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INTRODUCTION
Retail Sales
Electric utilities in Florida are required to provide safe, adequate, and reliable
electric service to the public at the lowest possible cost. Historically, electric
utilities have been responsible for the production, transmission, and distribution
of electricity, as well as the metering and billing of the electric energy sold
to homes and businesses. This complete package of electric services has been termed
"bundled retail service" or "integrated utility service," and, for the most part,
customers purchase electricity at a fixed price for all these services.
In Florida, a total of 54 electric utilities currently provide bundled retail service
to end-use customers in their service areas. The Florida Public Service Commission
(FPSC) fully regulates the rates and services of five investor-owned utilities.
They are Florida Power & Light Company (FPL), Florida Power Corporation (FPC),
Florida Public Utilities Company (FPUC), Gulf Power Company (Gulf), and Tampa Electric
Company (TECO). Together, these five investor-owned utilities provide approximately
79 percent of all electricity sold to retail customers in Florida. The remaining
21 percent is provided by 33 municipal electric utilities and 16 rural electric
cooperatives. The rates charged by municipal electric utilities are set by local
governments, while the rates of rural electric cooperatives are set by the Board
of Directors acting on behalf of its members. However, the FPSC does have rate structure
jurisdiction for municipal and cooperative electric utilities. Rate structure simply
means that the rates set by municipals and rural electric cooperatives must be fairly
divided among the customer classes (i.e., residential, commercial, industrial, etc.).
The FPSC also has jurisdiction over all electric utilities in the areas of public
safety, territorial boundaries, major power plant and transmission line need determinations,
conservation, cogeneration, and power supply planning.
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Wholesale Sales
In Florida, not all electric utilities generate all the electricity they sell to
their retail customers. Many smaller municipal electric utilities, the rural electric
cooperatives, and one small investor-owned utility in Florida purchase all or part
of their customers' generation requirements from other utilities. They also purchase
the transmission services necessary to move their purchased power from the power
plants where the electricity is generated to the load centers where their retail
customers reside. These
partial requirements
and
full requirements purchases
of generation and transmission services are one element of the wholesale market
for electricity which has existed in Florida and the rest of the nation for some
time.
The other element of the wholesale market is the
interchange market. In the interchange market, utilities which would
otherwise own and operate all their own generation may find it economical to purchase
capacity and energy from generating units owned by other utilities. Purchases in
the interchange market can take place on an hour-by-hour basis, on a short-term
basis up to a year, or on a long-term basis for many years. The price, terms, and
conditions associated with interchange purchases are either negotiated by the purchasing
and selling utilities or determined by a formula tariff approved by the Federal
Energy Regulatory Commission (FERC). Historically, the FPSC has encouraged generating
utilities to pursue cost-effective purchased power alternatives. The revenues generated
for the selling utility and the savings realized by the purchasing utility from
these wholesale transactions flow back to the utility's retail customers through
a cost recovery clause, resulting in reduced electric bills.
The FERC regulates the rates, terms, and conditions of wholesale energy sales and
the transmission services necessary to accomplish these sales. In the past, there
has been a bright line between the FERC's jurisdiction over wholesale sales and
wholesale transmission and the States' jurisdiction over retail sales and retail
transmission. Recently, however, certain Federal legislation and actions by the
FERC have clouded the distinction between this Federal and State jurisdiction. This
growing overlap between State and Federal jurisdiction will be discussed within
this report.
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CHAPTER TWO
WHOLESALE COMPETITION
Background
In the early years of its development, the electric industry was composed of individual
electric utilities that served isolated industrial customers and local community
lighting loads. Low voltage transmission was used to access individual industrial
customers and community load centers. Utilities were not interconnected with each
other, and each had to provide their own generating resources necessary to serve
their customers. As advances were made in the development and operation of high
voltage transmission technology, more and more utility systems found it advantageous
to interconnect their systems.
At first, utilities interconnected to increase reliability. With transmission interconnections,
utilities were able to rely on emergency generating assistance from neighboring
utilities during major generating unit outages. Because of the enhanced reliability
gained by these mutual assistance agreements, the need to maintain surplus reserve
generating capacity for each utility was reduced. This reduced each utility's costs
of providing reliable service. From these early beginnings, competition in the wholesale
supply of generation emerged.
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Wholesale Market in Florida
Prior to 1980, peninsular Florida had limited transmission interconnections to the
rest of the nation. At that time, the interconnections consisted of a few 230,000
volt and 138,000 volt transmission interties at the Florida/Georgia boundary. Together,
peninsular Florida utilities could import a maximum of 400 MW of generation. In
essence, peninsular Florida was an electrical island. Because of these weak interstate
interties, the wholesale market in Florida consisted primarily of partial requirements
and full requirements supply arrangements between peninsular Florida generating
and non-generating utilities and, to a lesser degree, purchased power interchanges
between peninsular Florida generating utilities
During the oil embargo of the 1970's, Florida's utilities were especially hard hit.
