THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Sunday, February 12, 1995 TAG: 9502110054
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY DAVE MAYFIELD, STAFF WRITER
LENGTH: Long : 204 lines
F. Kenneth Iverson has had electric-utility executives dancing like marionettes since he started talking last year about building a new steel mill in Virginia or some other southeastern state.
Where the chairman of Charlotte-based Nucor Corp. decides to build the $500 million factory will depend a lot on how much utilities are willing to cut rates.
``We have never put a plant anywhere where we have not negotiated on rates,'' he says.
Welcome to Utility Economics 601. It's a graduate-level course that master bargainer Iverson conquered some years ago. Now, a lot of economic developers, utility managers and other manufacturing executives are hurrying to enroll.
The subject is competition in the utility industry: how to use it to your advantage and how to keep it from being used against you.
It all sounds rather strange. After all, isn't the utility industry supposed to be one of those highly regulated monopoly businesses?
Yes. But changes are afoot: big changes.
Some utility policymakers envision a world in which large users of electricity - factories, shopping malls, even households - can buy power from a utility half a continent away. In California, regulators are driving toward this so-called ``retail wheeling'' as early as 2002.
While it's not clear Joe Homeowner will ever choose a power supplier the way he picks a long-distance phone company, there's an increasing likelihood that big businesses like manufacturing companies will do just that.
Three years ago, Congress gave wholesale buyers of electricity - those that purchase power from utilities and then resell it to homes and businesses - the leverage they needed to bypass local utilities to buy cheaper power. That's helped big electric cooperatives to hammer utilities like Virginia Power for lower rates.
This rate-cutting encouraged retail customers with the most clout - factory operators - to get harder-nosed in their own dealings with utilities. These manufacturers have concluded that it's only a matter of time before regulators free them to shop around for power too.
So big electricity buyers like Nucor, which have always pitted utilities against one another when scouting sites for new plants, are holding out for ever-deeper rate cuts.
And even companies whose factories aren't going anywhere are extracting cheaper prices from longtime power suppliers. In return, they make long-term commitments not to build their own generating plants or bring in power from somebody else.
Each of the Big Three automakers, for example, recently signed 10-year deals with Detroit Edison Co. The contracts could knock as much as $400 million off the power bills of the carmakers' Michigan plants over the next 10 years.
Baltimore Gas & Electric Co., Duke Power Co. in the Carolinas and Commonwealth Edison Co. of Chicago are among scores of other utilities that recently offered substantial discounts to new or existing factory operators.
``Everybody wants that industrial load,'' says Randy Wheeless, a spokesman for Charlotte-based Duke. ``In our case, our rates are already lower-than-average. But we felt like we needed something more.''
Virginia Power, the state's largest utility, has been active in this regard. It's asking the State Corporation Commission to approve two new incentive programs for its major industrial customers.
One would give its 25 largest customers advance notice of the next day's rates for power on an hour-by-hour basis and let them shift production to lower-cost hours. Another would allow Virginia Power to custom-build and operate steam- and electricity-generating plants at factory customers' sites.
Virginia Power even went so far as to ask this year's General Assembly to rewrite utility law so it's free to negotiate individual deals with any number of big customers. That proposal was withdrawn, partly because of opposition from consumer advocates.
Virginia Power says its talks with Nucor will be unaffected by the bill's withdrawal because, at double the demand of its current largest customer, the steel company belongs in a rate by itself. Nucor is considering the small town of West Point, about 35 miles west of Richmond, for the 500-employee mill. Its 160 megawatts of peak electricity demand would represent about 10 percent of Virginia Power's total industrial-customer base.
``We want to be viewed as someone who is creative when dealing with industry,'' says E. Paul Hilton, Virginia Power's manager of rates. ``The message from our major industrials is we need to do more. We need to find ways that enable them to be more competitive in a global market.''
Hilton and rate managers for other utilities say they're going on the offense now with incentive packages for big customers because they don't want to be playing defense later.
``If they were to react to something when it already existed, it would be too late,'' agrees utility analyst Thomas E. Hamlin, a senior vice president for Wheat First Butcher Singer Inc. of Richmond.
This trend toward competition is getting increasing attention from economic-development officials.
As utility rates and services become more negotiable, they're increasingly becoming a ``threshold decision'' on where new factories are built, says Virginia Commerce and Trade Secretary Robert T. Skunda. He thinks utilities like Virginia Power need more flexibility under state law to bargain with prospects.
Consumer advocates and environmentalists worry, however, about the consequences of a more freewheeling utility marketplace.
Allowing power companies to do things like cut individual deals with big customers risks creating a ``Pandora's box,'' says Jean Ann Fox, president of the Virginia Citizens Consumer Council.
