CITIZEN POWER

Public Policy Research Education and Advocacy

Electric Choice: Impediments to Creating a Robust Competitive

Marketplace in Western Pennsylvania

Roger Odisio, PhD

December 9, 1998

2118 Murray Avenue, Pittsburgh, Pennsylvania 15217 (412) 421-6072; fax (412) 421-6162

Context of the Problem

The Commission has already addressed the capacity shortages in Eastern Pennsylvania. Capacity problems are even more acute in the west. The overriding problem in Western Pennsylvania electricity markets, in fact, is the lack of suppliers that can economically serve customers. Primarily, suppliers are limited by both the excessive cost and limited availability of transmission to move power. When power is transmitted a significant distance, a supplier typically must pay separate rates to the owner of each system, known as “pancaked“ rates. Also, it is often difficult to get simultaneous access to several systems to facilitate a transaction.

In its orders on the proposed Allegheny/Duquesne merger, the Commission recognized this problem. As a condition of merger approval, it ordered the Applicants to either join a fully functioning ISO to reduce pancaking and access problems, or divest capacity to directly create more sellers.

The merger has been abandoned, and the problem remains. While Allegheny and Duquesne “joined” the Midwest ISO recently approved by FERC, they are not functioning members. They have not agreed to turn over operation or control of their transmission to the group operator. None of the other major neighboring utilities who could help to create a regional competitive market (e. g., AEP, First Energy, VEPCO, or Detroit Edison) is a member of the Midwest ISO. Nor has progress been made by these utilities in establishing a similar ISO that could be connected to or combined with the Midwest ISO. Unlike the eastern part of the state with the PJM ISO, utilities in Western Pennsylvania and surrounding markets seem intent on maintaining control of their individual transmission systems.

Retail deregulation has tended to worsen the supply problem. Utilities with existing capacity to serve local customers are holding on to it due to uncertainty about what they need to serve their current customers, the desire to sell to new customers now available to them, and the fact that scarcity drives up prices. Allegheny County recently requested bids to serve its 15 MW load. No one responded.

Eventually, if things go well, generation and transmission will be unbundled. Transmission will be controlled, operated, and perhaps owned, on a regional basis by an entity independent of generation owners, whether by means of an ISO, or through some other mechanism. But this is likely to take considerable time. For now, the key to the emergence of some degree of competition in Western Pennsylvania is access by licensed suppliers to existing capacity on a basis that is comparable to that enjoyed by the owners of that capacity.

Comparability/Unreasonable Preference Standards

The requirements for comparable access to existing capacity by licensed suppliers are already established. As the regulator of wholesale rates, FERC standards are clear. For example, on March 12, FERC granted Allegheny umbrella approval to charge market prices to wholesale customers, with the following condition:

In addition, the Commission requires that a public utility offering to

sell power to an affiliated marketer must make the same offer, at the

same time, to non-affiliated entities and must post simultaneously the

actual price charged to its affiliate for all transactions. (footnote omitted)

82FERC, paragraph 61,245

On compliance, Allegheny added language to Article I, Section 1.3 of its Standard Generation Service Rate Schedule saying, “All sales shall be made to affiliates and non-affiliates on a non-discriminatory basis” and “Allegheny Power further commits that it will simultaneously make publicly available via an electronic bulletin board the price charged to its affiliates under the SGSRS”.

Appendix G of Allegheny’s Restructuring Settlement sets out similar standards.

· Paragraph 1 says that no Allegheny supplier (EDC or marketer) shall receive “unreasonable preference” from the Allegheny Genco/EGS, or treatment that is not comparable to that received by non-affiliated suppliers, in the purchase, sale, use, or conveyance of any generation or transmission product.

· Paragraph 2 adds that tariffed service provided to affiliates must be “comparable or otherwise... not anticompetitive when compared to how the tariff services are provided to non-affiliated EGSs”.

· Paragraph3 prohibits anticompetitive cross subsidies between Allegheny affiliates.

Problems of Buying Power from Allegheny

Allegheny has found a way around the comparability standard. Part III I. 1.1 of the Settlement allows Allegheny to have an EGS marketer separate from its genco, provided it is bound by the Competitive Safeguards and Code of Conduct in Appendices G and H. Allegheny already had such a marketer in place, Allegheny Energy Solutions (AES). However, it has decided to eliminate AES, folding its functions into Allegheny Energy, a new combination genco/marketer scheduled to begin business on Jan 1. All of the West Penn generation, the entire capacity Allegheny uses to serve Pennsylvania customers, is being transferred to Allegheny Energy (1/3 is being leased back to West Penn until all current customers are eligible to switch).

By this simple device of creating a combination genco/marketer, Allegheny eliminates the internal sale to an affiliate, and with it, the requirements for offering comparable service to non-affiliates. Since there is no sale, there is no transfer price to post, and no power must be offered to others. Paragraphs 1-3 in Appendix G of the Settlement and the additional language Allegheny added to its wholesale rate schedule on file at FERC, that are intended to facilitate competition through the use of existing capacity, are rendered inoperative.