Oil was the dominant fuel for electric power generation. As prices soared at the
gas pump, so did customers' electric bills. Also, peninsular Florida utilities experienced
several bulk power interruptions resulting in rotating customer blackouts. These
interruptions were caused when recently constructed nuclear units in the state experienced
forced outages. Because of their large size, an unplanned outage of one of these
nuclear units would cause significant degradation in the quality of the power supplied
by the state's bulk power grid (voltage and frequency decline). These declines in
frequency would cause the weak tielines between peninsular Florida and the Southern
Company to open, thereby aggravating the problem and increasing the magnitude of
customer blackouts. In response to these concerns, the FPSC worked with the peninsular
Florida utilities to investigate the feasibility and cost-effectiveness of strengthening
the transmission interties between peninsular Florida and the Southern Company.
As a result, certain peninsular Florida utilities decided to construct two 500,000
volt transmission lines interconnecting peninsular Florida with the Southern Company.
These lines increased the maximum transmission import capability into peninsular
Florida to its present level of 3600 MW. The FPSC allowed special cost recovery
treatment for the construction of these lines.
With the increased ability to import generation into Florida, peninsular Florida
utilities entered into purchased power contracts for "coal-by-wire" from the Southern
Company. Both the Florida utilities and the utilities comprising the Southern Company
benefited from these contracts. The members of the Southern Company were able to
more efficiently utilize their existing coal-fired generation. Peninsular Florida's
ratepayers enjoyed increased reliability and lower fuel costs.
Another FPSC action which has facilitated the development of the wholesale market
in Florida was the creation of the Florida Energy Broker. The Energy Broker was
developed to facilitate short-term economy sales between the state's electric utilities.
The Energy Broker is a computerized system for marketing hourly non-firm electric
energy. Every hour, the Energy Broker matches potential sellers and buyers and results
in a benefit to the ratepayers of both utilities. To encourage use of the Energy
Broker, an incentive mechanism was created by the FPSC for investor-owned utilities,
in which they were allowed to retain 20 percent of the profit made on Energy Broker
sales. In 1995, the Energy Broker allowed membership by entities other than traditional
Florida utilities, including certain non-utility generators, known as Exempt Wholesale
Generators, and power marketers. Since the inception of the Florida Energy Broker
in 1978, total savings in energy cost have exceeded $750 million.
While the Energy Broker became an important catalyst in the development of the wholesale
market in Florida, today most wholesale sales are made outside the Energy Broker
system. Currently, wholesale sales in Florida run the gamut from short-term non-firm
sales to long-term firm contracts lasting several years. Most economy transactions
have migrated from the Energy Broker system to more flexible separately negotiated
contracts. However, wholesale sales in Florida continue to be a relatively small
portion of investor-owned utilities' sales and are predominantly conducted between
Florida's utilities. The table below displays the percentage of 1998 operating revenues
by type of wholesale sale for each of the three major peninsular Florida investor-owned
utilities. As shown, the percentage of operating revenues derived from wholesale
transactions is small relative to total revenues, with the bulk of wholesale revenue
derived from full requirements, long-term wholesale sales.
|
Percent of 1998 Operating Revenues by Type of Wholesale Sale
|
|
Energy Broker Sales |
Non-Broker Opportunity Sales |
Long-Term Wholesale Sales
|
|
Florida Power Company |
0.12% |
1.63% |
6.17% |
|
Florida Power & Light Corporation |
0.08% |
1.90% |
1.31% |
|
Tampa Electric Company |
1.66% |
0.21% |
7.26% |
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Federal Legislation - Public Utilities Regulatory Policy Act
Many industry analysts attribute the beginning of increased wholesale competition
to Congress' enactment of the Public Utilities Regulatory Policy Act of 1978 (PURPA).
PURPA required electric utilities to purchase capacity and energy from qualifying
cogeneration and small power production facilities, known as Qualifying Facilities
(QFs). In implementing PURPA, the FERC required utilities to pay QFs their "full
avoided cost," that is, the cost the utility would have incurred to construct the
generation itself.
PURPA served as a catalyst to encourage the development of lower cost natural gas-fired
generating technology. This new technology, known as a combined cycle unit, employs
steam recovery boilers to recover waste heat exhausted from a conventional combustion
turbine generating unit (similar to a jet engine) to produce additional electricity.
Combined cycle units substantially increase fuel efficiency. They can be certified
and constructed in a relatively short period of time at a fraction of the cost of
building conventional fossil steam generation. These units also provide planning
and operating flexibility because they can be constructed in a variety of modular
sizes and operate over a wide range of load conditions. Combined cycle units also
use less water and emit fewer air pollutants than other generation technologies.
As a result of these technological gains in natural gas-fired generation and the
current low cost of natural gas, the conventional view that generation is best provided
by a regulated monopoly utility has been called into question.
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Federal Legislation - Energy Policy Act of 1992
The Energy Policy Act of 1992 (EPACT) gave further impetus to wholesale competition
in the electric industry by reducing the regulatory requirements for certain wholesale
electric providers, known as Exempt Wholesale Generators (EWGs) or merchant plants.
EWGs are entities that own or operate a generating facility strictly for wholesale
energy sales. Prior to EPACT, any multi-state holding company entity which generated
electric power was subject to the Public Utilities Holding Company Act of 1935 (PUHCA).
