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"Leveling the playing field" with "postage stamp" electricity.

In October, 1995, the Oklahoma Legislature, through its Legislative Electric Utility Task Force, began a careful examination of issues involved in restructuring the state's electric utility industry. The Task Force was made possible through passage of Senate Joint Resolution 29, which provided for a series of information-gathering hearings. Funding for the Task Force Hearings was made possible by a grant from the National Conference of State Legislatures (NCSL).

The purpose of the Task Force was to try and settle on a public policy for electric service providers in Oklahoma that was agreeable with current and proposed federal policies, and at the same time, meet the changing needs and demands of citizens residing in and doing business in the state. Eventually, these Task Force hearings led to restructuring legislation being introduced and passed by the Oklahoma Legislature in both the '97 and '98 Legislative sessions.

All electric service providers operating within the state were allowed to make presentations to the Task Force at various times on a wide variety of issues. As the Task Force narrowed its focus, four key issues began to emerge as being critical to Oklahoma's electric utility restructuring effort. Those four issues were:

1. Feasibility of an Independent System Operator (ISO)

2. Technical Issues Associated with Electric Utility Restructuring

3. Financial Issues Related with Restructuring (taxes, transition fees, etc.)

4. Consumer Issues (social programs, stranded costs to be borne, etc.)

The Oklahoma Association of Electric Cooperatives (OAEC), a statewide association comprised of 28 electric distribution cooperatives and two generation and transmission cooperatives, outlined position statements for each of the four primary issues. All positions were recommended and approved by the OAEC Government Relations and Corporation Commission Board Committees, and were authorized by the OAEC Board of Directors.

It should be noted here that OAEC's comments on these critical issues were inclusive and dependent, meaning that support for any restructuring legislation in the state was contingent upon rural electric cooperative positions being incorporated into any subsequent industry restructuring bill.

"Leveling the Playing Field" with help from an unlikely source

Recognizing early on that "customer choice" of commodity electricity suppliers was going to be the single-most important theme of industry restructuring in the state, managers and directors from Oklahoma's electric cooperatives began to discuss the ramifications of "choice," how each distribution cooperative would be impacted, and, consequently, how the two cooperatively-owned G&Ts would be affected. Prices for both wholesale and retail electricity among all Oklahoma electric utility providers were already among the lowest in the nation, so how could "choice" be of benefit to both consumers and utilities? According to state REC managers and directors, these issues involved defining the terms of "fair and equal" competition.

How could Oklahoma's electric distribution cooperatives compete on a level playing field when they: (1) had 3.9 consumers per mile compared to the IOU's 26.3 and the municipal's 69.2 consumers per mile; (2) had kWh sales that averaged more than 14 times less per mile of powerline than sales of the state's two largest IOUs; and (3) had more than 2 and 1/2 times the miles of distribution powerline than the IOUs combined? The answer to these questions was found at an unlikely place: the United States Postal Service.

RFDs and RECs

Beginning in 1896, the concept of "Rural Free Delivery," or RFD, was incorporated into the operations of the U.S. Postal Service. For the first time, rural Americans were afforded the same opportunity for daily mail service as that of their urban counterparts. The "Patrons of Husbandry," also known as the National Grange, demanded Congress for rural mail service. On October 1, 1896, Congress agreed and the first Rural Free Delivery routes were established. Within five years the number of RFD routes had grown to more than 1200, serving an estimated 879,127 rural customers. Today, some 102 years after its inauguration, more than 57,000 RFD routes serve in excess of 25 million rural customers all across the United States.

Through Rural Free Delivery and Parcel Post (which came about in 1912), rural Americans were empowered to begin commerce with the "outside" world. In today's world of technology, electricity and telecommunications have become the pathways for rural commerce. The quest for "fair and equal" opportunity for commerce among electric utility providers begins by implementing a method which equalizes costs associated with distribution access. The mission of RFDs and RECs thus become the same: bind the nation together with a universal, reliable and equally accessible system of delivery to end-use customers everywhere, every day.

