New Rule Won’t Cut Energy Bills Soon

Though a new federal rule has opened access to the nation’s electric power lines, it could be years before consumers see lower bills as a result of competition.

The Federal Energy Regulatory Commission estimates that customers will eventually save as much as $5.4 billion a year. Before they can save though, commercial and industrial customers will have to buy out of long-term, high-priced electricity contracts.

Some utilities said the FERC’s April 24 ruling will negate the benefits of increased transmission access by levying “exit fees” on consumers who leave their local power companies.

“If customers were to leave a system under the FERC proposal, even though we offer lower-priced power, the added cost of leaving their old system could make them end up paying a higher price for electricity, so why would they leave the system?” said Linda Brei, a spokeswoman for Wisconsin Power & Light, a Madison-based utility serving about 375,000 electricity customers in the south-central region of the state.

“The mechanism that FERC proposes really provides a disincentive [to competition] because they have to pay for, in some cases, the poor business decisions of the utility that they’re leaving,” she said.

The FERC’s order requires wholesale electricity customers to pay the exit fee to utilities they have contracts with before departing, to cover the utilities’ “stranded costs” of building plants and installing transmission lines.

The agency will allow utilities to recover the stranded costs, which have been estimated at as high as $400 billion, as long as a utility can demonstrate that the costs were “prudent, verifiable and legitimate.”

The FERC said it’s possible some customers may be unable to change utilities as soon as they would like.

“Once the existing uneconomic assets and contracts are behind us, all wholesale customers will be better able to shop for power and reap long-term benefits of competitive supply markets,” the commission said in the order.

The FERC prefers direct assignment over other forms of cost recovery on a wholesale level because it transfers costs to those who caused utilities to incur them, though the recovery of retail stranded costs is ultimately up to public utility commissions in each state.

In California, utilities and regulators implemented a plan that allows for full recovery of retail stranded costs over the next eight years.

By dividing stranded costs into different categories, California’s three publicly traded utilities spread their anti-competitive costs to shareholders and consumers.

The costs of building nuclear plants and other generation facilities began to be recovered through a so-called competition transition charge during December, said Bill Reed, vice president of regulatory affairs for Enova Corp., formerly San Diego Gas & Electric Co.

The second type of stranded cost for which California will permit recovery is the continuing operating cost of nuclear plants.

Retail customers in California saw a 3.8-cent charge for each kilowatt-hour on their monthly bill starting April 15, to pay for the continuing cost of operating nuclear plants.

“The 3.8-cent charge is based on San Onofre operating at 78% of capacity,” Reed said. “If it operates at lower than that we lose, and if it operates higher than that we win. It’s an incentive to keep the plant operating as efficiently as possible.”

The three California utilities--Enova, Pacific Gas & Electric Co. and Edison International--will also be permitted to recover stranded costs associated with long-term contracts to purchase power under the Public Utilities Regulatory Policy Act of 1978.

If power under these contracts costs more than the market price, the difference can be collected from distribution customers through the competitive transition charge, Reed said.

The FERC will allow stranded costs to be paid through a one-time, lump-sum exit fee or an amortized lump-sum exit fee. The same charge can also be paid as a surcharge on the customer’s electricity transmission rate.

While the FERC rule could mean new customers for low-cost utilities following a transition period, some think the delay caused by the stranded cost recovery will penalize low-cost providers because it will give higher-cost utilities time to pay off uneconomic assets and eventually offer low enough rates to retain their traditional customers.