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Electrical Deregulation and Customer Choice Task Force

MINUTES OF

ELECTRICAL DEREGULATIONS AND CUSTOMER CHOICE TASK FORCE

Friday, September 25, 1998 - 9:00 a.m. - Room 303 State Capitol


Members Present:
    Sen. Leonard M. Blackham, Chair
    Rep. Beverly Ann Evans, Chair
    Sen. Lorin V. Jones
    Sen. Eddie "Ed" P. Mayne
    Sen. Millie M. Peterson
    Sen. Michael G. Waddoups
    Rep. Ralph Becker
    Rep. Judy Ann Buffmire
    Rep. Christine R. Fox-Finlinson
    Rep. J. Brent Haymond
    

Members Absent:
    Rep. Kevin S. Garn
    Rep. David Ure

Staff Present:
    Mr. Brian Allred,
        Research Analyst
    Mr. Robert H. Rees,
        Associate General Counsel
    Ms. Patricia Owen,
        Associate General Counsel
    Ms. Beverlee LeCheminant
        Legislative Secretary

Note:    Copies of information distributed during the meeting are on file in the Office of Legislative Research and General Counsel.

1.    Welcome - Approval of August 20, 1998 Minutes - In the absence of the task force chairs, Sen. Waddoups called the meeting to order at 9:20 a.m.

     MOTION: Sen. Peterson moved to approve the minutes of the August 20, 1998 meeting. The motion passed unanimously with Sen. Blackham and Reps. Evans and Fox-Finlinson absent for the vote.

2.    Public Service Commission Report - Market Power -

     a.    Public Service Commission Presentation - Mr. Stephen Mecham, Public Service Commission (PSC), indicated that the PSC has addressed the following issues in its report: 1) what constitutes the relevant market or markets for analyzing market power issues; 2) whether any electric service provider could exercise market power in a manner that would unduly restrict competitive choice for consumers of electricity in the state; and 3) if an electric service provider could exercise undue market power, what legislative actions could be taken to mitigate the market power.

    Mr. Mecham said the first thing the PSC did to address the issues in the report was to analyze:1) the facts as they are in Utah; 2) the competitors as they are or perhaps could be; 3) the size of the competitors; 4) the potential or existing barriers to entry; and 5) the conditions of supply and demand. He stated that a consultant was hired by the Division of Public Utilities to study these issues and the PSC researched the consultant's data and drew conclusions from that data which were made part of the report. He indicated that the study consisted of three different scenarios that would be necessary in order to develop and maintain a vibrant competitive market: 1) importing electricity into the state is going to be essential; 2) the size of the relevant market depends on the state's ability

to import and how open and free the western transmission system is to be able to get the power that is comparably priced to that the state already has access to; and 3) more study is going to be necessary. Mr. Mecham explained that the PSC is going to continue to study what it is going to take to ensure that safeguards are in place at the outset of deregulation as opposed to later in the process when consumers are already being exposed to paying prices that are higher than what a competitive market would warrant.

    Ms. Becky Wilson, Utility Economist, Division of Public Utilities, told the task force that in June the division received a report from its consultant which presented results showing what market clearing prices would be throughout the West. She indicated that the division analyzed the report to determine what Utah's place would look like in the market and how big the market was versus how small it would be. She distributed and reviewed some bar charts illustrating this information.

    Sen. Blackham asked Mr. Mecham to address the solution to the market power issue. Mr. Mecham reported that some of the suggestions in the report are: 1) divestiture of generation plants; 2) the formation of an independent system operator (ISO); 3) monitoring the market and assessing penalties if necessary if there are abuses of market power; 4) the imposition of price caps when things do not work as planned; 5) the possibility of public investment in transmission facilities; and 6) how consumers respond to price changes.

    Sen. Blackham asked Mr. Mecham to give the task force more insight into the market power that existed in the Midwest this summer and why extreme prices were charged because of the market power that existed for a short term.

    Mr. Mecham said the Midwest price spikes are referred to in the report, but he is not sure that anyone knows yet why those price spikes occurred.

    Ms. Wilson indicated that the Federal Energy Regulatory Commission is looking into the Midwest price spikes because there has been some concern of market power and the PSC has raised in its report the difficulty in distinguishing moderate rational market pricing versus the exercised market power. She said that FERC is scheduled to present the results of its report to Congress.

    Mr. Rich Collins, PSC, said that when there is a market system, particularly with electricity, that the prices are going to be very volatile and it could be that the price spikes in the Midwest were not due to market power, but to the functioning of a competitive market system and that, in order to cut off demand, prices had to rise. He said that one of the risks of moving into a competitive market is that the state will be vulnerable to volatility and it can become difficult for the government to differentiate between price volatility that occurs naturally in a competitive market with market power manipulation of the supply in order to raise the price.

     b.    Panel Discussion

    Mr. Ken Morris, Transmission Policy and Pricing, PacifiCorp, said PacifiCorp is concerned that the existence of market power depends on transmission access. He indicated that if there is adequate access to the transmission system connecting Utah customers to potential commodity suppliers in the west, then market power cannot be effective because other suppliers will offer to sell power to Utah customers at competitive market prices whenever PacifiCorp attempts to price its output above the competitive market price. Therefore, the discipline of market competition would eliminate market power potential. He stated that the issue comes down to how much transmission access there is in the state. He said that PacifiCorp believes that FERC Orders 88 and 89 will provide nondiscriminatory open access to the transmission system throughout the country.