The Distribution Equalization Concept

With the assistance of consultant Michael Moore of Oklahoma City-based C.H. Guernsey & Company, the OAEC staff, Government Relations and Corporation Commission Committee members began to develop the concept of distribution equalization. In broad form, the concept would provide the following:

1. All retail consumers would be charged for distribution service on a consistent basis, regardless of geographic location or utility providing service, through a set of Oklahoma Corporation Commission-approved uniform statewide distribution access and delivery charges.

2. Facilitation of competition by allowing all energy sellers to quote delivered prices to all retail consumers statewide.

3. Establishment of a statewide pool for distribution access and delivery revenues

4. The Oklahoma Corporation Commission designs statewide distribution access and delivery charges based on current utility revenues and existing OCC-approved utility rates.

5. Access and delivery charges would be paid by retail consumers to distribution system owner/operators.

6. Distribution owner/operators would receive net payments based on pool revenues.

7. Revenue growth would be allocated to distribution owner/operators based on each individual system's growth.

The statewide "pool" would be used to achieve an equalized, Oklahoma statewide distribution access and delivery charge. It would include both investor-owned and Cooperatively-owned utilities, and municipally-owned utilities if such municipal utility authority or city council has opted to participate in "customer choice."

(Note: Restructuring legislation passed in both 1997 and 1998 by the Oklahoma Legislature automatically includes IOUs and Co-ops in customer choice provisions, but sets forth an "opt in" provision for municipally-owned utilities.)

Pool funds could be administered by either the Oklahoma Corporation Commission (OCC) or an OCC-approved accounting firm, with bids for service and administration for five-year periods. The administrative cost of such an accounting firm, if selected, would be borne by the fund.

Initial Determination of Revenues

For utilities that generate electricity, initial distribution revenues would be determined by an OCC-approved, functionalized revenue study used to determine test-year distribution revenues. Non-generating utilities would have distribution revenues determined by subtracting purchased power costs from operating revenues for the designated test year.

There are also provisions for any changes that might occur to distribution revenues. Each owner/operator's initial portion of pool revenues would increase only by its growth revenue or the initiation by a distribution owner/operator of a new tariff filing, subsequently approved by the Oklahoma Corporation Commission. Two options for new tariff filings could exist: (1) System specific - the OCC reviews costs of only the distribution owner/operator who files; or (2) Industry-wide - OCC would review only the industry's index costs which are applicable to distribution owner/operators.

If a distribution owner/operator finds it necessary after a period of time to adjust upward his system's distribution access charge, then that system's access costs would become subject to both OCC and utility peer review. Only the adjusting system's customers would pay for any upward adjustment to the access and delivery charge; other pool participant's customers would not be responsible for the increase.

The Oklahoma Corporation Commission would review and approve the initial revenue filings by utilities in order to set uniform statewide access and delivery charges. After these initial filings, there would be no review provision allowed by the OCC on its own motion. Subsequent reviews would only be necessary for a utility or industry-initiated filing to change access or delivery charges.

Why fixed access and delivery charges?

The concept of uniform access and delivery charges may, at first glance, appear ludicrous and impossible to implement, especially among competing distribution owner/operators and fundamentally different utility groups, i.e., IOUs, Coops, and Municipals. However, there are some benefits in having fixed access and delivery fees, such as:

1. Uniform access and delivery fees provide strong encouragement to distribution owner/operators to control costs.

2. Uniform charges serve as protection to consumers against future increases in access and delivery fees.

3. Facilitates competition by allowing all commodity energy sellers to quote delivered prices to all retail consumers statewide.

4. Removes the "geographic isolation" factor from access costs.

Ultimately, the design of statewide access and delivery charges should reflect total distribution test-year revenues for eligible distribution system owner/operators. The Oklahoma Corporation Commission would design uniform access and delivery charges that incorporate the following: (1) revenues based on test-year allocations; (2) test-year customers, kW (demand) and kWh (energy); and (3) access and delivery charges that are differentiated by service level, i.e., residential, commercial and industrial. Once established, all access and delivery charges would go unchanged until new filings are approved for an owner/operator or for the industry as a whole.

