Battle is on to broker deregulation solution

It's a hotly contested topic. And last week a Florida commission recommended a big first step: permitting competition in the wholesale power market.

By STEVE HUETTEL

© St. Petersburg Times, published February 4, 2001

TALLAHASSEE -- Walter Revell remembers the warning he received last summer when Gov. Jeb Bush asked him to tackle the issue of deregulating Florida's electricity business.

[AP photo] Electric power transmission lines span the downtown Los Angeles skyline.

"It's the most heavily lobbied issue since I became governor," Bush said, according to Revell. "There's acrimony among all parties, and the dollars at stake are enormous."

On Wednesday, the blue-ribbon commission Revell oversees recommended a first big step: permitting competition in the wholesale power market.

And true to Bush's warning, the cavernous hearing room where the panel acted was packed with men in dark suits representing companies that own a piece of Florida's $13-billion-a-year electricity business as well as those from outside the state that want to break into it.

An old hand at state government and politics, Revell put the best possible spin on the proposal's chances of becoming law in the Florida Legislature's upcoming session.

"I think there will be more lobbyists for it," he said, "than against it."

The high-stakes game involves some of the state's most powerful business interests and also multinational companies, such as giant Duke Energy, that are determined to come into the state. Ultimately it will involve everyone who pays an electric bill in Florida.

"This is as big as it gets," said state Sen. Tom Lee, the Brandon Republican who sits on the Florida Energy 2020 Study Commission and last year chaired the Senate's Regulated Industries Committee. "It's pressure-packed in that it's not just some special interests that are impacted, it's every Floridian."

The competing corporate interests seem pleased with the outcome, but consumer advocates and municipal power companies say the panel cut a sweet deal for corporate giants that will drive up electricity prices for residential users.

"This is a political deal to get Duke and the other merchants into Florida," said Barry Moline, executive director of the Florida Municipal Electric Association. "It makes no difference to them what happens to consumer prices."

The battle initially was a struggle between the state's investor-owned utilities and companies such as Duke Energy, Calpine Corp. and Dynegy Inc. that sell power across the country to the highest bidder.

Florida Power, Florida Power & Light and Tampa Electric teamed up in court and won a state Supreme Court ruling last year that blocked Duke Energy from constructing a plant near Daytona Beach.

But it's not just a battle between entrenched home state utilities and out-of-state interlopers seeking to build so-called merchant plants.

Organizations representing retailers such as Publix supermarkets and industries that use huge amounts of electricity weighed in on the side of the merchant plant builders in the hope that competition would drive down the prices they pay to keep electricity flowing.

Armed with teams of lobbyists and mountains of campaign contributions, the utilities blocked efforts in the Legislature last year to let the merchant plants in. That's when Bush appointed the commission to broker a solution.

The 17-member panel of politicians, academics and business people with no direct ties to the power business came up with a blueprint that had something for both sides.

Merchant power companies could come to Florida and build as many plants as they like. Established utilities could sell their regulated plants at depreciated values to affiliated companies that would compete head-to-head on the open market.

The plan essentially is one proposed by TECO, which has been aggressively buying power plant projects in unregulated states and changed its position on deregulation last year.

FP&L supports the deal. Florida Power, now a subsidiary of North Carolina-based Progress Energy, calls the plan a workable model but won't embrace it before seeing what changes legislators might make.

The merchants are happy with the outcome, too. "We feel confident what's being proposed creates a level playing field we can compete on," said Tim Eves, head of Calpine Corp.'s Florida operations.

Getting past roadblocks

Merchant power companies have announced plans to build some 20 plants across the state. But the state utilities have enough clout in the Capitol to block any proposal that didn't give them a piece of the action, said Michael Twomey, president of Florida Utility Watch.

"The investor-owned utilities have a 100-year head start on the campaign contributions, the schmoozing," he said. "When these (legislators) are young executives on the chamber of commerce, they're grooming them to run for city council or county commission."

The campaign contributions just last year were staggering.

TECO Energy, parent of Tampa Electric, gave $503,000 to campaigns, including $341,703 to the state Republican Party and $139,500 to the Democratic Party.

Florida Power Corp. contributed $223,000 to the GOP and $68,000 to the Democrats. FP&L gave nearly $95,000 to Republicans and $75,000 to the Democrats. That doesn't include contributions to dozens of legislative candidates in both parties.

The independent power companies also were active, though on a much smaller scale. Calpine, Duke Energy and Enron each donated more than $20,000 to the GOP and lesser amounts to the Democrats.