This required filing with the Securities and Exchange Commission and various other
regulatory requirements. These requirements made it difficult for affiliated entities
of multi-state holding companies seeking to enter the generation market, as well
as electric utilities seeking to create affiliate companies, to invest in and develop
new sources of generation. EPACT encouraged the entry of new wholesale energy providers
by exempting EWGs from the requirements of PUHCA. Also, EPACT authorized the FERC
to allow certain EWGs to sell electricity in the wholesale marketplace at market
prices, rather than the conventional cost-based rates required of monopoly electric
utilities.
The rates charged by EWGs are generally set by the market. That is, if the FERC
believes an EWG does not have excess market influence, the EWG can sell excess electricity
at whatever price the market will bear. Unless specific contracts exist, load serving
entities have the option, but are not required, to purchase electricity from EWGs.
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EWGs/Merchant Plants in Florida
Hardee Power Station
The first EWG in Florida was the Hardee Power Station, a joint project between TECO
Power Services, an affiliate of Tampa Electric Company (TECO), and Seminole Electric
Cooperative. The unit is a 240 MW natural gas-fired combined cycle unit. The output
of the unit is shared between TECO and Seminole for their respective retail customers'
needs. The need for Hardee Power Station was approved by the FPSC on December 22,
1989 (Order No. 22335).Because TECO Power Services is an affiliate of TECO, a regulated
investor-owned utility, the FERC initially decided that the rates charged for the
plant's output should be cost-based. TECO petitioned FERC's ruling, contending
that it does not have sufficient market power to adversely influence wholesale market
rates in Florida. TECO has recently received the FERC's approval to charge market-based
rates.
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Duke New Smyrna
On March 4, 1999, the FPSC granted the determination of need for a 514 MW electrical
power plant in Volusia County. The project, jointly requested by the Utilities Commission,
City of New Smyrna Beach, and Duke Energy New Smyrna Beach Power Company Ltd., L.L.P.
(Duke New Smyrna), was found to be needed and in the best interests of electric
customers in Florida.
Based on the hearing record, 30 MWs from the project is needed by the City of New
Smyrna Beach to partially replace 83 MWs of existing capacity contracts which will
expire between September, 1999 and 2004. The price at which Duke New Smyrna has
offered to sell the City these 30 MWs of replacement power is significantly less
than what the City's retail customers are currently paying for purchased power.
The City estimates that its energy costs will be reduced by $3.1 million per year
net present value for the first ten years, and approximately $7.75 million total
net present value for the following ten years, for a total estimated savings of
approximately $39 million net present value. Also, the project will use approximately
2 million gallons of reclaimed waste water provided by the City that would otherwise
be discharged into the Indian River. The low-cost power to be provided to the City
is contingent upon the entire project being constructed. As such, if the project
is not constructed, the City will have to construct or contract for higher cost
capacity and energy.
The hearing record indicated that the availability and sale of the remaining 484
MW of capacity to other peninsular Florida utilities will enhance the reliability
of the peninsular Florida electric grid and put downward pressure on wholesale power
costs. Duke New Smyrna has elected to construct the 514 MW project as a merchant
plant and received EWG status from the FERC. Other than the contract for 30 MWs
to the City of New Smyrna Beach, Duke has decided to build the power plant without
first entering into any long-term wholesale sales contracts with other Florida utilities.
Duke asserts that the continued growth in electricity demand in Florida, coupled
with the ability to economically displace high cost oil generation, will create
market demand for the project's output. The direct risks associated with the construction
of the project will be borne by Duke New Smyrna. No utility or its retail ratepayers
will be obligated to purchase from the project. Rather, sales from the project will
be made either on an as-needed, as-available basis or subject to negotiated contracts.
As such, the Duke New Smyrna project presents another alternative for existing retail
serving utilities, without putting Florida ratepayers at risk for the costs of the
facility. Florida utilities will only purchase power from Duke New Smyrna if it
proves to be the lowest cost alternative at the time a contract is entered.
In addition to these benefits to Florida's electric ratepayers, the hearing record
indicated that the Duke New Smyrna Project will also provide other socio-economic
benefits to the state. At a construction cost of approximately $160 million, the
Duke New Smyrna Project will significantly add to the property tax base of Volusia
County and other taxing districts. It is estimated that the project will provide
$4.2 million annually to local taxing agencies. Peak employment during the construction
of the project is expected to be 250 persons. Once construction is completed, approximately
20 permanent positions will be needed to operate the power plant with a total annual
payroll of approximately $1 million.
The Commission's final order approving the need for the Duke New Smyrna project
was issued on March 22, 1999. The major investor-owned utilities in peninsular Florida,
FPL, FPC, and TECO, have appealed the Commission's decision to the Florida Supreme
Court. These investor-owned utilities oppose the project because they contend that
Duke New Smyrna should be required to enter into wholesale contracts with a retail-serving
utility before construction of the power plant should be approved. They argue that
EWGs such as Duke New Smyrna are not proper applicants for a determination of need
by the FPSC. The investor-owned utilities also contend that only utilities with
retail customers can (1) apply for a determination of need, or (2) sponsor the application
for a determination of need by an EWG with which they have entered a long-term firm
wholesale contract. The Florida Supreme Court is expected to hear oral arguments
on the case by October, 1999 with a final decision expected by the end of the year.
