Download the full text version of the the February 1 meeting.
Download the full text version of the the February 1 meeting.Next Meeting: February 15 in Portland. Consultants Bill Marcus and Jim Litchfield will present templates representing the region's electricity system.
Steering committee chair Chuck Collins said he had talked with some committee members about how to proceed after the presentations on February 15. The discussion is reported on page 17. Collins said all February meetings will be at the Lloyd Center Red Lion.
Laura Brien of the National Economic Research Associates (NERA) said there were two primary purposes for restructuring the electricity industry in the United Kingdom (UK). The first was to privatize the central generating board, and the second was to introduce competition into a publicly owned monopoly. The Thatcher government wanted to raise money and induce private-sector efficiency through privatization, she added.
Among the major issues involved in the restructuring were: who can sell to whom, trading and transition arrangements, market power, and regulation, Brien explained. A major feature was splitting up transmission and generation. The UK's generating system was divided into four competing entities: National Power, PowerGen, Nuclear Electric, and the Independents. Interconnectors in Scotland and France add further competition, she said.
The high-voltage transmission system ("the wires business") was restructured into the National Grid Company (NGC). Twelve regional electricity companies (RECs) were created to handle low-voltage transmission and distribution, she said.
Wholesale competition came first; retail competition is being gradually introduced, Brien explained. Initially, customers with loads of 1 megawatt (MW) or greater could buy in the market; by 1998, competition will be available to residential customers, she said. With the restructure, there is competition in generation, a monopoly in transmission, and retail competition, she said.
Generators bid resources into a power pool, and customers buy out of the pool. The pool establishes prices, and the NGC dispatches the system on a least-cost basis. Customers can negotiate fixed prices with suppliers through "contracts for differences," Brien explained, which reflect differences from the pool price. Today approximately 80 percent of the power traded is under contracts, the terms of which are confidential, she said.
"The lights stayed on," Brien said of the restructure, and "all-in-all, it worked very well." From 1990 to 1995, there were significant fluctuations in the spot market, and that has been perceived as a problem, she acknowledged.
In 1993, transitional contracts expired, and generators "put up the prices" in anticipation of negotiating new agreements, Brien said. The "Big Two," National Power and PowerGen, could manipulate the market, she stated, and regulators responded by ordering a 6,000 MW divestiture of resources and capping pool prices.
Restructuring has led to new trends in generation resources, Brien reported. Coal generation has declined markedly from 1990 to 1996. For social policy reasons, the government required the continued purchase of coal for generation, but over time, uncompetitive coal plants are being closed, she said. Gas generation is on the rise.
Regulators control the price for transmission and distribution and promote competition in generation. There is no regulation of investment in either sector, Brien said.
Stock prices for the RECs have risen, and all but four of the 12 have been taken over. It shows there are lots of profits to be made, Brien observed. There have been REC takeovers by generators, she added, a situation which is being studied by regulators. Takeover threats are imposing more discipline than regulation, she noted, squeezing inefficiencies out of the system.
Stranded costs have not been a big challenge in the UK's transition to a restructured and privatized industry, according to Brien. The government owned the system initially and was willing to absorb the financial costs to achieve the goals of privatization. Nuclear Electric is still state-owned. A competition transition charge (CTC) was levied on all energy sales and a subsidy was put in place for coal, she said; a high return is allowed on the wires business.
Restructuring worked to bring competition, Brien concluded. It might not have worked as well as possible because there are only two major generators; criticism of the restructuring has been aimed at the market power issue, she said.
Sharon Nelson, the steering committee's commentor, said Brien's talk illustrated that "restructuring does not mean deregulation." There are still economic and political problems to be dealt with in the regulatory arena, she stated.
Nelson said it behooves the committee to ask why we want to restructure. The Thatcher government wanted to raise money and to break the strangle hold of the labor unions in Britain, she said.
The utility regulation model in this country is unique in the world, Nelson continued. In Europe and Asia, monopolies grew up within organized governments, and "they are wrestling with getting governments out" of the system, she observed. In America, there is both public and private ownership, which changes the nature of the preconditions we have to face, she said. The UK and California models are not congruent with what we are doing here, Nelson said.
The whole notion of our utility regulation model is to use private capital and harness it for the public interest, she explained. There is a lot to be lost for public purposes if we don't get the regulatory arrangements and restructuring right, Nelson stated. Some parts of the industry have the earmarks of natural monopoly, she said, and urged the committee to keep an eye toward which are the monopoly sectors.
