S TATE OF CALIFORNIA BEFORE THE PUBLIC UTILITIES COMMISSION In the matter of: Order Instituting Rulemaking on the ) Commission s Proposed Policies ) Governing Restructuring California s ) Docket No. R.94-04-031 Electric Services Industry and ) Reforming Regulation ) _________________________________ ) ) Order Instituting Investigation on ) the Commission s Proposed Policies ) Governing Restructuring California s ) Docket No. I.94-04-032 Electric Services Industry and ) Reforming Regulation ) To: The Commission COMMENTS OF THE AMERICAN PUBLIC POWER ASSOCIATION ON UTILITIES COMPETITIVE POSITION, RETAIL WHEELING OR DIRECT ACCESS, AND STRANDED INVESTMENT AMERICAN PUBLIC POWER ASSOCIATION 2301 M Street, N.W., Third Floor Washington, D.C. 20037 202/467-2900 Dated: August 18, 1994 APPA COMMENTS ON UTILITIES COMPETITIVE POSITION, RETAIL WHEELING OR DIRECT ACCESS, AND STRANDED INVESTMENT The American Public Power Association is the national service organization representing approximately 1,750 publicly owned electric utilities throughout the United States. APPA member utilities serve some of the nation s largest cities, such as Los Angeles, Sacramento, Seattle, Phoenix (Salt River Project), Jacksonville, Austin, San Antonio, Nashville, Memphis, Cleveland, Omaha, and Orlando. Several state public power agencies, such as New York Power Authority, South Carolina Public Service Authority, and Lower Colorado River Authority in Texas provide electric power to many communities within their states. However, the majority of APPA members are located in small and medium- sized communities in every state except Hawaii. Collectively, public power utilities deliver electric energy to one of every seven U.S. electric consumers, and approximately one of every four in California. With the benefit of consultation with its California municipal membership, APPA has chosen until now not to participate in the CPUC proceedings in oth er than an observer role. While there are definitely broader relationships concerning the issues raised in the California proposal, this is a California proceeding, attempting to set California policies. Unfortunately, in their July 22, 1994, filing with the CPUC, the national trade association of investor-owned utilities, the Edison Electric Institute, chose to make a wayward side trip with a gratuitous accusation that (California s) municipal utilities 3 have a substantial unfair competitive advantage as compared with California s traditional [read jurisdictional] utilities. Access to preference hydroelectric power and tax-exemption benefits are pointed to as sources of this alleged unfair competitive advantage. Again with the benefit of consultation with the California municipal membership, APPA chooses now to submit comments, but comments that are restricted narrowly to a response to these particular EEI allegations concerning utilities competitive positions. The restricted nature of APPA s response to EEI s statements in no way implies agreement by APPA with all of the other EEI positions expressed in their comments. We will then take the opportunity to provide in brief APPA s positions on retail wheeling or direct access and on stranded investment. This will be done principally by inclusion of resolutions passed on these subjects by the entire APPA membership at its annual meeting in June, 1994. UTILITIES COMPETITIVE POSITIONS: PREFERENCE POWER AND TAX EXEMPTIONS In its comments on pages 4 and 5 of its filing, EEI paints a picture of the poor struggling investor-owned utilities suffering a substantial unfair competitive advantage because of the access to preference hydro power and tax-exemption benefits enjoyed by California s municipal utilities. At page 5 it even goes on to say: California s municipal utilities would have a substantial competitive advantage over the private utilities in California in marketing electricity to direct access customers because the municipalities can require their 4 native load customers to pay for the fixed costs of their utility systems while selling excess capacity on the margin to others at rates which need not reflect fixed costs. A basic test of reasonableness is always helpful. How reasonable is it to expect California s private utilities to be at a competitive disadvantage relative to the California municipals, rather than the other way around? How likely is it that PG&E and Southern California Edison will be quaking in their boots over the competitive threat of Palo Alto or Burbank, let alone Banning or Lompoc or Ukiah? As for the marketing statement, how politically reasonable is it to assume that local citizens who are responsible for regulating and setting their own electric rates will choose to charge retail customers in other cities less than they charge themselves and their neighbors and relatives in their home community? Regarding California municipal advantages of preference power and tax exemptions, the August 18 Comments of the California Municipal Utilities Association in these dockets say it all. There it is reported that California Debt Advisory Commission records show that in the past 10 years the state s three large private electric utilities have issued nearly $4 billion in tax- exempt bonds. Also, CMUA reports that according to FERC Form 1 records, the three private electric utilities often get more BPA and WAPA preference power than all of the state s publicly owned utilities combined. Taking the argument about utilities relative competitive position to a broader level, CMUA goes on to point out a list of other limiting conditions that public power utilities face and private utilities do not. These include public works bid, 5 disclosure, election and referendum requirements, and the like. On the other side of the coin, investor-owned utilities enjoy their own set of tax and financial benefits that are not available to p ublic power utilities. These include to varying degrees the use of accelerated depreciation, the remaining benefits of excess deferred