The final decision to approve the construction of the project has been postponed
by the Governor and Cabinet, who make up the Power Plant Siting Board, until the
Florida Supreme Court makes its ruling.
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Constellation Power - Oleander Power Plant
Constellation Power, an unregulated subsidiary of Baltimore Gas and Electric Company,
has announced its plans to construct a 950 MW natural gas-fired peaking power plant
in Brevard County. The project will consist of five 190 MW gas turbines. The proposed
plant will be an EWG merchant plant, selling capacity and energy through the wholesale
electric market to Florida's utilities. Because the plant will consist of combustion
turbines with no steam generation, it is not subject to the Power Plant Siting Act,
and therefore is not required to obtain a determination of need from the FPSC. Applications
have been filed for local environmental permitting. The project is currently being
evaluated by the Florida Department of Environmental Protection for air and water
permits. The anticipated in-service date of the plant is January, 2001.
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El Paso Power Services Company
Florida Power Corporation (FPC) and El Paso Power Services Company
(El Paso) have recently agreed to restructure certain existing cogeneration contracts.
El Paso will acquire three existing contracts for the sale of capacity and energy
to FPC. These three contracts were originally entered into in 1991 between FPC and
Royster Phosphates, Inc. (Royster), Mulberry Energy Company (Mulberry), and CFR
Bio-gen Corporation (CFR Bio-gen). In total, these contracts represent 184 MW of
capacity and associated energy committed to be sold to FPC. Generation to supply
these contracts is provided from two cogeneration facilities: (1) the natural gas-fired
combined cycle Mulberry facility in Polk County, and (2) the natural gas-fired combined
cycle Orange facility in Polk County.
Under the terms of the assignment, capacity payments made by FPC will be discounted
for the remaining term of each contract, resulting in savings in excess of $100
million net present value. Associated energy savings are estimated to be approximately
$15 million net present value. The agreement also provides that El Paso will waive
its rights under PURPA to require FPC to purchase the capacity and energy from the
two cogeneration facilities serving the contracts. El Paso will not be required
to maintain the Mulberry and Orange units as QFs under PURPA. Rather, the Mulberry
and Orange units will be operated as EWG merchant plants. FPC will continue to have
first call on capacity and energy from El Paso up to the capacity commitments contained
in the original contracts. However, when FPC is not using their full capacity commitment,
El Paso is free to sell the energy from the Mulberry and Orange units on the wholesale
market.
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Reliant Energy
Reliant Energy (Reliant), a Texas based energy provider, has been pursuing the purchase
of the Indian River Power Plant from the Orlando Utilities Commission (OUC). The
Indian River Power Plant consists of three natural gas/oil-fired steam generating
units which were originally built in 1960, 1964, and 1974. The total installed capacity
of these three generating units is 608 MW. Initially, Reliant plans to sell capacity
and energy from the units back to OUC. These sales to OUC would ramp down over a
period of about four years. Capacity and energy not sold to OUC will be sold as
EWG merchant capacity and energy on the wholesale market.
In a separate deal, Reliant has also been exploring the construction of a new EWG
merchant peaking plant, named Reliant Energy Osceola, near Kissimmee, Florida. The
proposed project would consist of approximately 460 MW of natural gas-fired combustion
turbines with an in-service date of 2001. Reliant intends to sell approximately
300 MW to Seminole Electric Cooperative for an initial term of 5 years and 100 MW
on the wholesale market. At the end of the proposed wholesale contract with Seminole,
the full 460 MW capacity of the plant would be sold on the wholesale market.
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Okeechobee Generating Company
Okeechobee Generating Company (Okeechobee), a wholly-owned subsidiary of California
based Pacific Gas & Electric (PG&E), has recently filed an application for
EWG status with the FERC. Okeechobee plans to construct a 500 MW class natural gas-fired,
combined cycle power plant in Okeechobee County, Florida. The project will be interconnected
with FPL's transmission facilities in the area and is expected to be placed in service
in the Spring of 2003.
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Merchant Plants in Other States
There are currently 10 states with fully operational merchant plants. These states
include: California, Colorado, Connecticut, Massachusetts, Maine, New Mexico, New
York, Texas, West Virginia and Wisconsin. Thirty-two additional states have merchant
plants under various stages of development. Appendix A contains a map displaying
the status of merchant plant development in each state.
A summary table showing the status of merchant plant capacity development in the
United states, as of May 31, 1999, is given below.
(1)
|
Stage of Development |
Merchant Capacity
|
|
Currently Operational |
13,349 MW |
|
Under Construction or Development |
14,886 MW |
|
Reported Plans for Merchant Plants |
56,021 MW |
|
Total |
84,256 MW |
Over 80 percent of the 13,349 MW of U.S. installed merchant plant capacity is located
in California. Most of these plants are not newly constructed plants, but existing
plants that were previously owned by utilities and sold through divestiture. Appendix
B contains further information on the location of these currently operational plants.