What has been the impact on consumers in the UK? Has it been good for all of them? Nelson asked. Large industrial customers took a small hit initially because subsidies from the old system disappeared, Brien said; overall, their rates have decreased. Medium-sized commercial customers have seen the largest decrease in price, she went on, and domestic customers have not yet had the chance to partake of direct competition. There is debate about the feasibility of competition at the residential level, Brien acknowledged, but the expectation is there will be reductions.
Is there reintegration going on? Nelson queried. Yes, Brien responded. National Power and PowerGen have put in takeover bids for RECs, and there have been attempts to reintegrate the system. Nelson asked how the energy efficiency trust is working, and Brien responded that the RECs have set up energy efficiency divisions; it's an option for competitive services, she said.
If it were done over again, would generation be more dispersed? Nelson asked. Yes, Brien said. At the time of the restructure, the government didn't want to split the system up into entities that were too small to sell profitably. Smaller pieces would not have been as marketable, she explained.
K.C. Golden asked about government-owned nuclear generation and retiring inefficient plants. Brien responded that nuclear power had become more competitive; nuclear doesn't tend to be at the margin in the pool -- oil and gas do. She said the nuclear plants were covering fixed costs with the transition levy imposed on all energy sales. The levy runs out this year, she noted.
Bill Drummond asked if high REC profits are a result of systems "being grossly undervalued in the rush to privatize." Brien acknowledged that getting full value was not as important as selling assets quickly. Roy Hemmingway asked how capacity is a valued in the power pool. Brien explained that it is calculated according to a pre-established formula.
Brett Wilcox asked if "the complicated pool" was preferable to "simple bilateral contracts." There was the need for a spot market element in the system, Brien replied. The pool makes it easier; everything is charged and paid at pool price, she said. Settlements occur outside the pool through contracts for differences.
Collins noted that large swings in spot market price would be a feature of the pool that is "hard to sell." Drummond asked about data on differences between contract and spot market prices. Brien said contract terms are confidential. Walt Pollock asked if there were costs, such as transition costs, recovered through the wires. Brien said yes, but they've been phased out or reduced.
Henry Hewitt of Stoel Rives was PacifiCorp's principal transactions lawyer in acquiring Powercor, a distribution company in the state of Victoria in Australia. He said Victoria's premier, Jeff Kennett, was elected on a platform of reducing government debt, and accomplishing that goal focused on the electric utility industry.
Prior to privatization, the State Electricity Commission of Victoria (SECV) owned and operated the electricity system. In a "remarkably short time," the government developed a plan to divide and sell parts of the industry, Hewitt said. In July 1994, the utility was divided into 12 companies: five distribution and five generation businesses, and two corporations in the middle -- Power Net Victoria and Victorian Power Exchange, he explained.
The generation side was formed around Victoria's primary generating facilities, largely coal-fired plants in the LaTrobe Valley, Hewitt stated. The scheme put high-voltage transmission business into Powernet, with Victoria Power Exchange remaining a state-operated and regulated grid. The five distribution businesses operate low-voltage lines, and offer retail service and local delivery of power. Distribution continues to be regulated, Hewitt said, with terms and rates established through the year 2000.
Competition in Victoria is being phased in over five years, and eventually all customers, even residential, will be able to choose their provider. A pool is in place for generation, and customers can negotiate contracts for differences with suppliers.
When privatization began, Hewitt said, there was a business plan in place for each of the twelve companies; each had its own board, and operated as a separate profit center. The businesses were set up like private companies, he said.
All five distribution entities have been sold, Hewitt stated, in a process "that exceeded expectations" for price. One of the generation businesses is now being sold, and the rest are expected to be on the block after the next election, he noted.
The newly privatized system has strict limitations on cross-ownership of generation and distribution companies. There is a strict notion of competition, Hewitt said, and the process in Victoria assures disaggregation and competition.
George Galloway, an attorney with Stoel Rives, who was involved in PacifiCorp's Victorian ventures, also noted the remarkable speed with which the state government implemented privatization. It was a political decision, made by a few people, without public input, he said. He likened it to the Mayor of Seattle deciding to privatize Seattle City Light and accomplishing it in two years.
