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PROGRESSIVE UTILITIES AT RISK

Power market deregulation and more competition might easily threaten utilities with long term contracts with wind companies such as Pacific Gas & Electric CO (PG&E) and Southern California Edison. A shift from government regulation to market competition will cost utility shareholders a considerable sum over the next five years. Four important cost categories have been studied to determine the most vulnerable of the utilities: obsolete or uneconomical power generation plants (such as PG&E's Diablo Canyon Nuclear Power Plant); above market, long term coal purchase contracts; above market long term power plant purchases; and deferred costs and other regulatory assets.

Power market deregulation will clearly alter the competitive position of electric utilities in the US. And according to a new report, the two Californian utilities that buy most wind power are among the most vulnerable in America. At stake are more than $250 billion in annual electrical revenues.

Pacific Gas & Electric Co (PG&E) and Southern California Edison (SCE) could well face tough decisions as they are particularly poorly placed to respond to upcoming utility deregulation and competition, says a new report by Resource Data International Inc (RDI) of Boulder, Colorado, a power industry consultant.

Among the investor-owned utilities best poised to profit from the new era of deregulation are PacifiCorp, Portland General Electric, Wisconsin Power & Light, Wisconsin Public Service Corp, and Southwestern Public Service Co of Texas.

Significant for wind power is that vulnerable utilities are more likely to re-negotiate long term contracts at above market rates, says report author Thomas Feiler. It is also not surprising that SCE, so pressured to retain its competitive position, is trying to overturn the current controversial auction of contracts for new renewables capacity, the Biennial Resource Plan Update (Windpower Monthly, February 1995). The two California utilities will have to cut costs dramatically to survive, especially if the $18 billion state energy industry opens up next year, he says. The transition from government regulation to market competition will cost utility shareholders $163 billion nationwide over the next five to ten years, concludes the report, issued in January.

Four important cost categories were studied to determine the 25 most vulnerable of the 3000 utilities studied: obsolete or uneconomical plants (such as PG&E's Diablo Canyon Nuclear Power Plant); above market, long term coal purchase contracts; above market long term power plant purchases; and deferred costs and other regulatory assets. The utilities eventually may be unable to recover $73 billion in investments in costly power plants, the report predicts.

"These utilities have to look at everything that is above market," says Feiler. "I can't see any reason why wind would be immune from that." But he stresses that the pressures are not necessarily bad for independent power producers. If their power plant were bought out by the utility, their margins of profitability afterwards might be higher than beforehand -- that is, they might become more profitable especially if their fuel costs are low.

The cost structure underlying a utility's rate structure, and the utility's flexibility as well as the size of its stranded investments, are considered crucial. SCE in fact is estimated to have the highest stranded investments of any -- of $9.1 billion. For its part, PG&E has stranded investments of $7.6 billion, the third highest after Commonwealth Edison Co of Illinois.

PG&E immediately took issue with the report, noting that it analysed utility cost structures from 1988 to 1993 and did not take into consideration its cost restructuring over the last year. "[The] assessment is based on old data," says the utility's Greg Pruett. He notes PG&E has now refinanced $5.5 billion in debt. Work force reductions are also expected to save $150-185 million yearly. The company is currently shedding its second round of 3000 workers. Commented RDI's Feiler, "PG&E does seem to be taking a large step in the right direction."

Deregulation is being driven by three fundamental forces, the report notes: the dramatic discrepancy in retail areas nationally, the economics of power generation that militate against having high fixed costs, and growing support from regulators and policy-makers for competition rather than cost of service regulation.

For instance, electric rates over the last five years have increased by more than 20% in New England to an average of $0.097 /kWh, but they have risen by just 2% in the North Central states to about $0.06/kWh. Competition also does not help every utility, says Feiler. For example, it might double rates in Washington state but reduce them in California.

As cost cutting pressures continue, utilities are also taking issue increasingly with the 1978 Public Utility Regulatory Policies Act (PURPA). Avoided costs were set partly based on future oil and gas prices, which actually turned out to be lower than had been anticipated. In New York, the State Public Service Commission has estimated that in 1997 seven of the state's utilities will pay $1 billion more because of PURPA than if they bought power on the open market. Niagara Mohawk Power Corp bought more of these contracts than any other, but it now says it has all the power it needs, and anyway could buy power elsewhere at $0.025/kWh. It estimates PURPA contracts cost it an extra $350 million a year and that by 1997 they will cost it $424 million. Such a scenario does not auger well for wind plants being built in the region.

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