Each new deal opens up demands for even more special treatments, Fox warns. ``It'll never end.'' Eventually, she says, households will be left holding the bag, paying higher electricity rates to cover the rampant price-slashing at the industrial end.
Some consumer advocates also worry what will happen to residential customers of high-cost utilities, when those utilities' best customers are ``cherry-picked'' away by cheaper power producers.
In that case, the losing utility could be left with too much capacity, the cost of which will have to be spread out over its remaining fewer customers.
This so-called ``stranded investment'' is one messy consequence of competition. And it's why utility regulators will try to control damage as they crack open the doors to a freer marketplace.
Groups like the Southern Environmental Law Center worry, meanwhile, that as factories' electricity costs plummet, many big companies won't be nearly as motivated to conserve energy. Cutting pollution at the industrial level, then, could be harder to achieve in the years ahead.
Virginia Power President James T. Rhodes acknowledges the risks, but says there's no stopping the trend toward competition.
``The only thing that is unclear,'' he says, ``is how far and how fast the competition will come.''
Rhodes says he's trying to move the utility toward a more freewheeling approach - one step at a time.
``There are some utilities who want to go from A to Z in a year or two,'' he says. ``There are others - we call them the `just say no' crowd - who want to keep everything the way it is. We're not in either one of those camps.''
Rhodes says he's not sure any power company will do better in the more open environment than as a highly regulated monopoly. It's a concern felt on Wall Street too. The 20 percent average drop in electric-utility stock prices last year, Wheat First analyst Hamlin says, was due partly to rising concern that competition will cut power companies' profits and historically high dividends.
But Rhodes is certain, he says, that even if Virginia Power suffers as the industry changes, it won't suffer as much as most other utilities. He says several factors will help insulate all of its customers, including households, from harm.
First of all, Virginia Power's industrial rates are already about one-fifth lower than the average for all U.S. investor-owned utilities. Secondly, only about 11 percent of its power demand is from industrial customers, compared to an industrywide average of about 25 percent.
That means it should be less vulnerable than most other utilities to losing those manufacturing customers. And it has a relatively small flank of factory customers to defend.
Virginia Power has kept its industrial rates relatively low because it has tightly controlled costs. It resisted the urge to build huge, expensive new plants in the past decade, opting mostly instead for small turbines or turning to independent power producers, who competed for the right to sell it electricity.
And Virginia Power has operated its big plants relatively efficiently. Its North Anna plant, for example, has been rated the lowest-cost generator among more than 70 nuclear plants nationwide. The Surry nuclear plant is among the 10 cheapest running.
Holding onto its edge hasn't been painless. Like every other big electric utility, Virginia Power has been paring its work force. In the past five years it has slashed some 3,000 jobs, to less than 11,000.
Rhodes says there's still room to cut, though it won't be as easy. The utility is in the midst of a ``re-engineering'' study to help identify future cost savings.
Its increased focus on the cost side of its business results from stronger downward pressure on its revenue side, again due largely to the prospect of competition. Virginia Power last filed for a general rate increase in 1992. Rhodes said it doesn't plan another filing in the ``foreseeable future.''
All U.S. electric utilities combined filed for only about $1 billion worth of rate hikes last year, down from $6 billion three years earlier.
If some of Virginia Power rate boss Hilton's plans work out, Virginia Power will get some help on the revenue side. At this stage of development in the competitive marketplace, he says, the utility stands to gain more business than it will lose.
``We've got a lot of assets and a lot of cards,'' he says. ``We're learning to play the cards in a way that's going to make us more competitive.''
One of the biggest opportunities, Hilton says, is winning contracts to supply power to big electric co-ops in the Southeast. It will likely mean selling power at lower rates than Virginia Power is accustomed. The utility recently had to cut rates to the Central Virginia Electric Co-op by about 10 percent, for instance, to lock in a 10-year supply agreement.
But Hilton says there's still a potential profit since Virginia Power's costs are lower than the industry average. The trick is not to cut prices too far.
``There are suppliers in the market right now in overcapacity situations who are willing to price electricity for less than it costs to produce it,'' he says.
If Virginia Power succeeds in nabbing some new co-op customers, the utility it takes the business away from may itself be hurt badly. And as a result its remaining customers may suffer too.
But that's one of the consequences of competition. There are winners and losers. Regulators will have a hard time keeping things from getting messy.
There are those who say the utility industry is headed for tremendous turmoil before the decade's out.
``I think it will happen in some states,'' Virginia Power President Rhodes says. ``I'm hopeful it won't happen in Virginia.'' ILLUSTRATION: JOHN CORBITT/Staff
Graphics
STAFF
POWER TO THE FACTORY
HOW VIRGINIA POWER MATCHES UP
SOURCE: Edison Electric Institute
[For complete graphics, please see microfilm]
by CNB