What Victoria did, Galloway said, has brought substantial efficiency to an inefficient system. There is regulation in place for poles and wires that will produce incentives to lower costs, he explained. Concerns about the system are subtle, according to Galloway, and have to do with the institutional arrangements.
The decision to bifurcate generation and distribution, Galloway said, was political, and politicians knew they were doing something "dramatic and controversial." They "didn't want the lights to go out in the process," he noted, and they left the physical system largely in place.
Among the questions to be sorted out, Galloway said, is whether the grid operator function should be separate from the trading function. Should operators have control of the market? The decision in the UK and Australia is yes, he noted, while a contrary conclusion is being drawn in California. Should there be a single system operator? Yes, that would be optimal, he said, and when the Victoria system is adopted nationally in Australia, there will be a single operator.
Should you have a single hourly trading market? The judgment in Australia was to have one marketplace, he said. Should participation in that market be mandatory? Despite all of the free-market rhetoric in Victoria, Galloway noted, it is illegal to generate a kilowatt of electricity and not sell into the government pool. The law prevents trading outside the pool, he said.
Galloway described the consequences of "doing it wrong" in restructuring. It can lead to difficulties in financing new resources and distortions in transmission investment decisions. Transmission constraints have a big impact on the market, he said, and Victoria doesn't appear to have resolved that problem.
There can be a tendency toward excess reliability and "gold plating" in a single unified system, Galloway said, as well as a lack of innovation and lack of competition for ancillary services. The challenge is how to set the system up so it is actually driven by the market forces that started people thinking about it in the first place, Galloway concluded.
Pools are not necessarily market mechanisms, Hemmingway said. They work as such on the sellers' side only, he said. What makes them work is bilateral agreements outside the pool. We must be leery of pools as a market mechanism, Hemmingway stated, and we need to know how they operate to discipline sellers, he continued. I'm disturbed by formulas that link fixed costs of resources to pool price. A true market would value the future availability of electricity, he observed.
I am confused about what pools are meant to accomplish, Hemmingway said. Obviously, they are a transition to a bilateral market, he noted, but I'd like us to explore the various elements before we discuss the desirability of pools, he said.
Both Great Britain and Victoria have done nothing for public values, which we are charged to preserve, Hemmingway stated, labeling the funding level in Great Britain as "ludicrous." They have only 25 million pounds for a country of 50 million people, he said. That would be as if BPA programs allocated 50 cents per person in the Northwest, the equivalent of a $5 million conservation program, Hemmingway noted.
As for divestiture, Victoria's distribution companies sold for double the book value because of the perception of efficiencies to be gained, Hemmingway said. The generation companies will sell for less, he predicted. Where there is a government monopoly, stranded investment can be solved by issuing more debt, Hemmingway stated. Some things that made it work elsewhere may not exist here, he said, since government is not willing to absorb the losses.
Wilcox asked if the independent system operator (ISO) and the independent grid operator were different from one another. Galloway said there was a question of whether to have the dispatch and load control functions in one institution. There is a recognition in the United States that it would be wholesome to separate them, he added. A sub-question is whether there should be just two systems or more. There is also the question of whether an ISO should be a quasi-public entity, he said.
Pools are certainly good, but should we have only one pool? Galloway asked. People can vote with their feet, he observed. In a quasi-government institution, people don't have the ability to do business elsewhere, he noted.
Pollock asked about the public policy imperatives in a Victoria-style system. Before this started, "the only public purpose was building unneeded plants and keeping unneeded people on the payroll," Galloway observed. There was no impetus for demand-side management, he said, acknowledging "there was a fleeting effort to enter cogeneration contracts." There was nothing to preserve from the old days, Galloway concluded. The jury is still out on how much the market will embrace public purposes, he said.
Nelson asked why the point-to-point wholesale transmission charges PacifiCorp filed are more than double BPA's. PacifiCorp has substantial investment in transmission and a widely dispersed system, Galloway replied. When you divide by the number of kilowatt-hours, you get a bigger number, he said. It's a real problem for competition in the Northwest, Nelson commented.
Al Alexanderson inquired if multiple pools could be connected into a central operating entity in order to use the system efficiently. Galloway acknowledged many questions exist on how to operate the transmission system and how to dispatch plants. My own sense is that in the western United States, generators are achieving a large efficiency with a disjointed dispatch system, he said. I would be slow to replace market-driven dispatch with a system in which engineers are trying to optimize, Galloway noted.
