FERC Expert Says Alma May Escape Utility's Stranded Costs Claim

Alma, Michigan got a boost in its battle with Consumers Energy Co. (CE) over stranded costs should the city form a municipal electric utility. Two Federal Energy Regulatory Commission staffers, testifying as expert witnesses, agreed with most of the city's arguments and said that the Alma's debt to the private power company for stranded costs is at most $6.3 millionóor could be as low as zero.

A study commissioned by the city in 1994 concluded that residents and businesses would save 20% in rates, or $61 million over ten years if the city municipalizes, and that 95% of industrial and commercial customers would switch to the municipal system, along with 90% of residential customers. The winning supplier among eleven bidders participating in a subsequent test Request for Proposals promised another $11 million in savings over ten years.

These savings were put into question when CE attorneys announced that Alma's consumers would owe its shareholders $105 million, or $11,700 per customer, in stranded costs payments if the town municipalizes. The utility claim arose after a 1995 Federal Energy Regulatory Commission report, order 888, which said a utility's right to impose stranded costs "exit fees" would depend on whether the utility claimant had a "reasonable expectation of continued service." So the question addressed by the FERC was, whether the monopoly had a reasonable expectation of continued monopoly status in Alma.

The good news for Alma came when FERC expert David McAndrew said the private utility had a reasonable expectation that it would continue to serve Alma--based on the fact that no municipal utilities have been formed in Michigan for some 50 years--but only for 10 years (based on Consumers Energy's use of 10-year planning forecasts), significantly limiting the monopoly's stranded costs claim. They said the 10-year period began Jan. 1, 1995, when the company should have reasonably expected that losing Alma was a possibility, and would therefore end in 2004. In addition, he said that Consumers Energy should not be entitled to any stranded costs through 2001 because growing demand for its electricity is growing at a rate that exceeds the loss of Alma's 54-MW load.

The estimated $6.3 million would be incurred between 2002 and 2004óbut only if Michigan allows retail access as currently proposed by the Michigan Public Service Commission. McAndrew said that even the $6.3 million could also disappear if CE's planning period was less than 10 years or if Alma could show it could have obtained transmission service prior to enactment of the Energy Policy Act of 1992.A hearing in the FERC proceeding is scheduled to begin April 27.

"We're very pleased," Alma City Manager Doug Thomas said. Consumers Energy first said the city would owe $105.6 million, thenówhen it had to file a formal estimate with FERCólowered that to $56.1 million based on an expectation of continuing to serve the city for 30 years. A feasibility study indicated Alma could expect to save $68 million over 10 years if it formed a municipal electric utility.

Alma, a community of 9000 within 5.75 square miles, has a load of 55 MW, much of which serves a refinery and heavy industrial base. Because CE executives promised a court battle to stop any effort to condemn its distribution system, city leaders chose to consider building a new distribution system to buy power on the wholesale market and compete directly for customers with CE. The system would cost $18 million, financed with 25 year municipal revenue bonds.


Copyright (c) 1998 by the American Local Power Project