An additional 14,886 MW of merchant capacity is under construction or development.
This includes 6,558 MW of capacity under construction in: Connecticut, Illinois,
Massachusetts, Maine, Mississippi, Missouri, Nevada, Rhode Island and Texas. In
addition, more than 8,000 MW of merchant capacity is under development. The plants
characterized as under development have met or partially met the necessary siting
requirements, and the completion of these projects is relatively certain. Appendix
C provides further information on these plants.
There are also plans reported for 56,021 MW of additional merchant capacity. While
these plants may have partially met the necessary siting requirements, completion
is less certain than for plants under development. Appendix D contains further information
on the location of these plants.
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CHAPTER THREE
TRANSMISSION
FERC Orders No. 888 & 889
Transmission is the bridge between electric generation and end-use customers. An
efficient wholesale generation market cannot exist without an adequate and efficiently
operated wholesale transmission system. Therefore, in addition to creating a new
class of EWG merchant plants to foster competition in the wholesale generation of
electricity, the Energy Policy Act of 1992 (EPACT) also addressed the FERC's authority
to pursue open access for wholesale transmission.
In 1996, the FERC issued Orders No. 888 and 889 to establish rules governing a more
open wholesale transmission market. Order No. 888 required all transmission-owning
public utilities to make their transmission facilities available to any user at
a fair price and in a non-discriminatory manner. In order to achieve these goals,
Order No. 888 required all public utilities to "functionally unbundle" their wholesale
power services. Functional unbundling entails requiring transmission owning utilities
to: (1) take transmission services under the same tariff rates, terms, and conditions
as do others; (2) state separate rates for wholesale generation, transmission, and
ancillary services; and (3) rely on the same electronic information network that
its transmission customers rely on to obtain information about its transmission
system when buying or selling power.
Order No. 889 required that all public utilities establish or participate in an
Open Access Same-Time Information System (OASIS). It also established standards
of conduct designed to prevent employees of a public utility engaged in wholesale
power marketing functions from obtaining preferential access to pertinent transmission
system information. An OASIS is an Internet based transmission service reservation
system where participating utilities can: (1) post information about transmission
capacity available for purchase by transmission customers, (2) post information
about the status of the transmission system, and (3) provide a means for transmission
customers to request transmission service over defined transmission paths. Order
No. 889 also established the type, frequency and format of the transmission-related
information which must be posted on OASIS.
Finally, in order to extend the provisions of Orders No. 888 and 889 to all transmission-owning
systems, FERC also required that non-FERC regulated utilities (e.g., municipal electric
utilities and rural electric cooperatives) must adopt reciprocating and conforming
transmission access policies before being able to take service under a FERC regulated
public utility tariff.
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Impact on Florida
Order No. 888 has blurred the jurisdictional lines between state and federal regulation
of wholesale and retail transmission. Prior to FERC Order No. 888, there was a clearer
line of demarcation between state and federal jurisdiction. Under the Federal Power
Act (FPA), the FERC was authorized to regulate the rates, terms, and conditions
of wholesale energy sales and transmission in interstate commerce. In defining the
FERC's jurisdiction over wholesale transmission, the FPA was careful not to usurp
existing state jurisdiction over retail transmission service. Section 212 of the
FPA states:
(g) Prohibition On Orders Inconsistent With Retail Marketing Areas. -- No order
may be issued under this Act which is inconsistent with any state law which governs
the retail marketing areas of electric utilities.
This section of the FPA enunciates the Congressional intent to preserve the status
quo with regard to federal and state jurisdictions over retail services. In Order
No. 888, however, the FERC extended its jurisdiction into several areas that have
historically been the province of the states.<
One area in which the FERC has asserted jurisdiction is the regulation of unbundled
retail transmission when a state orders retail access. Unbundling means the separation
of the rates, terms, and conditions for generation, transmission, distribution,
and other retail services provided by an electric utility on customer bills. If
a state decides to allow retail competition, unbundling is a prerequisite. The FERC
contends that if a state requires its electric utilities to provide retail competition
for generation services, the state will relinquish its ratemaking authority over
the transmission component of the unbundled rate. The FERC has also asserted jurisdiction
over the recovery of costs, if any, stranded by state-directed or voluntary retail
wheeling when a state commission lacks authority to address the issue or when a
retail customer converts to a wholesale customer (municipalization).
While the FERC has expressed its intent to provide deference to the states on issues
pertaining to stranded cost recovery and the transition from bundled to unbundled
rates, it is not clear what voice state regulators will truly have at the FERC.
Further, in states such as Florida where the Legislature has established a clear
and pervasive state regulatory scheme, it makes little sense for the FERC to preempt
the state's jurisdiction. Costs for facilities that are currently under the jurisdiction
of state authorities do not suddenly become the FERC's jurisdiction because retail
wheeling is instituted. Transmission lines still perform the same function of bringing
power to the retail customer located within the territory of a state regulated utility.