Rachel Shimshak asked if there is a way to deal with pollution in the Victoria system. Is there an incentive to close dirty plants? she queried. I don't think the system in any way captures environmental externalities, Galloway replied.
Peter Lund of Pacific Gas Transmission Company said restructuring in the natural gas industry illustrates how fast basic business assumptions can change. Historically, PGT operated a merchant business, buying from Canadian producers and selling to one principal customer. Today, the company is solely a transporter, moving gas on its pipeline for many customers. PGT's firm transport business grew from a handful of customers in 1992 to nearly 80 customers in 1995, Lund said.
Based on gas industry experience, Lund predicted there will be winners and losers at every stage of restructure. The ultimate winners will be those who process and understand market information and have the ability to make quick decisions, he said.
FERC's objective with gas deregulation was pretty simple --create an open transportation network in which the price of gas would be regulated through competitive forces, he stated. The first step came with Congressional action to deregulate the wellhead price of gas. FERC issued a series of orders, and among the earliest, Order 380 said gas customers did not have to buy from their pipeline suppliers. Order 436 allowed pipelines to open access for transportation, but did not require it.
The stranded costs in the gas industry, Lund noted, were supply contracts that were made uneconomic as access to pipelines was opened up. FERC came out with a formula for splitting those costs among pipeline owners, local distribution companies, and a pipeline's transportation customers, he said.
Order 636 required pipelines to unbundle sales from transportation, and at that point, PGT dissolved its merchant business, Lund said. The order dramatically changed ratemaking in the gas industry; under it, customers pay pipelines a reservation charge to keep space open for their purchases. There is also a mechanism through which customers can release and resell capacity to help pay their reservation charges, he explained. Lund urged the committee to examine, particularly with respect to BPA's transmission system, what has gone on in the gas industry with capacity turnbacks. As unbundling occurs, he said, there may be segments of the system that have high costs but low value to customers.
Lund said there has been phenomenal growth in the number of gas contracts traded in the commodities futures market. Over 93,000 contracts were traded in a single day last year. NYMEX is seriously considering an electricity futures contract for deliveries at the California/Oregon border, he said, calling it "good news," and a fundamental way of valuing electricity as a commodity in the west.
Gas marketers have carved a sizable niche in the market, Lund continued. They are very prevalent in purchasing capacity released by pipelines, and their rise means a more fluid market, he said. There is also a large spot market in natural gas, and the percentage of gas sold at market prices has risen from 14 percent in 1984 to 70 percent in 1995. The intensity of the market activity and the number of transactions have led to the need for new electronic information-handling systems, Lund noted.
Lund cautioned that if the gas industry is an example, the first attempt at deregulation may not be the last. Each change will create winners and losers, he said, noting that the market is poised for deregulation of electricity and is moving ahead without regulation. The market will also reveal inefficiencies, Lund stated, and will favor the least-cost providers of energy services.
The region's gas consumption is much lower than elsewhere in the country, Lund reported. Northwest states are in the bottom quartile in terms of homes heated with natural gas, and as a generating fuel, it represents about 9 percent of the region's firm resources, a figure that assumes U.S. Genco's plant at Hermiston comes on line, he noted. Developing more gas-fired generation would broaden the region's fuel diversity, Lund said.
Mary Ann Hutton of Northwest Industrial Gas Users stated that the objectives of natural gas deregulation were access and competition in the marketplace. The philosophy was that where regulation is necessary, it should be at a minimum. Deregulation was a way to bring benefits to all consumers through competition, flexibility, and cost-efficiency, she explained.
Why competition? It gave customers access to lower price gas resources and brought about gas-on-gas competition, Hutton said. In addition, competition promoted the full and efficient use of facilities and spread fixed costs more broadly, she added.
Deregulation affords flexibility; suppliers are able to tailor products and services to fit customers. Contracts can allow for different standards of reliability and price sensitivity, Hutton explained. Customers want to be able to take -- and to pay -- for just the services they need, she said. Competitive pressures will not allow subsidies in rate structures, and in the gas industry, pipeline and distribution costs have been realigned, Hutton said.
