Staking claim to rural territories, IOUs challenge REC protections

Pam Boschee

News Editor

In the late 1800s, barbed wires crisscrossing prairies and rangelands often led to territorial disputes among ranchers in rural areas. Today, wires continue to be the subject of territorial disputes in many of those same regions, but the focus is no longer on fence posts strung with barbed galvanized wires. Instead, heads turn upwards to poles and towers with aluminum-steel conductors stretching for miles across croplands and pastures, and investor-owned utilities (IOUs) and rural electric cooperatives (RECs) have taken the place of the sparring ranchers.

Toeing the line

North Dakota`s IOUs-Montana-Dakota Utilities Co. (MDU), Northern States Power and Otter Tail Power Co.-were involved in this kind of dispute in the 1999 state legislative session. No final resolution was reached, however, when legislation intended to modify the state`s Territorial Integrity Act (TIA) was referred to the Electric Utilities Committee for further study.

In 1965, the North Dakota legislature passed TIA to prohibit public utilities from interfering with or duplicating REC service in rural areas. The IOUs contend, however, that over the years, TIA`s language has allowed RECs to serve virtually all newly annexed urban areas to the exclusion of public utilities.

MDU pointed out that it is essentially ringed by RECs around the four major cities it serves and, therefore, cut off from serving all new urban growth annexed to these cities. It claims to lose about 300 urban customers per year to RECs. These annexed areas contain what are generally considered to be valuable customers-upscale residential neighborhoods, industrial parks and shopping malls.

MDU says RECs were created to serve customers that could not be served without subsidization. No legitimate public need is now being served, said the IOU, when federal subsidies-including preferential access to low-priced federal hydropower, exemption from federal income taxes, and favorable financing arrangements through the Rural Utilities Service (RUS), an agency of the U.S. Department of Agriculture-are used to provide electric service to urban America.

For example, about 25 percent of the area inside Bismarck`s (the capital) city limits is currently served by an REC, Capital Electric. Over one-third of Capital Electric`s customers are located in urban Bismarck. According to MDU, about 80 percent of the load growth experienced by Capital Electric in the last two years was urban.

Dan Sharp, MDU Resources Group`s public information specialist, said MDU wants the law changed so “as a municipality annexes additional area, the REC keeps the customers it already serves in that area, but new electrical load after annexation would go to the IOU.”

Sharp thinks the law will very likely be changed, “but to what extent remains to be seen.”

On the other side of the fence, Harlan Fulgesten, communications and government relations director for the North Dakota Association of Rural Electric Cooperatives, said, “We think there`s no justification for giving IOUs any newly annexed areas of municipalities in service territories developed and served for 50 to 60 years, in some cases, by RECs. It makes no sense to grandfather existing customers to the REC and grant the right to serve all new customers to IOUs.”

Fulgesten points to “duplication of infrastructure and the creation of disorderly development that would raise costs and create safety hazards.” He added that RECs should be allowed to get the benefit of serving the new customers to spread out the cost of their infrastructure investments.

Fulgesten said, “The Act works very well as it is. We have not seen any justification or reason put forth to change it.”

RECs, in turn, want limits placed on municipal utilities` territories. The National Rural Electric Cooperative Association (NRECA) adopted a resolution at its annual meeting in March recommending that tax-exempt financing “not be allowed to be used to adversely acquire rural electric load or service territory” from RECs. NRECA said Congress should “grant tax-exempt funding for competitive purposes only if” it includes such a territorial restriction. The territorial provision would apply to rural electric system borrowers from RUS or co-ops with certificated service territory under state regulatory jurisdiction.

Joining forces adds clout

Utility cooperatives formed in the early 1900s when the rest of the country was being wired, and the wiring companies saw little profit in running lines from farm to farm or through small towns. Rural areas connected to the grid when President Franklin Roosevelt signed into law the Tennessee Valley Authority Act in 1933 and the Rural Electrification Administration (REA) in 1935. Residences and businesses agreed to join RECs and purchase power from them.

Although over 98 percent of rural America has since been electrified, a remote New Mexico ranching community benefited from the 1935 REA provisions just last September.

Socorro Electric Co-op completed construction of a 21.9 mile distribution line to reach 11 families in Riley, N.M. The line cost $228,000, most of which was provided by an RUS loan. The individual families put up from $1,000 to $14,000 as a down payment, depending on how far they were from the line. Their electricity was previously generated by owner-operated diesel generators, which residents complained were noisy, or photovoltaic systems that did not always generate adequate power.

Today, there are about 1,000 RECs providing service to more than 32 million consumers in 46 states. RECs` kWh sales amount to 7.4 percent of total U.S. electricity sales, and produce revenues of over $14 billion. RECs own about 33 million kW of installed electric capacity, or 4.5 percent of all capacity, and own and maintain nearly half the electric distribution lines in the United States.

Although the statistics cited above reflect a significant presence in the electricity market, electric co-ops also must face deregulation and competition. They, like IOUs, are increasingly looking at consolidation, diversification and alliances to capitalize on synergies and economies of scale.

The National Rural Electric Cooperative Association (NRECA) reported there have been 56 mergers involving 113 rural distribution systems in 20 states since 1980. The median number of customer meters served by the RECs was 5,122, affecting 1.2 million customers. (see table) Also during that period, three generation and transmission cooperatives merged.

