Florida: Deregulation -- will it zap us?

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Deregulation -- will it zap us? By Chris Boyd of the Sentinel Staff

February 25, 2001

It's hard to imagine a worse time to sell Florida on the deregulation of its electric industry.

As the state contemplates opening its wholesale power business to competition, all eyes are on California, where a botched restructuring plan has sent the power grid there into meltdown.

Florida is one of the last states to begin rethinking its energy-delivery system. Last month, a blue-ribbon task force formed by Gov. Jeb Bush presented its plan for the first phase of deregulation, the spinning off of the industry's power-producing sector. Throughout the remainder of the year, the group will continue studying the state's $13 billion electric industry, and a more comprehensive plan may emerge.

The first-step proposal, now in the legislators' hands, would require the state's large, investor-owned utilities to sell off their generating plants. It also would permit other power companies to enter the state, build new plants and sell the power to electric companies.

In principle, the resulting competition would increase Florida's energy supply and, ultimately, lower consumer prices.

Indeed, out-of-state companies such as Duke Energy, Dynegy Inc. and Calpine Corp. say they could build efficient new plants that would produce power for less than those now in operation.

Under existing state law, they're prohibited from building plants and selling the power to utilities at market rates. Deregulation would change that.

But as legislative committees have a go at the report from Bush's 17-member Florida Energy 2020 Study Commission, there are many questions. Lawmakers want to know what went wrong in California and how Florida can avoid similar problems. They want a thorough economic analysis of the deregulation plan, one that would show that residential and commercial customers would benefit from restructuring.

Energy needs on rise

Under regulation, utilities like Florida Power & Light Co. and Florida Power Corp. build plants to meet needs. The state Public Service Commission approves the plans and sets rates accordingly, guaranteeing utilities enough revenue to pay off their plants and make a profit.

That system has ensured that Florida always has more than enough power, and projections show the surplus lasting through this decade. However, the demand for electricity is growing fast. Forecasts suggest that by the end of the decade, consumption will rise by 11,000 megawatts, requiring more construction.

If deregulation is adopted, the state would let the market decide what to build. If the out-of-state power companies come through, new construction would not only meet demand, it would exceed it.

"Power prices are relatively high in Florida, compared to the rest of the Southeast," said Tim Eves, spokesman for Calpine. "New, energy-efficient plants would be very effective competitors."

Deregulation's proponents argue that competitors will rush into the market once rules keeping them out are dropped.

"Absolutely, deregulation can work," said Paul Sotkiewicz, director of energy studies at the Public Utilities Research Center of the University of Florida in Gainesville. "Rates will definitely be lower five, 10 or 15 years from now. The whole issue is creating a market that is truly competitive, where generators feel that they can win a fair return on their investment."

If the system doesn't work as well as Sotkiewicz predicts, the 2020 commission's white paper contains a fail-safe: If enough plants aren't built, state regulators would step back in and force power companies to build them. Details of exactly how that would happen are sketchy, but the provision would prevent power companies from investing little and raising prices as demand exceeded supply.

The mechanism of change is already turning. By the end of this year, the Federal Energy Regulatory Commission wants the nation's private utilities to relinquish their transmission systems -- the grid of high-tension lines that link power plants to the local distribution outlets. The state's Big Three utilities -- FPL, Florida Power and Tampa Electric Co. -- are ready to comply, with the creation of a federally regulated transmission company called GridFlorida.

The 2020 task force argues that the arrival of GridFlorida is the perfect moment to cut the plants loose. The commission says the electric industry is no longer a "natural monopoly," and that it ought to be divided into three components: generation, transmission and sales.

Of the three components, only transmission would remain tightly regulated. The sales component -- what consumers think of as their power company -- would buy electricity from the generating companies, which would own the plants. In principle, the generators would compete on price for contracts from the retail electric companies.

The plan presupposes a lot of plant construction. Unlike other states that can buy power from their neighbors, Florida's geography requires that it generate its own power. The long distances that out-of-state electricity would have to travel to reach the state's population centers make it uneconomical under routine conditions.

Companies see advantages

Florida's existing power companies say they're for deregulation, but it hasn't always been that way. For decades, the companies have operated without a problem, and their first response to an out-of-state interloper was a lawsuit.

When Duke Energy won approval from the PSC to build a plant in Volusia County and sell the output to the highest bidder, the Big Three joined together and sued, and last year they won a state Supreme Court ruling stopping the project. The incumbents argued that Florida law doesn't permit the construction of large, unregulated power plants.