Both the gas and electricity industries have take-or-pay and contract liabilities to address in deregulation, as well as responsibility for uncompetitive resources, she continued. Many of the same questions exist, Hutton said, citing transition costs, capacity allocations, and the impacts of cost shifting.
Among the things that did not work in gas deregulation, Hutton said, were "half-way measures." None of them worked, they clogged the courts and didn't bring benefits to consumers, she stated.
"Big studies" didn't work either, Hutton continued. It's "a fast and loose market," she pointed out, and there isn't time to over-analyze. In an extremely dynamic market, plans are obsolete by the time they're finished, she said. "You can't script the whole play," she cautioned. Let the market evolve and as problems arise, solve them pragmatically, Hutton counseled.
What did work? Hutton said distinguishing between competitive and regulated markets is important. The greatest challenge is to find the balance between those two, she told the committee, and use the minimum amount of regulation to do the job, Hutton said. It worked to provide unbundled, nondiscriminatory transportation as a separate discrete function, she said.
It is essential to eliminate cross-subsidies and get to rates that reflect true costs, Hutton said. It promotes efficiency and gives realistic feedback to customers about the cost of the services they are selecting, she stated. And Hutton urged the committee to look for simple, pragmatic solutions. Don't make it harder than it is, she said, labeling "obligation to serve" as "the biggest non-issue" in gas deregulation. Simply define it by contract, along with other rights and obligations, she recommended.
Hutton urged "trust and cooperation"; things work better when parties define their needs and make clear their underlying concerns. She likened deregulation to a train coming down the tracks. You can wave as it goes by, you can jump on, but you can't just lie on the tracks, Hutton quipped.
"Absolutely," there have been benefits for consumers with gas deregulation, Hutton said. The industrial customers got the largest benefits, but residential rates decreased too, she said. Nationwide, industrial rates are down 57 percent, and residential rates 24 percent since 1988, Hutton reported. In the Northwest, the decreases have been in the range of 10-22 percent, she said. Sticking to the goals of deregulation has been beneficial for all consumers, Hutton concluded.
Gary Zarker said all four Northwest governors emphasized spreading the benefits of change broadly. In the Northwest, there is a large public purpose embedded in the electricity industry; we are largely a public function, he noted, and there is a good deal of government involved. If the market won't tolerate cross-subsidies, how do you balance those purposes? Zarker asked.
Lund replied that this is where trust and working together enter the picture. He suggested phasing in change and allowing for transition. Lund said the public perspective within the electricity industry is different from that in natural gas, but the obligation to serve is still there. One effect of opening gas markets was to stimulate talk of municipalization, he noted.
Zarker asked what public purposes the gas industry has. Dwayne Foley of Northwest Natural Gas said the distribution companies offer conservation programs and weatherization. During cold weather, we don't turn off customers' heat for non-payment of a bill, he added. There are a whole host of subtle subsidies, he said, noting that customers pay the same commodity rate even though some require far more service-related visits than others.
What about your obligation to serve on the residential level? Zarker queried. We have the obligation to serve, Foley responded. That would get tougher if 11 months out of the year, a customer wants retail wheeling, and on a day like today, asks for commodity service, he added, referring to the freezing weather outside.
Jason Eisdorfer said he agreed that deregulation had brought benefits to natural gas users. But "they've fallen mainly to industrial customers," he said. The commodity price of gas has dropped largely due to technology that was already coming along when deregulation hit, Eisdorfer stated.
You showed us Washington state tariffs demonstrating that residential gas prices have been reduced, he continued, adding thanks is due to Sharon Nelson for seeing that it happened. One customer's cost-based rates are another's cost-shifting, Eisdorfer contended. After disaggregation of generation and distribution, we need to think about market power; the consumer participants are not at all equal, he said.
My experience is that demand-side management with the gas companies "approaches disaster," Eisdorfer said. One of the solutions we hear on the electric side is that when we reach a new market, there will be vigorous energy service companies, he said. On the gas side, that hasn't happened, Eisdorfer stated. Collins added that the charts do show big differences in market power among customers.
Hutton responded that cost shifting is not necessarily bad, if you start with a misaligned system. You must shift costs to get it right, she stated. Regulators have not been doing this blindly, Hutton added; they have used detailed cost-of-service studies.