Allegheny subsidiary AYP Energy also owns some generation. It was formed as an exempt wholesale generator by the purchase from Duquesne Light of a 276 MW share in one of Allegheny’s Ft. Martin coal units. But it, too, will be a genco/marketer, eliminating any internal transfer price and the requirement to offer the power to non-affiliates.

Settlement Appendix G, paragraph 6, does require a specific transfer price posting. But it applies only to sales by Allegheny to industrial and commercial customers outside West Penn’s service territory, and to those within the territory, where a customer with multiple locations requests Allegheny to supply it both inside and outside the territory. This is likely to have a very limited benefit to competition, since it depends on how much power Allegheny seeks to sell to these customers. Allegheny will have an incentive to sell power to other kinds of customers (e.g., residential) and avoid sales which require them to offer the power to non-affiliates.

Finally, the Settlement contains one other way some Allegheny capacity is to be made available to non-affiliates. Appendix G, paragraph 7 requires Allegheny to annually offer specified amounts of power (750 MW in 1999 and 1000MW for three years thereafter) to unaffiliated suppliers. However, up to 724 MW of the amount for 1999 was already sold before the settlement was even signed. Such unilateral deals with selected suppliers are the antithesis of how a market is supposed to work. In effect, Allegheny has agreed to divide part of the local market with a small group of suppliers, rather than to make the power available to all suppliers on a comparable basis.

The Effect on ECAP Programs

The Energy Cooperative Association of Pennsylvania (ECAP), and the customers it seeks to serve, have a particular interest in freeing up more capacity. As part of the Settlement, Allegheny agreed to contribute $4 million to Citizen Power, (the sponsor of ECAP in Western Pennsylvania) to enable ECAP to fulfill several public interest purposes, including: providing low cost power and conservation services to residential customers, particularly low income and rural households; expanding the availability of clean and renewable energy sources; and helping to create a fuel mix source and emissions test pilot program. Each of the tasks requires ECAP having access to power. Without supply to sell, the money is useless, and the purposes for which it was contributed will go unmet.

Problems of Buying Power from Duquesne Light

Duquesne Light has agreed to make 600 MW of power available to “jump start” the market in its territory. But the limitations it has imposed severely limit its effectiveness.

Duquesne now commits to offer the power for only 6 months. But most, if not all, large load customers require one year contracts, making this source virtually useless for those customers. Duquesne has publicly claimed that the reason for the limitation is the pending auction of its generating capacity. For several reasons, there is little chance the auction will be completed by the end of 1999, let alone June.

· Before the auction can begin, Duquesne must work out an agreement to swap several of its units with those of First Energy. It is not clear when this will be finished.

· Duquesne must then file the First Energy agreement at FERC (because transmission is involved) and await approval. This will take months, the amount depending on the nature of the agreement, the number of parties who intervene, and the extent to which it is controversial. FERC approval for the swap must be obtained before the auction can begin.

· In addition, the PaPUC has granted 45 days for parties to comment on the auction proposal and for Duquesne to respond, once the swap agreement has been filed there.

· Once all regulatory work is completed, Duquesne estimates that the auction itself will take about 6 months if everything goes smoothly.

Duquesne’s own press release (October 16) announcing the jump start program indicates that it did not consider the auction a limitation until the end of 1999, at the earliest.

Duquesne Light expects to make another offering of power in Spring

of 1999 for the remainder of the year. Any future offerings will be

coordinated with Duquesne’s generation auction to ensure that Duquesne

has adequate capacity to offer to the market (emphasis added).

Moreover, Duquesne seems to be in a good position to offer more than 600 MW (which is less than one quarter of its capacity). Due to its high rates, most Duquesne customers appear eager to switch to another supplier. Duquesne is unlikely to need a lot of capacity to supply its remaining customers. In fact, in its auction plan Duquesne is proposing to auction its Provider Of Last Resort status to others. The more power offered by Duquesne to licensed suppliers as it exits the market, the more vigorous will be the competition to serve its customers.

Recommendations

· Duquesne’s offer of jump start power should immediately be extended to one year. Not later than June 30, Duquesne should file with the Commission its assessment of the feasibility of offering another year of jump start power. Duquesne’s offer should be increased to 1,000 MW, and the extra power should be earmarked for residential customers. Whatever the amount of power being offered, however, an amount roughly equivalent to its share of current load should allocated to residential customers. It is those customers who are most in danger of being left out of the benefits of the market.

· In order to meet the Commission’s ongoing responsibility to implement the Restructuring Settlement, and be consistent with the purpose of FERC policy on wholesale sales, the generation and marketing functions of Allegheny Energy should be separated into distinct entities within the corporate structure. Any transfer price between them should be posted and the power offered simultaneously to non-affiliates.

· To get the market in the west off dead center, Allegheny, as the major power supplier in the area, should be required to implement a jump start program similar to that offered by Duquesne, notwithstanding its initial 724 MW sale to a few suppliers that was consummated before the settlement was signed. Allegheny should offer 750 MW to all licensed suppliers for 1999 (increasing to 1,000 MW for the next three years, as it has agreed to do) at a fixed energy price reflecting the wholesale market (or no more than Duquesne’s offer of 2.6 cents/Kwh).