In January, a merger of three electric co-ops formed the third-largest Michigan-based power company. Customers of Top O`Michigan Electric Co., Great Lakes Energy Cooperative and Western Michigan Electric Cooperative voted to merge the three companies into one, now called Great Lakes Energy Cooperative.

The new company serves 106,000 homes and businesses in 26 Michigan counties. The three co-ops sold 826 million kWh in 1997 for a combined revenue of $77 million. The co-op is also one of the state`s largest independent retail propane companies.

With deregulation literally around the corner, Great Lakes Energy officials view the merger as the most effective way to prepare for competition.

“The merger makes us a larger, stronger and more efficient competitor,” said Ed Doss, president and CEO. “It strengthens our position in our niche of serving residential and small business customers.”

In North Carolina, an electric co-op turned to diversification as its strategy for survival. Blue Ridge Electric Membership Corp invested in a for-profit utility, Blue Ridge Energies, which sells propane gas, fuel oil, diesel fuel, kerosene and commercial gasoline to a 13-county area. Blue Ridge Electric`s 40 percent ownership in Blue Ridge Energies was touted as a “strategic first step” in continuing to provide affordable power to rural areas, said Blue Ridge Electric CEO Doug Johnson. “We`ll use the profits to ensure we have the resources to provide energy in an area that has difficult terrain, lots of rock, sparse population and tough weather conditions.”

Joining forces to keep power afford- able has also been the motivation for the formation of power marketing alliances, such as the following. (See sidebar for a profile of Pacific Northwest Generating Cooperative)

– EnPower Services Inc., La Crosse, Wis., is the sales and marketing organization for 76 electric co-ops in the Upper Midwest. It recently formed a strategic alliance with Foremost Farms USA, one of the top five dairy co-ops in the United States, to decrease energy-related costs, enhance energy efficiency and maximize profitability.

– EnPower also formed an alliance with Cenex Harvest States to increase the sale of electricity and propane. Nearly 50 EnPower-affiliated electric co-ops are in discussions with about 100 Cenex Harvest States propane co-ops in the Midwest.

– The Alliance for Cooperative Energy Services Power Marketing was initiated by Indiana`s Wabash Valley Power Association late last year when it became the power marketer`s first member generation and transmission (G&T) co-op. Wabash`s CEO Ed Martin, said, “Now is the time for G&Ts to maximize their natural ability to work together as a major player in power marketing and to provide their member systems with the lowest possible prices.”

Forming partnerships to provide communication services is another strategy co-ops share with IOUs in their attempts to sustain or increase revenues. In Texas, uniView Technologies Corp. launched a web presence and rural Internet Service Provider (ISP) connectivity for Mid-South Electric Cooperative to provide interactive and e-commerce services to the co-op`s more than 17,000 regional customers.

To establish the co-op as an ISP, uniView built a special hub in Huntsville, Texas.

Kenneth Camp, Mid-South Electric`s general manager, said, “With increasing utility competition and a great customer demand for interactivity in rural areas, we needed a unique solution to remain competitive. We will continue to work with uniView to expand the hub and enhance these value-added services.”

The changes being made by co-ops demonstrate once again that necessity appears to be the mother of invention-or at least adaptation. Like IOUs, co-ops are seeking new strategies to keep their customers. Whether urban or rural, customers are not taken for granted, and any complacency about their retention seems to have gone the way of the kerosene lamp.

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RECs maintain nearly half the distribution lines in the United States.

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PNGC PROVIDES MUSCLE FOR RURAL CUSTOMERS

Pacific Northwest Generating Cooperative (PNGC), Portland, Ore., is owned by 11 electric cooperative utilities that serve primarily rural customers throughout the Northwest. It annually purchases more than $100 million in wholesale power for its members, who in turn have more than 500,000 retail and wholesale customers.

PNGC received a power marketing license from FERC in 1996, and supplies 30 percent of the power for its members.

Load aggregation provides PNGC with the muscle to gain leverage on market prices and options. The average power pool requirement is about 400 MW, said Pat Reiten, PNGC`s vice president for marketing and public affairs. The systems are spread out with the area west of the Cascade Mountains being primarily residential, and the area east of the Cascades consisting of heavy irrigation demands. Overall, 60 to 70 percent of PNGC`s power needs are residential.

PNGC relies heavily on the Bonneville Power Administration (BPA), which controls 80 percent of the high-voltage transmission in the area, according to Reiten. “Seventy percent of our combined power comes from BPA.” PNGC has general transfer agreements with BPA for delivery of nonfederal power, which Reiten points out is “extremely useful for eastern and southern Idaho.” BPA charges back a predefined cost to the member cooperatives for the transmission provided, avoiding pancaked rate charges.

Commenting on FERC`s recent proposal to require utilities to join regional transmission organizations, Reiten said that PNGC is anxious for federal legislation to guarantee guidelines and time lines. “The market may not resolve monopoly transmission on its own.”

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The Clarion Energy Content Team is made up of editors from various publications, including POWERGRID International, Power Engineering, Renewable Energy World, Hydro Review, Smart Energy International, and Power Engineering International. Contact the content lead for this publication at Jennifer.Runyon@ClarionEvents.com.

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