Last decade, while rates went up 111 percent for residential customers, some industries saw a thousand percent increase, Hutton said. There was a huge imbalance going in, she contended, and huge subsidies. If subsidies are not straightened out, there will be ways around them, like bypass, she cautioned. It is important to keep industries on the system; they have favorable load profiles and contribute to fixed costs, Hutton added.
Cost shifting may not be "a dirty word to you, but it is to me," Eisdorfer said. Lund said it is important to consider the percent of the rate made up by the gas commodity itself. Hutton added that distributors have looked hard at how to serve the residential peak. It's not efficient to put more pipe in the ground, she said, adding that companies are using such mechanisms as buying for the future and conservation programs to shave peak.
Hemmingway queried Lund on firm transport business versus the short-term contracts. Lund said PGT was strictly transportation and sold no commodity. In the face of gas price declines, we've brought more transport resources on line, he said. Short-term contracts are a growing concern; putting pipe in the ground without firm transportation commitments is a problem, Lund acknowledged. PGT is unique in that we have many 20-year contracts, he explained. But the trend is toward short-term contracts, and the problem is balancing capital investments with customer desires, Lund said.
Golden directed a comment to "how dirty a word is cost shifting?" To what extent can we have an argument here about cost alignment? Should we try to forswear having a cost allocation discussion? Golden queried. Wilcox suggested the issue was one of defining a subsidy. My definition is anything other than what the market would pay, he stated. Open markets eat subsidies, Foley agreed; you can't sustain them.
Nelson said the exchange between Jason and Mary Ann is the 1980s -- "been there, done that." Politically, all customers should benefit, she stated. It is not politically sustainable to do otherwise. One speaker mentioned bypass, she noted. Bypass is both a reality, and it's a strategy, Nelson argued. Some customers threaten bypass to negotiate, she suggested.
Quite a few who threatened bypass have come back, Foley acknowledged. They were all customers using our pipe, he said; those who have other transportation do not return.
At what point do we bring the natural gas industry into the Regional Act? Jim Davis asked. I don't think that was in the governors' charge, Collins observed. Pollock added, as we consider collecting monies for market transformation, it may involve the gas industry. Davis suggested the committee not get too far from that question during the review.
Ron Lehr, a Colorado attorney and former state regulator, said regionalization and the wires charge on long-distance lines are lessons from restructuring in telecommunications that are relevant to what's going on with electricity. But, he cautioned, there are important distinctions as well.
Harold Greene, the judge who presided over the break-up of AT&T is a "federal judge for life," and he ruled the process with an iron hand, according to Lehr. It's also important to recognize that without telephone service, you miss calls and suffer inconvenience. Without electricity, "civilization ends," he quipped.
In the telephone industry, there was a mentality of divorce, Lehr said, with the attendant acrimony. He referred to the "flowery competitive rhetoric" that evolved in telephone restructuring, and said rhetoric is also with us in the electricity industry. "The outcries about bypass," are an example, Lehr said.
The regional Bell companies were on the short end in the AT&T divorce, Lehr said, and they took to the political arena to solve their problems. There was some political hardball as a result, he said. The regional Bells also went into the "business strategy mode," Lehr said, and among their strategies were asset transfers, reorganizations, and cost-cutting, including layoffs.
A lot was done that was very expensive and didn't work, Lehr contended. Many things that were done wrong diverted management attention and capital away from the basics of the business, he said, and now we have service problems. In Colorado, regulators have had to require local phone companies to give customers vouchers for cellular phones when new hook-ups are too slow.
The response to these problems has been regulatory and policy reforms to encourage competition. Restructuring is not about deregulation, he stated, and in fact it involves a period of hyper-regulation or "warp speed regulation."
In the transition to competition, Lehr urged defining the public policy criteria, including such things as least-cost, reliability, environmental protection, end-use efficiency, and sustainability. Competition segments the market, he said. Define the market segments and desired outcomes; there isn't one market, Lehr added, we must talk market by market. With regard to wholesale competition, Lehr urged the committee to look deeply into the regional transmission groups (RTGs) that are forming.
Customer choice should be one of the outcomes of competition, Lehr said. Cost is the most important factor, he said, but it is not the only factor. People will pay more, for example, if power is reliable and renewable, he said.
"Follow the money" to assure equity for customers, companies, and competitors, Lehr urged. Cost allocations are a big issue between and among functions and affiliates, he said, noting that in Colorado, 51 percent of the telephone costs were joint and common to customer groups. Rate of return is still a big issue; investors want to know what to expect, Lehr added.