The states are in a much better position to judge the extent and value of assets
which may become stranded as a result of retail wheeling. In most cases, the states
have approved both the construction and the cost recovery for these facilities under
bundled rate structures. In light of these concerns, on April 11, 1997, the FPSC
filed a petition in the United states Court of Appeals challenging these elements
of Order No. 888. The FPSC was joined in this appeal by the state commissions of
New York, Arkansas, Idaho, North Carolina, Wyoming, Illinois, and Washington and
the National Association of Regulatory Utility Commissioners (NARUC). Briefs have
been filed in the case but the U.S. Court of Appeals has not yet acted.
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Regional Transmission Organizations
On May 13, 1999, the FERC issued a Notice of Proposed Rulemaking (NOPR) proposing
to amend its regulations under the Federal Power Act (FPA) to facilitate the formation
of Regional Transmission Organizations (RTOs). Perhaps because the FERC has not
seen all the changes it envisioned from Order No. 888, it has begun looking into
establishing RTOs as the next step toward ensuring fair and non-discriminatory access
to transmission services and ancillary services for all users of the transmission
system.
An RTO would perform all the functions currently performed by individual transmission
owning utilities. The difference would be that an RTO would plan, construct, maintain,
and operate all the transmission facilities within a entire region. As such, an
RTO, rather than the current transmission owners, would exercise independent control
over the development and operation of the transmission system. The transmission
owners would receive compensation for their existing transmission investments based
on the usage of their transmission lines. FERC looks at the formation of RTO's as
a way to mitigate vertical market power associated with generators controlling access
to the transmission system.
At the moment, the FERC's authority to mandate RTO's is not clear. Nevertheless,
the FERC has proposed rulemaking to adopt certain minimum characteristics and functions
for a transmission entity to qualify as an RTO. FERC's proposed characteristics
of an RTO, as outlined in the FERC NOPR, are provided in Appendix E. The transmission
organizations which have been approved by FERC are contained in Appendix F.
On July 30, 1999, the FPSC submitted comments on the FERC's proposed rules concerning
RTOs. The FPSC has encouraged the FERC to continue to maintain a flexible policy
toward the formation of RTOs. The FPSC believes that the FERC lacks the authority
to mandate a one-size-fits-all solution and must proceed on a case-by-case basis
to address specific transmission problems. This can best be accomplished by working
with the states to develop regional approaches that achieve regional market consensus
and are endorsed by state regulators.
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Florida Transmission Issues
In Florida, the FPSC has broad authority under Sections 366.04(2)(c), and 366.05(8),
Florida Statutes, over transmission grid-related matters (the Grid Bill). The FPSC
is vested with jurisdiction over the planning, development, and maintenance of a
coordinated electric grid throughout Florida. This jurisdiction includes establishing
the provision for sharing of energy reserves of all electric utilities in the state
for the establishment of conservation and reliability within a coordinated grid.
To the extent that a deficiency is determined to exist in the Florida grid, the
FPSC is authorized, after appropriate evidentiary proceedings, to order utilities
to correct deficiencies and to allocate the costs of such improvements on the basis
of benefits received.
In the enforcement of these responsibilities, each electric utility in Florida is
required pursuant to Chapter 186, Florida Statutes, to file Ten Year Site Plans
annually with the FPSC. These plans identify the utilities' forecasts of system
load, demand-side conservation achievements, and plans for generation and transmission
additions required to serve the electrical requirements of Florida's customers.
These plans are reviewed by the Commission and a report of their suitability from
a planning perspective is provided to the Florida Legislature. Ultimately, as a
utility's plans come to fruition with the construction of additional bulk power
facilities, the FPSC must determine and approve the need for major new generation
and transmission facility additions pursuant to the Florida Electrical Power Plant
Siting and Transmission Line Siting Acts. Under the Grid Bill, the FPSC also has
the authority to initiate a need determination on its own motion. The need determination
process is followed by environmental and land use review by the appropriate other
Florida agencies. Finally, site certification is approved, or denied, by the Governor
and Cabinet sitting as the Siting Board. The FPSC has a considerable history of
oversight activities in its implementation of the Grid Bill and the Electrical Power
Plant and Transmission Line Siting Acts, which have resulted in significant increased
efficiency of Florida's electric grid and savings that have benefitted the state's
electric consumers.
Pursuant to the FPSC's jurisdiction over grid related matters, work continues in
Florida to explore Florida-specific transmission issues. The FPSC has held a series
of public workshops in 1999, to solicit views of the Florida electric utilities
and other interested parties regarding RTO formation. Three proposals have emerged
from these workshops: (1) Independent Transmission Administrator (ITA) Proposal,
(2) Regional Transmission Solution (RTS) Proposal, and (3) Public Not-for-Profit
Transco Proposal. These proposals are summarized below.
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ITA Proposal
The ITA proposal was developed and submitted by the following entities:
- Constellation Power Development, Inc.
- Duke Energy New Smyrna Beach Power Company LTD., L.L.P.
- Florida Municipal Power Agency
- Orlando Utilities Commission
- Reliant Energy, Inc.
- Seminole Electric Cooperative, Inc.