investment tax credits, and regulatorily mandated reimbursement for conservation/DSM programs and/or lost consumer load, for example. These statements do not apply to California alone. APPA has looked in turn at each of the purported reasons that its member municipal rates are lower than those of private utilities tax- exempt financing, level of state and local tax payments, and preference power. Taken together these factors do not explain 50 percent of the difference. The rest the majority is due to factors that are very beneficial to consumers, the economy, and social efficiency the choice not to charge a profit, local efficiencies, local cost and other responsiveness, and that corny concept of public spirit and esprit de corps. In a paper delivered at this past year s meeting of the American Economic Association, Professor Kwoka conducted a multivariate analysis and concluded: These results hold constant a lengthy list of factors often thought to be responsible for apparent differences in costs, prices, and margins. These factors include scale of operation, factor costs, hydro power usage, and certain tax and capital cost advantages of publicly owned utilities. While the results confirm the importance of these factors, they show that public ownership is still responsible for over 50% of the apparent price difference. 1 John E. Kwoka, Pricing in the Electric Power Industry: The Influence of Ownership, Competition, and Integration, paper delivered January 4, 1994, at the American Economic Association meetings in Boston. 6 Further, these analyses yield quite conservative results because they do not account for the private utilities tax and financial benefits mentioned above. APPA also compared tax payments and contributions to state and local government for publicly owned and investor-owned distribution utilities. The median payment as a percent of electric operating revenue was virtually identical 5.5 percent for publicly owned utilities and 5.6 percent for investor-owned utilities. In short, tax and financia l and preference power benefits are not the exclusive province of municipal electric utilities, and municipals rate advantages are more generally attributable to a nonprofit status, efficiency, and local responsiveness. 7 RETAIL WHEELING OR DIRECT ACCESS APPA does not intend to burden the already voluminous record in this docket, but it does take this opportunity to present to the CPUC its national position on retail wheeling or direct access as it is called in California. It speaks clearly to the need to proceed in an orderly fashion and to obtain the full benefits of wholesale competition first. The following Resolution was agreed upon by the national APPA membership at its annual meeting in Chicago this summer. Retail Wheeling Many large industrial electric users and others are actively urging states to permit retail wheeling in order to allow large industrial customers, and in some cases other retail electric consumers, to purchase their electric requirements from a variety of sources other than the local utility. Some states are moving forward with retail wheeling proposals. The California Public Utility Commission has announced its intention to allow retail wheeling in California, the state of Michigan has approved a limited retail wheeling experiment, and a number of other states are analyzing the potential advantages and disadvantages of retail wheeling. The prospect of retail wheeling raises a number of very important and difficult policy issues, including, but not limited to: (i) how the traditional utility obligation to serve all customers within its service territory may be modified or eliminated by retail wheeling; (ii) the potential impact of retail wheeling on environmental objectives, demand- side management programs and the development of renewable technologies; and (iii) whether small industrial, commercial and residential customers who may be denied the right to participate in retail wheeling by statute, regulation, or practic al circumstances can be protected. The prospect of retail wheeling raises particular concerns for public power systems. Retail wheeling would overturn a local governmental decision to provide electric power as a municipal service to all 8 consumers within the community, managed by a local governing body accountable to consumers. Moreover, as a practical matter, many public power systems may be denied the ability to compete for retail customers outside their service territories due to state laws that prevent them from financing improvements to serve customer loads that are not in or near their communities. Advocates of retail wheeling assert that allowing large industrial customers to shop for retail power supply will result in lower costs of electricity for all end-users, but have not yet demonstrated that this result is likely to occur, or that small industrial, commercial and residential customers will be protected against an inappropriate reallocation of costs from industrial customers. The Federal Energy Regulatory Commission (FERC) only recently has begun to implement its new authority to order wholesale transmission service. These efforts by FERC to create an open, non-discriminatory transmission access regime, and to foster the creation of competitive regional bulk power markets, have met with resistance in a number of quarters. Open transmission access is not the norm in the nation today, and competitive regional bulk power markets are just beginning to form. A number of states and utilities, including public power systems, are experimenting with competitive bidding for the construction of new generation and the procurement of power on a long-term basis in order to lower costs for the benefit of all ratepayers through competition. It is very important that change in the electric utility industry be managed carefully and in an orderly fashion for the protection of all consumers. Now, Therefore, Be It Resolved: 1. That the American Public Power Association continues