Sunday, August 15, 1999

PUCO faces tough decisions on electric deregulation

The Cincinnati Enquirer

Steam escapes the cooling tower at CG&E's Zimmer power plant in Moscow, Ohio.
(Glenn Hartong photo)
| ZOOM |
        After months of wrangling, Ohio lawmakers have dumped their $11 billion electricity problem into the lap of the Public Utilities Commission of Ohio (PUCO), but Chairman Alan Schriber isn't upset.

        He's looking forward to it.

        “I love this,” said Mr. Schriber, a Wyoming resident who was named by Gov. Bob Taft to head the PUCO earlier this year.

        “It's exciting, fun moving into new territory, and it's always challenging,” said Mr. Schriber, a former Miami University economics professor.

        The challenge facing Mr. Schriber and the four other PUCO commissioners is overseeing the transition of Ohio's $11 billion electric industry from a monopoly controlled by eight utilities into a competitive market where businesses and residential consumers can choose their own suppliers starting Jan. 1, 2001.

        Besides allowing Ohioans to shop for lower electricity prices, the legislation promises to dramatically reshape the state's staid power industry.

        In other states that have approved deregulation — such as Illinois — a wave of utility consolidation has followed with large, out-of-state competitors acquiring smaller utilities, said Barry Abramson, utilities analysts with PaineWebber Inc.

        A number of utility industry observers think Dayton's DPL Inc., parent of Dayton Power & Light Co., could be the most likely to seek a merger partner.

        “They're a well-run company, but they're just not big enough,” said David Rinebolt, executive director of the Ohio Partnership for Affordable Energy, a coalition of low-income agencies and energy marketers active in the deregulation debate.

        Mr. Abramson said the state's power companies might also attempt to diversify their generating assets, selling or swapping plants in Ohio for generating facilities in other parts of the country, in an attempt to even out the peaks and valleys in demand.

        In what many view as the first such move, Akron-based FirstEnergy Corp. has asked the PUCO to approve the swap of three coal-fired power plants in northeast Ohio and New Castle, Pa., for the ownership interest that Pennsylvania-based Duquesne Light Co. has in five mainly nuclear generating units in northern Ohio and Pennsylvania.

Look for smaller plants
        “I think the landscape will change significantly,” Mr. Schriber said. “There will be a lot of marketers; they may not own anything in Ohio in terms of generating plants. But I think there will be a lot of people producing electricity for sale.”

        The new power plant construction won't be large, billion-dollar generating plants that utilities have built in the past, but smaller, free-standing units designed to generate additional power during periods of peak demand.

        Charlotte, N.C.-based Duke Energy Corp., one of the nation's largest power companies, broke ground last week on a 640-megawatt peaking plant near Trenton in Butler County.

        And Cincinnati's Cinergy Corp., which set records for peak demand during last month's heat wave, said last week that it is studying the addition of 200 to 300 megawatts of peaking capacity to its 11,000 megawatts of generating capacity within the next year.

A new concept: competition
        Businesses and consumers can also expect to be the target of intense marketing campaigns by a flurry of new power marketers and aggregators offering discount power rates much the way gas marketers have moved into the state with the advent of natural gas competition.

        The law calls for a 5 percent reduction on the generating portion of customers' bills starting in 2001. Cinergy has estimated that will save its average residential customer about $2.30 a month.

        But consumers will have the opportunity to save by joining “buying pools” formed by aggregators and other power marketers offering better rates.

        “I think that's how consumers will ultimately benefit,” Mr. Schriber said. “You and I in Cincinnati aren't going to benefit individually because electric rates are pretty low here. But if, for example, the city of Wyoming chooses to be an aggregator, they may be able to lock in terms better than I could individually.”

Tough, massive work
        But before Ohio consumers get to that point, PUCO has its work cut out for it.

        The bill signed into law July 6 by Gov. Taft lays out the framework for opening Ohio's electricity market to competition but punts to the PUCO some of the thornier issues.

        “The deregulation bill did about two-thirds of the work, but there's still one-third to be done, and it's definitely the toughest third,” Mr. Rinebolt said.

        By early next January, each of the Ohio utilities must file a detailed transition plan outlining how each will unbundle its electric rates into separate charges for generation, transmission, distribution and other services.

        The utilities must also disclose how they'll separate their generation operations from their transmission and distribution business. Although the law permits sharing employees and assets, the law requires separate corporate entities for each function. The utilities must also disclose benefits they'll provide employees whose jobs are eliminated by restructuring and a plan for educating consumers.

        The law also leaves up to the PUCO to determine what, if any, transition costs each utility will be entitled to recover during the initial five-year period as the state moves to a deregulated market. Those costs would be connected with moving from a regulated, bundled service to a competitive, open-access service.

        “Actually, transition costs is a meaningless term,” Mr. Schriber said. “I like to think in terms of transition revenues, or how much revenue each utility will get during this transition period. The revenues they are entitled to get will be the really contentious issue.”

        One of the criteria for cost recovery is that they can't be made up in a competitive market.

        For example, Mr. Schriber said, “If a utility is currently selling electric generation for 10 cents (a kilowatt hour), and the market price is 6 cents, then you have to assume that 4 cents isn't recoverable in a competitive market.”

        But he adds: “A lot of it will hinge on estimates of what the market price is going to be. That's going to be a wild, wild guess.”

        James Turner, president of Cinergy's Cincinnati Gas & Electric unit, said the utility is still assembling its transition plan and isn't ready to disclose details.

        But Mr. Turner said CG&E hopes to file its plan early, possibly as soon as early October, the effective date of the legislation.

        “The transition hearings have the potential to be contentious proceedings,” Mr. Turner said. “We want to get an order (out of the commission) to proceed, and we don't want to get bogged down in some of the issues. Mainly, we want certainty as quickly as we can get.”

        Mr. Schriber agrees that the transition hearings might be difficult, much like full-blown utility rate cases in the past with the utilities and other parties each presenting witnesses and information supporting their case and challenging the other side.

        “It will be new ground for us, but it won't be unlike a rate case in the sense that there will be some pretty heavy-duty number crunching,” he said.

'Wild proceedings ahead'
        Mr. Schriber, who was a PUCO commissioner in the 1980s when the commission faced decommissioning nuclear power plants then under construction, said the transition hearing could be even more contentious.

        “I can certainly see that possibility,” he said. “There are more players today. More stakeholders — industrial users, small commercial customers and consumers and all the utilities will be filing at the same time. Yes, I can see some pretty wild proceedings ahead.”

        The law requires the PUCO to act on each of the plans within 275 days after they are filed. To help ease the workload, the legislature approved an additional $1.2 million to the commission's $47 million budgets to hire additional staffers.

        Despite the added workload, Mr. Schriber said the PUCO is better equipped than the legislature to iron out the thorny issues of transition costs and who will pay what.

        “After four or five years of the legislature going at it, it looked like it would be tougher and tougher for them to do it,” said Mr. Schriber, who was Gov. Taft's point man during the last stage of the debate in the General Assembly.

        “(The PUCO) has a process in place to handle this. We have five commissioners and a highly skilled staff. It's a process that includes hearings, rehearings and appeals to the court. It's government more by due process rather than by lobbyists.”


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