(Note: Senate Bill 500 established that electric rates for all consumer classes shall not rise above current levels throughout the transition period.)

Revenue distribution and effects

Retail consumers of all classes would pay OCC-established uniform access and delivery charges, differentiated by service level. The "statewide pool" revenues, up to the total test-year revenues, would then be assigned back to distribution system owner/operators in proportion to initial revenue allocations for each owner. Any revenues that are above the total test-year revenues (resulting from load growth) would be allocated back to owner/operators based on system growth, including factors for customers, kWhs, and plant.

The effects of this revenue distribution would be two-fold. First, it provides all distribution owner/operators with their system's existing revenues initially. Second, it assigns revenue growth to those distribution owner/operators who are experiencing growth of their system.

The 'subsidy' issue

Critics of the distribution equalization concept point out that it appears to be nothing more than a subsidization of "rural" consumers by the urban utilities. This argument can effectively be refuted by calling attention to the fact that investor-owned utilities are already "subsidizing" their customers who live in rural areas, since these customers pay the same rates for service as their urban counterparts. The IOUs are thus using revenues from more densely populated urban areas to subsidize their rural, less populated (and more costly) service areas. The statewide distribution equalization concept allows all utilities to pool their distribution access and delivery costs and spread such costs to all electric-consuming facilities (by class), establishing a uniform fee for access to and "transportation" of energy across the entire state.

'Cooperative' efforts

Moving distribution equalization from concept to implementation consideration has been a cooperative effort by Oklahoma's electric co-ops, and that cooperation continues today. Over the past three years, many meetings have been held with directors, managers and employees concerning various aspects of restructuring, including distribution equalization. When called upon to attend Legislative Task Force hearings, Cooperative personnel responded with interest and enthusiasm. It has been a joint effort among boards of directors, Co-op managers and employees, and the Statewide staff to progress to this point, but much work remains to be done.

The next step...

Passage of two electric restructuring acts by the Oklahoma Legislature have laid the foundation for the distribution equalization concept. Senate Bill 500, authored by State Senator Kevin Easley (D-Wagoner) and State Representative Jim Glover (D-Elgin), was passed by the Legislature and signed into law by Governor Frank Keating on April 25, 1997. Section 4, article 12 of SB-500 contains a provision that authorizes the exploration of an equalized distribution access fee. Senate Bill 888, again authored by Easley of the Senate and Glover of the House, authorizes a study of uniform access and delivery fees for electric distribution owner/operators in Oklahoma. SB-888 was passed and signed into law on June 10, 1998.

A utility study group has taken the concepts under advisement and will make recommendations to the Legislative Electric Utility Task Force prior to the 1999 legislative session.

Harold Hale is the Director of Legislative and Regulatory Affairs for the Oklahoma Association of Electric Cooperatives (OAEC). He served 10 years in the Oklahoma House of Representatives. Prior to his election to the Oklahoma Legislature, Mr. Hale worked in the retail grocery business for more than 20 years. He currently is a registered lobbyist in the state of Oklahoma.

Sid Sperry is Director of Marketing and Member Relations for OAEC. Before joining the statewide staff in 1989, Mr. Sperry was employed by Alfalfa Electric Cooperative, Cherokee, OK, as Member Services Manager. He has also served as Manager of Communications at Verdigris Valley Electric Cooperative, Collinsville, OK.
COPYRIGHT 1998 National Rural Electric Cooperative Association
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1998 Gale, Cengage Learning. All rights reserved.

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Title Annotation:how Oklahoma's electric cooperatives successfully competed against rivals despite enactment of restructuring legislation by the state
Author:Hale, Harold; Sperry, Sid
Publication:Management Quarterly
Date:Jun 22, 1998
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