Telephone companies taxed the wires to fund universal service, the major public purpose in the telephone system, Lehr said. Phone customers pay an access charge, and the money is used to subsidize service in high-cost areas. Make sure the charges are targeted to what you want, Lehr said, and verify how they are being used.
Wilcox said the ability to choose among AT&T, MCI, and other long-distance providers is a big benefit. Some of that ability is due to cost-shifting; I think it's worth it, he said. The problems of restructuring relate to the local service companies, not the long-distance carriers, Wilcox said, suggesting that the same would be true within the electricity industry.
We need to define the local distribution problems apart from the benefits restructuring offers on the wholesale level, Wilcox said. Lehr's comments were a good reminder that there are many problems with deregulation, but, he said, there are also many benefits.
Lehr responded that the cost benefits in long-distance telephone service were due to cost-shifting. In Colorado, 42 percent of all customers made one long-distance call or less each month; they weren't winners, he said. Phone service is a "duopoly," he charged; "if you can tell me which long-distance plan is best for you, I'll buy your service." Service is the same, the advertising is the difference, he said.
Collins said he had purchased blocks of long-distance time and saved money with deregulation. If AT&T had kept its monopoly, how much fiber optic would have been laid? he queried. You're at a high enough volume -- you're a winner, Lehr responded. The costs got unloaded on the one-call-a-month customers, he stated.
Jeff Roark of Southern Electric International prefaced his description of privatization in Argentina with an observation that World Bank policies have considerable influence on what is going on in the Third World. The Bank's unwillingness to loan to maintain inefficient systems forces governments to raise money through other means, including privatization, he said.
Since 1992, Argentina has privatized most of its generating capacity and its transmission system. The objectives of privatization were to assure a reliable electricity supply, promote efficiency, minimize cost, promote private ownership and competition, and support prices, Roark explained. He called the Argentine system a "highly regulated competitive market." There are rules for everything, he said.
There are many generators, many distributors, a single 500-KV transmitter, several sub-transmitters, and a central independent dispatcher (ISO). The ISO implements regulations, plans operations, schedules generation, calculates rates, settles transactions, and bills and remunerates participants.
Roark said the transmission pricing structure is among the most advanced in the world, but it is "exceedingly complex." The major transmitter keeps the lines in the air and the power flowing, but does not expand the system. Users are responsible for proposing expansions. The theory is price signals will lead to upgrades, Roark said; that's "a great idea that doesn't work."
The system serves a peak load of 11,000 MW, about the size of Alabama Power. There are huge expanses of 500-KV line that carry a relatively small load, he explained. About 5,000 MW of generation is in the Andes Mountains, but 50 percent of the load is near Buenos Aires, a thousand miles away, Roark said. In peaks, transmission is constrained, he added.
As for system pricing and contract arrangements, Roark said bilateral "physical" contracts are not allowed. The ISO dispatches to maximize efficiency. But there are contracts for differences between parties, he explained.
The generating system is 30 to 40 percent hydro, and plants are operated through 30-year concession agreements with private parties, Roark said. No single company owns all plants on any river, he added. Each plant represents a unique concession-owning company with its own profit motive, Roark reiterated, and everyone must be able to trust the ISO to treat them fairly. The rules for dispatch were established before privatization; all participants had a chance to look them over. Roark said hydro resources are optimized, and there are mechanisms to prevent operators with large amounts of storage from exercising market power.
Argentina's market is nowhere near perfect, Roark concluded. Price signals have not worked appropriately to expand the transmission system, and constraints have become worse, he said. This makes investments in Argentina risky. If you're going to buy anything in Argentina, come talk to me first, Roark quipped.
Referring to Roark's admonitions that the Argentine system is complex, John Saven said he would talk about something simple, his toaster. It makes good toast, but at times it doesn't pop up, he explained. The toast burns, and my daughters complain that we should get a new one or fix the old one. Recently one daughter said, "if it's hard to fix, why bother?" That has a certain relevance here, he observed.
Saven asked about citizen participation in Argentina's privatization process. That is not part of the culture, Roark responded; what the public thought wasn't important. The government was broke and needed money to maintain the system, he said; it wasn't a big issue with the public. People in Argentina are accustomed to infrastructure that doesn't work, Roark added.