- Tampa Electric Company
- U.S. Generating Company
This proposal provides that the ITA would oversee and administer the planning and
operation of peninsular Florida transmission grid facilities. The ITA would administer
an Open Access Transmission Tariff for peninsular Florida that would provide fair,
equitable, and non-discriminatory access and use by all eligible users. The current
functions of the Florida Reliability Coordinating Council (FRCC) would be merged
with the ITA, and efforts would be made to use the existing FRCC infrastructure
under the ITA governance structure. The FRCC is currently one of ten reliability
councils that make up the North American Electric Reliability Council (NERC). Each
of these entities is responsible for ensuring and enhancing the reliability and
adequacy of bulk power electricity supply in well-defined geographical and electrical
regions in North America. The FRCC oversees the reliability of the region of Florida
that lies east of the Appalachicola River, commonly referred to as peninsular Florida.
The ITA would not own or profit from any generation, transmission, or distribution
facilities and would not engage in the purchase or sale of electric energy or capacity.
The business affairs of the ITA would be governed by a "stakeholder" Board of Directors
with fifteen members representing investor-owned utilities, municipal utilities,
cooperative utilities, power marketers and independent power producers. Each of
the voting members of the Board of Directors would be given one vote, and any action
would require approval of a 2/3 majority of voting Board Members.
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RTS Proposal
The proposal put forward by Florida Power and Light Company and Florida Power Corporation,
the RTS Proposal, is
not an RTO
proposal. Their proposal would not require FERC approval. At this point in time,
only FPL and FPC support this proposal.
The RTS proposal relies on the FPSC to provide independent oversight and governance
over transmission planning and operations. The FPSC would resolve disputes with
respect to the need for new transmission facilities or new interconnections. Under
the proposal, an FPSC Security Coordinator Representative would be hired by the
FPSC, and located on a permanent basis at the Control Center that performs the Security
Coordinator function. The Security Coordinator Representative would be responsible
for monitoring transmission services, auditing the Security Coordinator on a regular
basis, and conducting unplanned audits in response to specific complaints of a transmission
customer.
The FRCC would remain a reliability-only organization with a voting structure that
will ultimately be established by nationwide criteria now being developed. A streamlined
FPSC dispute resolution process which would be binding on all parties, would be
created through the rulemaking process. FPL and FPC believe that there presently
is sufficient authority under the Florida Grid Bill for the FPSC to perform the
contemplated activities.
Under the RTS proposal, FPL and FPC also propose to discount transmission service
to mitigate "pancaking" of transmission rates within peninsular Florida. These discounted
rates would apply to new transactions that occur on or after October 1, 1999.
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Public Not-for-Profit Transco Proposal
Jacksonville Electric Authority proposes a non-profit, publicly owned, transmission
company (transco) to own and operate the transmission grid in peninsular Florida.
The chief benefit of this proposal, according to JEA, is that a robust electric
generation market could be facilitated without the accompanying fiduciary obligations
to stockholders to maximize return on investment.
The JEA proposal would require substantial amendment to existing law for implementation.
One of the difficult issues that would have to be determined, probably ultimately
in the courts, is the compensation to be paid to the current owners of the transmission
facilities.
Gainesville Regional Utilities (GRU) also filed a proposal supporting a not-for-profit
transmission company. Neither JEA nor GRU provided details on how the transco would
be developed. A spokesperson representing the City of Tallahassee also spoke favorably
of the not-for-profit transco concept, but did not file written comments.
The FPSC will continue to pursue in-state solutions to transmission issues. To this
end, an additional Commission workshop will be held to further discuss the three
RTO proposals summarized above.
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CHAPTER FOUR
RETAIL COMPETITION
Electric Utility Restructuring
Electric restructuring generally describes a movement from regulated monopoly electric
utility services to market-based competitive electric services. A lot of different
terms are being used to describe what is happening at the federal level and in other
states in the transition to electric competition. Phrases such as restructuring,
deregulation, competition, retail wheeling, retail access, and customer choice have
all been used to describe a broad-based, national movement away from the traditional
rate base regulation of vertically integrated, monopoly public utilities. Regardless
of the name attached, what is generally being discussed is the breaking out of generation
services into a separate, more competitive segment of the industry while transmission
and distribution remain largely regulated monopoly services. These 'unbundled' services
would each be priced separately on a customer's bill.
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What is Happening in Other States
A number of states are exploring retail restructuring as a way of achieving lower
rates and greater customer satisfaction. Higher than average electric rates appear
to be the primary driver in these states. Most states experimenting with retail
restructuring are using a phase-in system to allow some percentage of retail customers
to select from alternative electric generation providers over a window of several
years. In a few states, such as California and Massachusetts, all customers will
be allowed to choose their generation supplier at once on a date certain. Transmission
and distribution services (poles, lines, substations, meters, and monthly billing)
will continue to be provided by the regulated utility. Only the generation portion
of electric service will be subject to customer choice.
California, New Hampshire, New York, and Massachusetts were among the first states
to move toward retail access. The average residential rate in these states is approximately
12 cents per kilowatt-hour (KWH). Because of these high rates, economic development
appears to have suffered with the loss of jobs and the relocation of industry. In
many high-cost states, large commercial and industrial customers have been the most
active in encouraging a move toward competition. At present, a total of twenty-two
states have enacted legislation or implemented regulations requiring retail restructuring,
although the legal basis is being challenged in several states.