The antipathy has vanished now. The incumbents and the so-called merchant plant builders are united behind the 2020 report. In it, each group sees benefits. The major utilities have embraced the notion of selling their plants to affiliated companies at depreciated, or book, value.If the state deregulates and the plants are sold, FPL and the other large providers would continue to function as power retailers. Consumers would hardly notice a difference at first; they would still pay their bills to the same companies.

For three years, the state would regulate wholesale power prices, giving the outsiders a chance to enter the market. After that, controls would be phased out and unfettered competition would begin.

In theory, the utilities and the generators would operate like any other market-driven companies -- the electric suppliers would compete on price to win contracts from the retail utilities.

The plan has detractors. The Florida Municipal Electric Association is one of the most vocal. It argues that allowing the transfer of power plants from the big utilities to their affiliated spinoffs at book value offers the companies potentially huge windfalls and potentially higher -- not lower -- electric rates for consumers.

"We think deregulation could be a good thing, but our chief concern is the way it's done," said Barry Moline, executive director of the association, which represents municipal power companies such as the Orlando Utilities Commission.

The issue concerns "stranded" benefits and costs, the differences that might exist between the market value of a power plant and its book value. Moline said the sale of Florida's power plants could fetch $15 billion in a free market, yielding a stranded benefit of $9 billion above their book value.

Because the plants were paid for under regulation, their costs were factored into consumers' utility bills, Moline said. If the plants are worth more than book, he said, the benefit should be determined and the money returned to customers in the form of rate relief.

Moline worries that the rate benefits that consumers now enjoy from paid-down plants could vanish under deregulation.

The regulated system sets rates based on the cost of production. A plant carrying little debt can produce power for less than one incumbered by a lot of debt. The municipal electric association says deregulated plants, which sell power at market rates, would not pass along the savings.

"If we don't do this right, we'll have higher prices, like California," Moline said. "But if we succeed, the consumer will benefit with adequate power at competitive rates."

The power companies disagree with Moline's analysis. In testimony last fall to the 2020 commission, Richard Lehfeldt of Teco Energy, parent company of Tampa Electric, said the company's plants are probably worth less than book value.

What are plants worth?

Uncertainty over plant valuation has led to fissures in the 2020 commission. Although its members unanimously endorsed the wholesale deregulation plan, several are having second thoughts about the power plant issue.

Sanford Berg, a commission member and director of the University of Florida's Public Utilities Research Center, said the power plants shouldn't be transferred to spinoff companies until their market value is determined.

"We do not know whether there are stranded benefits or costs," Berg wrote in a position paper released after the commission voted. "Without some estimates from the [PSC] or the Public Counsel, I am not confident that the transfer serves the public interest."

The big utilities are ready to fight their case. They have some of the state's top lobbyists at their disposal, and have political connections developed over generations.

The Legislature may find the issue too hot to handle. The reason: California. The Golden State's restructuring plan is threatening to undermine its huge economy.

Deregulation's champions say California started with the wrong assumptions. When the program was launched, the state was already operating at an energy deficit, forcing its utilities to import electricity from other states. At that point, out-of-state power was a relative bargain, and there was little incentive from merchant power companies to build plants in California.

By contrast, Florida has added enough new generating capacity to provide a 20 percent surplus. The Florida Reliability Coordinating Council, which monitors the state's needs, forecasts reserves to remain near that level throughout the decade.

Competitive companies and the investor-owned utilities say that private power companies wouldn't be jostling for access to Florida because they couldn't produce power more cheaply than the existing plants.

"We believe that the proposed system is fair to all of us, and will ensure that our customers benefit from competition," FPL spokesman Bill Swank said.But Swank admits it's hard to find a problem with the regulated system.

"We're not like California," Swank said. "The regulated system we have in Florida has served the state's customers very well. Our reliability is higher than the national average. California hasn't built a plant in 10 years, but right now FPL has $1.3 million in construction."

Indeed, state lawmakers are questioning whether anything needs to be done at this time.

"There is nothing requiring us to do this," said Sen. Debbie Wasserman Schultz, D-Weston. Sen. Tom Lee, R-Brandon, a committee member, said he doubted the Senate would act on the issue this year.

Christopher Boyd can be reached at cboyd@orlandosentinel.com or 407-420-5723. Copyright © 2001, Orlando Sentinel

-- Martin Thompson (mthom1927@aol.com), February 25, 2001


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