Eisdorfer asked about fish in Argentina's rivers and how the system might work to protect them? Roark said fish protections would best be imposed before privatization takes place so the market value reflects those costs when resources change hands. In Argentina, irrigation, flood control, and other restrictions were packaged with the hydro plants, he explained. The government gave up some value, but things that increased risk, including needed capital improvements, were laid out, Roark said.
Pollock asked about the reliability of transmission. It's a huge and barely stable system, Roark replied. If you were building to meet peak today, I doubt you would build plants across the country and link them with thousands of miles of 500-KV line, he said.
Collins asked the committee to approve a Council staff suggestion that standard conflict of interest language be dropped from consultant contracts for the review. In lieu of that language, consultants would submit letters disclosing what other clients they have for review-related work, he said. If I haven't heard from you by Monday, we'll proceed on that basis, Collins said.
Discussion returned to the topic of how the committee would proceed with developing templates of the region's electricity system. Drummond proposed that after Marcus and Litchfield's presentation, the committee divide into three subgroups and use the next meeting or two to construct templates. That way, we won't get into defending our own individual products, he said. At our meeting in mid-March, we'd have three designs and would try, as a committee, to resolve the differences, Drummond proposed.
"To avoid premature clashes" and "galvanizing into positions," I'd suggest we proceed more slowly, Saven said. I'd like the chance to communicate with the 45 utilities in my organization, he said. There is a tendency to be conservative initially, Saven continued. The first reaction is not "the grand solution," it's "I hope I don't blow it." I'd like to keep a broad perspective and a couple of iterations before we go with a detailed form, he said.
Nelson suggested the first order of business be defining the problem, and Alexanderson said the template preparers should define what problem they are solving with the templates they present. Collins said Litchfield and Marcus were told to design the perfect system and be clear about the objectives that drive it.
Litchfield said he and Marcus spent a day with Council staff and went over the issues involved in devising the template of an industry structure, he explained. We'll come up with an end-state optimal condition, then backup to the current structure and explore what needs to happen. My sense is the purpose here is not for you to grab on to a template, but to highlight the issues and areas for work groups to focus attention, Litchfield said.
Collins said the committee would receive copies of the generic template prior to the February 15 meeting. Davis asked about the work groups, and Collins said there would be a two-week delay in forming them. Pollock suggested undertaking "anything we can do jointly" on February 15 to get us along in the process. Litchfield suggested it's possible it isn't going to be that controversial -- we'll give you the building blocks, he said.
Todd Maddock asked about background issues, and Litchfield said, we'll lay those out. Golden said he hoped that before the committee divides up, "we take a first cut as a group," focusing on the goals and objectives. Wilcox said he agreed with the approach of hearing the presentations, dividing into groups, and reporting back on the work. Ken Canon suggested the subgroups be afforded an hour on the 15th to get together to discuss an internal approach.
Shimshak asked about the results of the public participation sessions, and requested a report on federal legislative proposals. Collins said at the February 29 meeting, governors' representatives will report on what they heard from the public. Pollock said he would round up information on federal legislation.
Collins appointed Saven to chair a subcommittee to plan for the work groups. John Etchart reminded the committee that Kyle Simpson of DOE would be at the February 15 meeting.
"The hard part begins now," Collins said, at the closing gavel.
Steering Committee Members: Chair Chuck Collins, Colsper West Corporation; Al Alexanderson, Portland General Electric; Rick Applegate, Trout Unlimited; Ken Canon, Industrial Customers of Northwest Utilities; Jim Davis, Douglas County (WA) PUD; Bill Drummond, Western Montana Electric Generation and Transmission Cooperative; Jason Eisdorfer, Citizen's Utility Board of Oregon; John Etchart, Montana Governor's Representative; Bob Gannon, Montana Power; K.C. Golden, energy consultant; Charles Hedemark, Intermountain Gas; Roy Hemmingway, Oregon Governor's Representative; Mike Kreidler, Washington Governor's Representative; Todd Maddock, Idaho Governor's Representative; Sharon Nelson, Washington Utilities & Transportation Commission; Walt Pollock, Bonneville Power Administration; John Saven, Northwest Requirements Utilities; Rachel Shimshak, Renewable Northwest Project; Brett Wilcox, Northwest Aluminum Company; Gary Zarker, Seattle City Light.
Last modified: February 7, 1996
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