That doesn't count the money contributed by high-octane lobbyists that include former House Speaker Ralph Habin (Constellation Energy), former Bush lobbyist Ken Plant (Duke Energy) and Ron Book (FP&L), an aide to U.S. Sen. Bob Graham when he was governor.

"These are not dot-com lobbyists," said Lee, the Brandon senator. "They know how the game's played, and they play much more for keeps."

Even with that kind of corporate muscle behind it, the plan faces serious roadblocks at the Capitol.

California's bungled deregulation is being blamed for that state's rolling blackouts, skyrocketing power bills and utilities on the brink of bankruptcy.

Supporters of the Florida blueprint insist there are safeguards to keep the state from going down the same path:

Utilities could make long-term power contracts so they are not at the mercy of the spot market, as California was. The state could force them to build plants if supplies threaten to get too low. And customers would receive a three-year freeze on base rates, though they might pay more if fuel prices go up.

Still, the barrage of headlines about California could make the issue political toxic waste, especially for the many freshmen legislators.

Despite the commission's unanimous vote last week, several members expressed serious concerns about portions of the plan.

Rep. Ken Littlefield, R-Dade City, propped up a yellow light as he spoke Wednesday. "It can either mean stop or proceed with caution," he said. "I suggest we proceed with caution."

Lee said he wouldn't vote in the Senate for the proposal as written. He questioned why the state's utilities should get to sell plants built with ratepayers' money to affiliates at depreciated or "book" value.

That's a particularly thorny question in the nationwide debate over deregulation.

The Florida plants would fetch $15-billion on the open market, the Florida Municipal Electric Association estimates. That's $9-billion more than their book value -- money that should go to customers, the organization argues.

"We dispute (the association's) argument as bad policy and dispute their numbers completely," responded Richard Lehfeldt, TECO's senior vice president for external affairs.

In fact, TECO and other utilities argue that the older plants may be worth less than their book value.

When that was the case in other states, utilities were allowed to raise rates to make up the difference, called a "stranded cost."

For example, Moody's Investors Service estimated the stranded costs of TECO's plants at $300-million in 1998, two years before the utility agreed to major renovations to settle a lawsuit with the federal government, according to Lehfeldt.

David Struhs, secretary of the state Department of Environmental Protection, said the commission and Legislature should get an estimate of the plants' market value before acting.

"No one can say if it's a good deal or a bad deal," he said. "It's imperative that before we endorse this deal we find out what the value of these assets are."

But Revell, a former state transportation secretary and Florida Chamber of Commerce president, dismissed the idea of a cost study. An estimate would be based on so many theoretical assumptions that it would be "a mindless number," he said.

Cutting costs?

Perhaps the biggest unknown about the plan is the one most important to customers: Will my bill go up or down?

The municipal electric association estimates that annual energy costs in Florida will rise by at least $700-million and by as much as $1.6-billion.

Most of Florida's non-peak power is produced by plants that are 10 to 30 years old, the association says, and the debt on many has been paid off.

Without high debt payments, the plants produce power at low cost. But if the plants are sold to affiliates and unregulated, the association says, their power would sell at market rates.

Those rates would be higher than today because it costs new merchant plants more to generate power, according to the association.

Merchant companies, not surprisingly, dispute that. Computer models show a more efficient, cleaner-burning natural gas plant can cut wholesale costs $200-million to $300-million, Calpine says.

If the merchants didn't think they could compete on price, spokesman Matt Bokor says, why would they push so hard to get into Florida?

Sandy Woods, a commission member and accounting director for Publix, said consultants the chain brings in to lower its "nine-figure" electric bill always say they can't help in a state without competition.

More important, she said, is bringing the state more power generation to meet growing demand. In her four months on the commission, Woods was convinced opening the state to merchants was the best way to do that. She also was schooled in the politics of power.

"I learned the investor-owned utilities are very powerful," Woods said. "They like (the plan) and it's likely to get somewhere."

- Times researcher John Martin contributed to this report. Contact Steve Huettel at huettel@sptimes.com or (813) 226-3384.

What's proposed

Gov. Jeb Bush's commission on energy has recommended that the Legislature:

Permit out-of-state power companies to build "merchant plants."

Allow the state's established utilities to transfer existing power plants after three years to affiliates that could compete with merchants in selling electricity to investor-owned and public utilities.

Freeze retail base utility rates for three years, although increases in fuel costs and power purchases from other generators would be passed along to consumers.

By the end of the year, the commission plans to report to Bush on the possibility of "retail" deregulation. That eventually would allow consumers to choose among companies competing to provide power to their homes and businesses. -- STEVE HUETTEL

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