COMPETITIVE FRANCHISE PROPOSAL

[Matt Freedman <freedman@citizen.org>]

  COMPETITIVE FRANCHISE PROPOSAL SUMMARIZED
  DOCUMENTS AVAILABLE FROM MASSACHUSETTS AND CALIFORNIA
  
  One of the greatest challenges of restructuring the
  electricity industry will be addressing the issue of market power
  in a reconfigured market.  Consumer and low-income advocates fear
  that individual customers will be unable to capture the benefits
  of competition, which will flow instead to large industrial users
  of electricity.  A possible way to address this issue is
  employing aggregation that permits numerous individual users in a
  given geographical area to bargain collectively for electricity
  services.
  
  Critical Mass has several documents available on the topic: 
  
       -- a summary of the Towards Utility Rate Normalization
       (TURN) community access proposal in California.  TURN is a
       ratepayer advoacy group.
  
       -- Massachusetts state Senator Mark Montigny's bill on the
       competitive franchise, and his testimony to the Department
       of Public Utilities (DPU) in support of the competitive
       franchise model.  
  
  Full copies of these materials are available in ASCII (text) or
  WordPerfect 5.1 (uuencoded) format and can be obtained by sending
  an email request to Critical Mass (cmep@citizen.org).
  
  A summary of the Competitive Franchise model, taken from Senator
  Montigny's testimony to the Massachusetts DPU, follows.
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  SUMMARY OF COMPETITIVE FRANCHISE PROPOSAL
  
  The competitive franchise is a popular proposal for implementing
  aggregation.  This model allows communities to purchase
  electricity services and, in theory, do so more effectively than
  could isolated consumers on their own.
  
       How would such a model work?  Senator Montigny's testimony
  to the Massachusetts Department of Public Utilities on behalf of
  his proposal is summarized below.
  
  INTRODUCTION
  Successful electricity industry restructuring in the public
  interest should achieve three goals: (1) economic savings for all
  customer classes; (2) environmental protection and the economic
  efficiency; and (3) assured public accountability.
  
  MASSACHUSETTSDITIONS
  The Massachusetts economy needs electricity restructuring.  Local
  utilities have some of the nation's highest electric rates,
  including three of the 12 highest rates for industrial users.  As
  a result, companies like Raytheon, the state's largest employer,
  used the threat of departure to bargain for lower prices.  "These
  conditions require comprehensive change that is focused not only
  on generation and transmission, but also, and perhaps most
  importantly, on the retail level."
  
  THE CONCEPT
  To date, discussion of restructuring has not addressed the
  distribution level.  Failing to do so could harm consumers.  The
  competitive franchise addresses this issue and is a model for
  comprehensive restructuring.  Relying on traditional franchise
  law, the competitive franchise proposal resembles municipal
  franchising for services like cable television.  
  
  Specifically the proposal would allow municipalities to create a
  "Consumer Service District" that would function as a retail
  market that private utilities may bid to serve.  The resulting
  contracts would contain provisions to promote environmental,
  efficiency, and consumer protection goals and would be subject to
  state standards in these areas.
  
  CREATING A CONSUMER SERVICE DISTRICT
  A two-thirds vote by a municipal governing body would create a
  Consumer Service District and an Office of the Consumer Service
  District manager, answerable to the governing body.  The state
  Department of Public Utilities (DPU) would notify the current
  service provider on the municipality's intention to accept bids
  on providing electric services.  The incumbent utility would then
  be required to provide the municipality with information on
  existing facilities, plans, demand forecasts for the area, and
  other data to enable the municipality to prepare a request for
  proposals.
  
  ISSUING A REQUEST FOR PROPOSALS
  The Request For Proposals would contain a district profile, DSM
  provisions, integrated resource management plans, environmental
  protection requirements, DPU requirements, length of term data
  (expected at 10 years), low-income service and rate protections,
  demand forecasting expectations, and standard contract
  provisions.  Before the request is issued, the municipality will
  likely take the opportunity to negotiate more favorable terms
  with the incumbent utility.
  
  CHOOSING THE WINNER
  Once the municipality accepts a bid, direct negotiations of a
  contract begin, with either the current provider or a prospective
  new contractor.
  
  METHODS OF TRANSITION OF DISTRIBUTION SYSTEM 
  TO A NEW SERVICE PROVIDER
  Several alternatives for transfer exist.  The distribution system
  could be rented or purchased by the new provider, or the
  municipality could use eminent domain to take ownership.  "Given
  that the eminent domain formula specifies replacement value minus
  depreciation, there is a strong incentive for the disenfranchised
  utility to rent, or sell, its distribution system."  The bill
  provides for an administrative process for the eminent domain
  taking.
  
  EVALUATION AND ARBITRATION FOR EMINENT DOMAIN
  
  The municipality can request the formation of a three-member
  arbitration board, with representatives from the incumbent
  utility, the new provider, and the DPU, to determine the value of
  previous service provider's facilities.  The board would conduct
  hearings to "specify the valuation, schedule of payment, and
  schedule for transition in ownership of taken facilities and
  service."  The board would also conduct hearings on allegations
  of delays, with the loser paying the charges.
  
  STRANDED INVESTMENT
  To prevent the incumbent utility from hiking rates elsewhere and
  ensure the true competitiveness of the new contract, the
  legislation allows recovery of some stranded costs.  After the
  creation of the Consumer Service District, the incumbent utility
  can request that the DPU designate certain facilities and
  contracts as stranded.  The DPU make its determination based on
  whether: (1) the creation of the Consumer Service District is the
  cause; (2) the incumbent made adequate efforts to market its
  assets; and (3) the incumbent has no reasonable alternatives.
  
  The DPU would have authority to order the sale of any assets
  deemed stranded to establish the value through the market, rather
  than rely on administrative methods.
  
  The resulting loss would be set as the original cost minus
  depreciation (or other cost deemed prudent) minus the sale price
  of the contract or facilities.  Ratepayers would be responsible
  for no more than one third of the loss; the incumbent, no less
  than two thirds.
  
  DEPARTMENTAL REVIEW OF THE PROPOSED CONTRACT
  Once transition and stranded costs are determined, the DPU would
  review the contract to assure compliance with regulations.  If
  the contract is approved, the DPU would amend the incumbent
  utility's franchise to exclude the Consumer Service District.
  
  ANNUAL REPORTS AND FRANCHISE FEE
  The new provider would file annual reports to demonstrate
  compliance with contract terms.  A franchise fee, likely between
  two and six percent of gross annual revenues, would also be paid
  to the municipality's government. 
  
  SUMMARY
  Restructuring makes sense only to the extent that it benefits
  citizens. We should consider what is unique about energy, both
  its importance to survival and its impacts on the economy and
  environment.  Retail wheeling proposals have failed to consider
  the impacts on average consumers.  One should not assume that
  they will aggregate themselves into purchasing units with market
  power.  Because the competitive franchise begins with
  aggregation, the bill ensures that consumers have power wherever
  competition occurs.  "It means power companies will compete for
  their business, rather than vice versa." The franchise also
  offers revenues and planning flexibility to municipalities,
  stability and accountability at the distribution level to the
  state, and freedom to expand to well-run, low-cost utilities. 
  Finally, everyone will benefit from lower prices and rules
  designed to protect the environment, expand energy efficiency,
  and protect low-income consumers.
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