. Kurt Winterfield, Deseret Generation and Transmission (Deseret), stated that there will be retail level competition in the future and the questions then are: how to transition from where we are today with wholesale level competition to full retail competition; what the length of that transition is; and what the rules of the transition period are going to be. The distribution member cooperatives of Deseret have the following concerns: 1) that the task force clearly understands the

distinction between investor-owned utilities and distribution and wholesale cooperatives as well as municipalities; 2) that because the structure of the cooperatives is different, that there may be some misunderstanding about cooperatives; and 3) that in any legislation or direction to the Public Service Commission that the relationship between Deseret and its members is recognized.

    B.    Utah Associated Municipal Power Systems (UAMPS)

    Mr. Roger Tew, Van Cott, Bagley, Cornwall, and McCarthy, indicated that the real debate over stranded costs comes down to finding ways of mitigating or minimizing the impact on people who are adversely affected. The focus on stranded costs is a policy determination and in the absence of policy direction from the Legislature, UAMPS made some assumptions in coming up with estimates of stranded costs

    Mr. David Tuttle, Manager, Finance and Accounting, UAMPS, explained UAMPS' process in determining an estimate of stranded costs for its members and indicated that the preliminary estimate is $335 million in today's dollars.

    Mr. Reed Searle, IPA General Manager, stated that IPA employed three different methodologies to determine stranded investment for 14% of IPP, which reflects municipal ownership in IPP. The first is based on Net Book Value compared to Replacement Cost Less Depreciation. Using this approach, the stranded cost of 14 % of IPP is $94 million. The second approach is the approach used by Moody's, a national credit rating agency, which identified the amount of debt, or investment that could be paid off or recovered through electricity sales from a plant at the average regional power price, with the balance of the debt or investment being stranded. The stranded investment under that approach for the 14 % of IPP is $498.8 million. The third approach compares what the municipalities are likely to have to pay for IPP power according to IPA's cost projections, versus what they could buy power for on the open market. Under this approach, the stranded investment is $0. He indicated that IPA has no position with respect to which of these three stranded cost methodologies is most accurate and IPA believes electrical restructuring in Utah will have little effect on IPA.

    C.    Utah Municipal Power Agency (UMPA)

     Mr. Leon Pexton, Chief Financial Officer, UMPA, presented an overhead presentation on municipal stranded costs issues. He indicated that municipal power systems exist and operate in a much more narrowly defined regulated and legislated business environment than does PacifiCorp; a larger number of legislative and regulatory boundaries create different types of stranded costs for municipals than for PacifiCorp; federal tax laws and federal contract terms prohibit UMPA from selling electricity to any PacifiCorp retail customer; and any adopted methodology needs to be broad enough to objectively accommodate municipals and PacifiCorp. He stated that whether mandated or allowed to elect, municipals need to have the same ability as PacifiCorp to recover stranded

investments and to date no state has mandated or obligated municipals to engage in retail wheeling. He provided task force members with printed copies of his slide presentation.

7.    Adjourn

     MOTION: Sen. Jones moved to adjourn the meeting at 1:00 p.m. The motion passed unanimously. Reps. Buffmire and Garn were absent for the vote.