to support actively the development and implementation by FERC of non-discriminatory, open transmission access policies and the creation of competitive regional bulk power markets that will result in an efficient utilization of regional electric resources through power pooling or market mechanisms, or both; 2. That APPA supports efforts by public power systems and others to gain the benefits of competition in generation construction and long- 9 term power procurement through competitive bidding and other processes; and 3. That APPA will not support mandated retail wheeling until such time as: a. Non-discriminatory, open transmission access is available to all electric utilities and other sellers of power and energy at wholesale, that eliminates all advantages for transmission owners in bulk power markets derived from their ownership and control of transmission; b. Fully competitive, regional bulk power markets have been developed that result in an efficient utilization of regional resources to meet regional load through pooling or market mechanisms, or both; c. Issues related to the obligation of a utility to provide service and to protection of small industrial, commercial and residential customers have been resolved in a way that is fair to all electric utilities and customer classes; and d. A thorough analysis has been completed that (i) demonstrates that significant cost and efficiency gains are likely to occur as a result of retail wheeling for the benefit of all electric end-users, above and beyond the benefits that are achieved through the combination of open, non-discriminatory transmission access, competitive regional bulk power markets and competition in the construction of new generation and procurement of long-term power, and (ii) resolves the potential adverse impact of retail wheeling on achievement of state and national environmental goals, demand-side management programs and the development of cost-effe ctive renewable technologies. STRANDED INVESTMENT At its 1994 annual meeting, the APPA membership also passed a Resolution on stranded investment. The issue of stranded investment, or a rose by any such name, is integrally related with utilities competitive positions, the CPUC direct access proposal, and, indeed, with the overall goals 10 of securing the benefits of competition in electricity supply. Thus, we include here the APPA Resolution on stranded investment. It speaks to the anticompetitive implications of the use of stranded investment payments and their assignment to transmission charges. Stranded Investment Electric utilities losing wholesale sales due to increased competition are seeking regulatory protection through recovery of stranded investments investments made uneconomic allegedly as a result of changed rules in the bulk power market including in particular enhanced transmission access. One proposed means of recovery of these stranded investments is through a transmission surcharge. The concept of a customer paying its supplier for stranded investment is totally inconsistent with a competitive market. Such payments have an anticompetitive effect and will prevent the creation of a vigorous bulk power market by: erecting a barrier to entry for alternative suppliers; discriminatorily favoring and shielding certain individual competitors; artificially giving an entrenched competitor a paid-off asset with which to compete with rivals; and distorting transmission prices if charges are placed there. The potential for stranded investment in the bulk power market cannot have taken utility executives by surprise. The electric utility industry has focused for some time on the reality of a more competitive environment, and many utilities have taken steps restructurings, asset write downs, mergers, downsizings to compete and win in this new environment. Stranded investment is not a federal issue. Wholesale transactions are, in most cases, governed by contracts with expiration dates and termination clauses. Also at wholesale, FERC has long held that there is no statutory obligation to serve. For these reasons, a wholesale supplier has no reasonable expectation that any particular wholesale customer will remain as a wholesale customer after the contract expiration date. Stranded investment is alleged to be a consequence of and a reason to oppose the creation of new municipal electric utilities. However, new municipal utilities are established pursuant to state law, and stranded 11 investment issues, to the extent they are addressed, should be addressed at the state level. Stranded investment is also argued to be a consequence of changed state policies on retail wheeling. Again, this is a state not a federal matter. Now, Therefore, Be It Resolved: That the American Public Power Association supports the development of a vigorous electric bulk power market and opposes stranded generation investment charges including in particular as an addition to transmission charges or as an exit fee because they are inconsistent with such a market and would have serious anticompetitive effects. Be It Further Resolved: That APPA opposes the imposition by the Federal Energy Regulatory Commission of stranded investment charges for new electric utility wholesale customers. Also very instructive on the issue of stranded investment, in APPA s opinion, is the recent U.S. Court of Appeals decision in the District of Columbia Circuit regarding earlier FERC approvals of tariff filings by Entergy. The circuit court said that it is anticompetitive and in violation of antitrust law to incorporate stranded generation costs in transmission fees. This decision has broad implications beyond the Entergy case and beyond federal jurisdictions. Accordingly, we have enclosed a copy of that July 12, 1994, decision with this filing. Thank you for the opportunity to submit these comments and materials in your important procee ding. Respectfully submitted, American Public Power Association David W. Penn 12 Director of Policy Analysis 13