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Deregulation comes to power companies Non-utilities take a piece of the energy market

THE BALTIMORE SUN

First there were the airlines and the railroads. Then came the telephone company and financial institutions. Now it's the electric utility companies' turn to get a taste of deregulation.

In ever-increasing numbers, non-utility companies are producing power for the nation's households, promising low rates to attract business.

The push for a more competitive energy market received a major boost this month when Maryland's Public Service Commission ordered Baltimore Gas and Electric Co. to take bids from outside producers on new electric generating capacity. Before, BG&E; either built the plants itself or negotiated privately with other companies.

And the trend should gain even more momentum as Congress moves to revise a 57-year-old law governing public utilities.

One of the chief selling points for non-utility power producers is the potential savings to ratepayers. Merribel S. Ayres, executive director of the National Independent Energy Producers, contends that increased competition in generating power could mean a savings of 5 percent to 15 percent for consumers. Non-utility producers also say that if something goes wrong, and they cannot generate power at an agreed-upon price, their stockholders pay -- not consumers.

Some -- but not all -- utility companies oppose the new system. They warn that lower prices may prove illusionary. And %o consumers may unwittingly sacrifice reliable service, they say.

"It's the beginning of change and it's not going to be a change for the good," said Graham B. Painter, public affairs manager for the Houston Lighting & Power Co.

Until the late 1970s, with few exceptions, utility companies sold electricity generated at their own facilities. But the playing field changed in 1978 with the passage of the Public Utility Regulatory Act, which allowed cogeneration plants -- those that simultaneously produce electricity for the utility and steam for area industries -- into the power-generation business.

By 1986, non-utility generation had a capacity of about 25,320.6 megawatts, according to the Edison Electric Institute. A megawatt is a million watts. In the next five years, the amount of power generated by non-utility producers jumped by 78.2 percent to 45,126.7 megawatts, though it still accounted for only percent of the power produced in the U.S.

Non-utility companies built about half of the generating plants that began operation over the past two years, according to the National Independent Energy Producers. That boosted the amount of electricity produced by independents to 8 percent of the nation's total -- a percentage expected to double in the next decade, the organization said.

And this trend promises to accelerate if Congress passes the National Energy Security Act, which would dramatically change the way utilities do business. The bill passed the Senate in February; the House of Representatives approved a different version Wednesday. The measures now go to a Senate-House conference committee to resolve the differences.

Part of that bill would amend the Public Utility Holding Company Act of 1935 to allow non-utility companies to build power plants other than cogeneration facilities. Another provision would permit independent energy producers to transmit their power over the lines of one utility to another.

While actual regulation of electricity rates would still be in the hands of state regulators, many of the factors that go into setting those rates, including a company's capital base and financial viability, could be affected by the new federal laws.

The issue has divided the utility industry. Some companies believe the industry is heading down a dangerous road. Others foresee a healthier, more competitive business.

"It's going to restructure the utility industry, but the customer will never see it," said Daniel V. Flanagan Jr., coordinator for the Utility Working Group, which represents 37 utilities that support changes in the law.

A key reason for their support: Utilities will get a chance to shift the risk of building power plants to other companies. This is particularly attractive in light of the fiascoes of the late 1970s and early 1980s, when some utility companies were burned by building for future demand that never materialized. Others suffered overruns on large generating plants, particularly nuclear power plants.

"Its called divvying up the risk," Mr. Flanagan said. Many of the utilities supporting the group, including BG&E;, have independent power subsidiaries that could benefit from opening the field, he said.

As to reliability, Mr. Flanagan said that issue has been settled by studies by the General Accounting Office and other agencies that show independents to be as reliable, if not more, than the established utilities.

But other utility companies do not share this confidence.

Houston Lighting & Power, for example, gets 27 percent of its power from independent producers -- the result of pressure from state regulators, Mr. Painter said.

But the utility could have saved consumers $190 million a year if it had not been shackled by legal restrictions on generating power, he said.

From 1978 to 1988, the company was prohibited by federal law from building natural gas generating plants, even though

cogeneration companies were allowed to, Mr. Painter said. If Houston Lighting had been allowed to build the same type of plants, the company estimates it would be charging consumers $190 million less every year.

Mr. Painter also criticizes the reliability of independent producers. They often have high debt financing on their projects and are not subject to the utilities' rigorous requirements to provide power during natural disasters.

The question of independent producers' financial strength concerns Maryland People's Counsel John Glynn, the state official who represents ratepayers before the Public Service Commission. "The more dependent you are on them, the more dependent you are on their financial viability."

A certain amount of independent production is good, he said, but he worries about depending too heavily on companies whose financial strength may vary widely.

That skepticism is shared by officials of the Potomac Electric Power Co., which is part of the Electric Reliability Coalition, a group of more than 40 utilities opposed to changing the nation's power-generating system.

PEPCO, which provides electricity to Washington, D.C., and Montgomery and Prince George's counties, does not intend to increase the amount of power it gets from non-utility suppliers beyond the levels it has agreed to. The utility company's agreements would increase its non-utility power supply to about 10 percent.

Andrew W. Williams, vice president of energy and policy development for Pepco, said the company does not want to go further because of the effect that might have on its credit rating.

Meanwhile, Houston's Mr. Painter charges that the ultimate goal of the independent power producers is to sell directly to large industries and institutions. Such customers are plums in the utility business because they do not require a lot of maintenance. "They want to pick the cream of the crop," Mr. Painter said. "No one is proposing to compete for the residential users."

"The fixed costs of the electrical system would be spread over the remaining ratepayers, [increasing their rates]," Mr. Painter said. "You would have a rather efficient industrial system and then everybody else."

Selling power directly to industries would be done by transmitting power over existing utility lines to specific industrial customers, a practice called "retail wheeling." That's different from "wholesale wheeling," in which power is sold to a utility company.

Even though the proposed federal legislation prohibits retail wheeling, Mr. Painter said it will not be the last word on the issue. Retail wheeling is "absolutely the ultimate goal."

But supporters of changing the utility laws say independent producers are no longer interested in retail wheeling. "We have not embraced retail wheeling," said Ayres of the National Independent Energy Producers. "Houston Lighting & Power is attempting to confuse the world on that."

Power surge

=1

Percent of power generated by non-utilities

YEAR.. ..Percentage

1986.. .. .. .. 3.5

1987.. .. .. .. 4.0

1988.. .. .. .. 4.5

1989.. .. .. .. 5.2

1990.. .. .. .. 5.8

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