    Mr. Morris also addressed the LCG study by saying that his conclusion is that Montana's study is flawed, its transmission model is flawed, and any conclusions that are drawn from this model have to be suspect until more work can be done to analyze the model.

    Ms. Nancy Kelly, Committee of Consumer Services (CCS), said CCS believes that divestiture of transmission and divestiture of generation will be ineffective in removing market power in the long run. She indicated that divestiture of generation would not solve the problem because in order to survive in the electricity industry, a company has to be big. Ms. Kelly also explained that the state has transmission bottle necks because the transmission lines were developed initially to serve the local utilities. Then the utilities realized that they could share reserve capacity so they made interconnections between their territories, and then realized they could reduce costs by sharing energy.

    Mr. Curt Winterfeld, Assistant General Manager of Marketing, Deseret Generation and Transmission, stated that the modeling of WSCC and the Utah market is an important process and will, if done correctly, provide some insight. He told the task force not to be discouraged with the fact that oftentimes these models are imperfect when they are first developed and he encouraged the task force to strive to improve the models and glean from them the information they can provide when they are done correctly.

    Mr. Winterfeld emphasized that transmission prices are as much of a barrier to effective competition as physical limitations. He also told the task force that while divestiture may be an important element in mitigating market power, he does not feel that divestiture and the creation of an ISO alone can be viewed as total mitigation of market power.

    Mr. Ted Rampton, Utah Associated Municipal Power Systems (UAMPS), indicated that UAMPS has reviewed the PSC's report and agrees with the outcome of the report, but concurs with some of the conclusions that have been expressed about the way the model was put together and some of the assumptions that were made. He said UAMPS feels that: 1) current power transmission contracts and arrangements need to be looked at differently; 2) the physical relationships between

transmission and generation need to be considered; 3) there is a relationship and a value of the fixed or stranded costs; and 4) the task force must thoroughly consider the market power and the dominance of the single utility in the state as it is now and should discuss mitigation measures that need to be taken in order for the market power to be diminished. Mr. Rampton stated that UAMPS favors the creation of an ISO and feels that it should be looked at on a local level to mitigate some of the market control.

    Mr. Richard Judd, Utah Municipal Power Agency (UMPA), said another side of market power that has not been discussed thoroughly is that large industrial customers also have market power. The task force has discussed the concern to hurry into deregulation so the state will not lose its cheap resources; however, if deregulation and market power are not addressed properly, the large industrial customers will take the cheaper power..

     c.    Public Comment -

    Ms. Betsy Wolf, Salt Lake Community Action Program, indicated that most consumers are not interested in choice if the choice they have is which company they choose to provide electricity at higher prices. She urged the task force to study this issue carefully and not to proceed forward until an adequate way can be figured out to mitigate the market power issue.

     d.    Task Force Questions and Discussion -

    Sen. Peterson said that with regard to the issue of allowing a group such as the large industrials to bleed off the low-cost market tends to make her believe that the task force needs to consider opposing any legislation to restructure until it has been able to deal with all of the issues.

    Sen. Blackham stated that an ISO, or some similar organization, would be needed in a deregulated market and the larger the ISO the better chance there is of having a competitive market. He indicated that from the testimony that has been given, the majority seem to feel that in the Utah market with Utah Power and Light having such a large presence, that the ability to exercise market power is a major issue related to deregulation.

    Sen. Jones said he agrees that the only way the competitive market would be effective is to have an ISO.

    Rep. Haymond said he agrees that the ISO concept has to be in place before the task force can realistically think of market power or deregulation.

    Rep. Buffmire said she does not feel that the task force is in a position to make a decision yet and that more data is needed.

    Rep. Haymond suggested that the task force could decide what its goal is if the state goes to

deregulation and could define a path for each of the issues to see how to proceed in making the transition correctly.

    Sen. Jones said that he would be in favor of a voluntary divestiture with caps on the percentage of load that any monopoly could carry in the state.

    Rep. Becker indicated that the task force has the benefit of watching what is happening in other states and continuing in its learning so it will be prepared to move forward when it feels it is the right time.

3.    Other Task Force Business - Sen. Blackham distributed suggested agendas for the meetings of October 8th and November 5th and indicated that the October 8th meeting will consist of the PSC's report on transition costs and the November 5th meeting will consist of a discussion on environmental issues, alternative energy, energy efficiency, and renewable energy. He stated that the task force has the obligation to prepare a report for the Legislature and the chairs and staff are in the process of writing that report for the task force members to review. The report will be mailed to task force members before the November 5th meeting so they can review it and be prepared to discuss it at that meeting. The chairs will also be reporting to the Business, Labor, and Economic Development and Public Utilities and Technology Interim Committees in November regarding the actions of the task force for the past two years.

4.    Adjourn -

     MOTION: Rep,. Haymond moved to adjourn the meeting at 11:35 a.m. The motion passed unanimously with Sen. Mayne and Rep. Fox-Finlinson absent for the vote.
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