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What is Happening in Florida
Florida's electric utility industry has provided very reliable service at competitive
prices. On average, Florida's rates have been relatively stable for more than a
decade. Adjusting for inflation, the price of electricity in Florida has actually
been declining. Compared to prices around the nation, Florida's electric rates continue
to be around the national average (approximately 7.2 cents per KWH statewide average).
This is particularly commendable given Florida's unique peninsular geography. Florida
has little low-cost hydropower, and all our generating fuels must be transported
very long distances by rail, pipeline, or water. Also, unlike many other states,
Florida's electrical grid is only tied to other utilities in one direction, to the
north through the Southern Company. This limits the state's ability to rely on out-of-state
purchases.
During the summer of 1996, the FPSC contracted with the University of Florida's
Public Utilities Research Center for a series of staff training seminars. Three
public forums were held in which experts from around the country addressed many
outstanding issues surrounding retail restructuring. These public forums experienced
a good turnout from participants representing views from all sides of the issues.
Following these training sessions, the FPSC established an in-house team of staff
members to continue to monitor and discuss restructuring issues as they develop.
In the national arena, the FPSC has intervened in the FERC's open transmission access
docket and has filed comments advocating the preservation of state jurisdiction
over transmission and distribution costs currently being paid by retail customers.
The FPSC has also been an active participant in the National Association of Regulatory
Commissioners (NARUC). Commissioner Susan Clark currently serves as the chair of
the NARUC Electricity Committee. This committee plays a pivotal role in developing
policy positions on restructuring matters affecting state regulation.
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Who is Likely to Gain from Retail Competition
In Florida, as with the rest of the nation, industrial and large commercial customers
have been the most vocal advocates of electric restructuring. These customers appear
to have the most to gain from restructuring, since their size and business experience
give them the ability to negotiate for low-cost generation or to install self-service
generation. They also appear to represent the primary market segment to which merchant
plants, brokers, and other alternative generation suppliers would most likely target.
Small-use residential and commercial customers are less likely to have meaningful
alternative generation supply choices in a competitive market and may be left paying
higher costs.
One of the primary reasons some states are pursuing retail competition is high electric
rates. Florida's electric rates, which are around the national average, have been
relatively stable in nominal terms for more than a decade, and when adjusted for
inflation, have actually declined by 22 percent. Florida has long supported competition
in the wholesale bulk power markets. Savings achieved from the purchase of economic
wholesale power alternatives are spread to all electric ratepayers, not a select
few. It remains unclear whether all Florida ratepayers would benefit from a mandate
for retail competition. In many states that have adopted retail competition, actual
program implementation is just now going forward. In some states, implementation
has been delayed because of litigation over major issues such as stranded cost recovery.
During the 105th Congress, a number of bills addressing the restructuring of the
electric utility industry were introduced. Several bills would have required states
to implement retail competition by a date certain. While none of these bills was
passed into law, Congress is currently addressing electric utility restructuring
in the 106th Congress. The FPSC, in concert with the NARUC, has encouraged Congress
to refrain from including a "date certain" mandate in any electric utility restructuring
law. The states should be allowed the flexibility to determine if and when retail
competition should be enacted and should be free to implement such retail competition
in a way that benefits all electric utility customers, not just a select few.
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Summary of Individual State Restructuring Activity
Arizona
The Arizona Corporation Commission (ACC) initially undertook restructuring on its
own motion. In 1996, the ACC issued Order 59943 which was a broad blueprint for
competition and established staff working groups to deal with specific issues. By
December 31, 1997, all utilities subject to ACC jurisdiction (only investor-owned)
were to propose for ACC review and approval a plan on how customers will be selected
for participation in the competitive market prior to 2003. The investor-owned utilities
challenged the ACC's authority, but were ultimately denied by the Arizona Supreme
Court. Thereafter, both Arizona Public Service and Tucson Electric Power submitted
settlement agreements. Finally, on December 1, 1998, the Arizona Supreme Court blocked
approval of the negotiated settlements submitted by these utilities on procedural
grounds. Intervenors in the process argued that insufficient time had been allocated
for a fair evidentiary hearing. The ACC vacated its order and plans to conduct new
hearings on stranded cost and unbundling. This will likely delay implementation
by at least a year.
HB 2663 passed the legislature in May, 1998 and applies only to public power utilities.
Retail access will continue on schedule for the state's largest public power utility,
Salt River Project, with full competition planned no later than December 31, 2000.
The legislature mandated that 20 percent of customers could begin to choose alternative
retail suppliers by December 31, 1998. The public power utilities have great flexibility
to collect stranded costs by way of a temporary surcharge on the distribution portion
of the bills. Recovery must end by December, 2004, and participation is required
in some type of regional transmission authority or ISO.
Arkansas
SB 791, signed in April, 1999, set the ground rules for retail competition in Arkansas.
January 1, 2002 is the initial target date with delays permitted until June, 2003.
Municipal and cooperative utilities have the option to open their service areas
to competition. Transmission owning utilities must participate in some form of an
independent system operation. Nonmitigable and prudently incurred stranded costs