Ms. Lois Cashell
Secretary
Federal Energy Regulatory Commission
888 First Street, N.E.
Washington, D.C. 20426
Dear Ms. Cashell:
On May 10, 1996, the Federal Energy Regulatory Commission (hereinafter "FERC") published Order 888 as a final order for Docket No. RM95-8-000. Promoting Wholesale Competition Through Open Access Non-Discriminatory Transmission Services By Public Utilities, and Docket No. RM94-7-001, Recovery of Stranded Costs By Public Utilities and Transmitting Utilities. It is our understanding that Order 888 will allow for open access transmission and the recovery of stranded costs in the power industry. The intent of the order is to deregulate the electric utility industry and promote a competitive marketplace.
The Office of Advocacy commends your efforts to increase competition and acknowledges that deregulation will help level the playing field for small businesses. Open access transmission is critical to competition in the area of wholesale power. It will lead to greater technical efficiency, business opportunities to small businesses seeking to develop power generation facilities, and cost savings for small businesses and consumers in general. However, the Office of Advocacy in concerned about the enforcement of the order and the potential negative implications for small business. In that the Office of Advocacy of the U.S. Small Business Administration (SBA) was established by Congress under Pub. L. No. 94-305 to advocate the views of small business before federal agencies and Congress, we believe that it is imperative for us to present our concerns at this time.
Stranded Cost Recovery
Although the Office of Advocacy generally supports the concept of stranded cost recovery, Advocacy is concerned that the manner in which FERC plans to implement stranded cost recovery may impede competition. Order 888 allows for the recovery of stranded costs that are the direct result of deregulation. The stranded costs fees will be collected only for contracts entered into before July 1994. The amount of the fees will be determined via a formula contrived by FERC or through negotiations of the parties. Negotiated contracts for stranded costs recovery between the parties require the final approval of FERC.
Advocacy commends the Commission' s decision to limit the recovery of the stranded costs to fees directly related to the deregulation. However, Advocacy is apprehensive about the equitable distribution of stranded costs among a utility's customer base. As stated in our comment letter on the Notice of Proposed Rulemaking (NOPR), Advocacy supports the notion of stranded costs recovery in a manner that provides for an equal assessment of the costs to all customers. Advocacy contends that the direct assignment of stranded costs is a potential barrier to the competitive marketplace that may impede the growth of small businesses.
Advocacy recognizes that the recovery of stranded costs is necessary in the interest of fundamental fairness and to prevent the utilities from undergoing an undue burden. However, if the amount of the assessment of stranded costs to a departing customer is too high, customers may be unwilling to leave their current supplier to obtain a more competitive rate. Accordingly, competitors who enter the market may not be able to obtain the necessary customer base to become a viable contender in the industry. Similarly, if the recovery amount is too low, the remaining customers may have to bear an undue burden.
Determining the proper amount of stranded cost recovery is an integral step in the deregulation process. Sensitivity to the needs of small businesses is crucial to developing a competitive market. All entrants/participants should have an opportunity to meet the demands of the market.
On the surface, Order 888 addresses the problem by devising a formula to determine the allocated amount of stranded cost recovery. However, the formula can be abused by a company through the manipulation of the necessary financial statements of the parties. Moreover, the contracting parties may renegotiate the terms of a contract so that it is beneficial to some customers and harmful to others. Such abuse could be harmful to small businesses.
The Office of Advocacy recognizes the fact that the Commission will be monitoring the process, and that the Commission will make the final determination on whether the proper amount of stranded costs are being recovered. However, the Office of Advocacy is extremely concerned about the potential abuse of the stranded costs recovery process. As such, Advocacy respectfully requests that the Commission solicit its input, as well as the input of the small business community and small business organizations, when determining whether the proposed stranded costs recovery amount is fundamentally fair in terms of maintaining a viable environment for small businesses. In doing so, Advocacy, the small business community, and small business organizations may be able to assist in assuring benefits do not accrue to one class of customers at the expense of others. Regulatory Flexibility Act
The Regulatory Flexibility Act establishes that agencies shall endeavor to fit regulatory informational requirements to the scale of the businesses, organizations and governmental jurisdictions subject to regulation. Under the law, federal agencies are required to determine whether a regulation has a significant economic impact on a substantial number of small entities. In accordance with 612 of the Regulatory Flexibility Act (RFA) (5 U.S.C. 601-612), the Office of Advocacy is required to monitor agency compliance with the RFA.
RFA encompasses three types of entities-- small businesses, small organizations, and small municipalities. A small organization is a nonprofit enterprise that is independently owned and operated and is not dominant in its field. Small government jurisdictions include cities, counties, towns, townships, villages, school districts, and special districts with populations of less than 50,000. Small businesses are defined and determined through the Small Business Administration' s general size standards. In the public utilities industry, a small business is defined as a business which disposes 4 million MWh per year.
In the final order, FERC stated that a regulatory flexibility analysis was not necessary because the regulation will not affect a significant number of small entities. The basis of its conclusion was that currently, small entities make up approximately 11% of the electric utility industry. The Commission bases its calculation on the fact that although 50 of the 166 public utilities public utilities dispose of less than 4 million MWh per year, only 19 of the 50 are not affiliated with larger utilities. Advocacy contends that the Commission's conclusion is fallacious. Simple elementary school arithmetic reveals that 50 is approximately 30% of 166. By any mode of reasoning, 30% is a significant portion of an industry. Moreover, given the circumstances of the deregulation, the 11% is also significant. Simply to dismiss the small business community without analyzing and admitting the effects of the proposed regulation on small entities defies comprehension.
Advocacy further submits that given the circumstances, the Commission' s reliance on Mid-Tex Electric Co-op Inc. v. F.E.R.C., 773 F.2d 327 (1985) is misguided. In Mid-Tex Electric Co-op Inc. v. F.E.R.C., Judge Bork stated that in reviewing the Regulatory Flexibility Act, an agency must only consider the businesses that are directly affected by the regulation in terms of compliance. As such, the Commission concluded that it need only consider the small businesses that are currently in the industry in deciding whether to perform a regulatory flexibility analysis.
While the Office of Advocacy is aware of the Mid-Tex Electric Co-op Inc. v. F.E.R.C. case, the Office of Advocacy contends that an Initial Regulatory Flexibility report should have been provided in dealing with this regulation. The purpose of deregulation is to promote competitive markets in a particular industry and to perforate barriers to competition. Analogous deregulatory experiences have demonstrated that deregulation produces a rapid influx of new entrants into an industry. Advocacy submits that the Commission can reasonably expect a significant amount of new entrants into the utility industry at the inception of deregulation. In view of this, the Commission should have performed a regulatory flexibilitAssistant Advocate y analysis to determine the potential effect on small businesses as new entrants to the industry to insure that its rule would promote rather than hinder competition or reduce the benefits of deregulation.
In the past, other utilities have undergone deregulation producing remarkable increases in competition. In August 1982, the United States District Court for the District of Columbia entered a Modification of Final Judgment to deregulate the telecommunications industry. (See, United States V. American Telephone and Telegraph Company, 552 F. Supp. 131 (D.D.C.1982), aff' d 103 S.Ct. 1240 (1983). At the time of the order, there were thirteen companies with assigned carrier identification codes. Two years later, in 1984, there were 123 companies with assigned carrier identification codes. By 1992, there were 692 companies with carrier identification codes.(1) In a ten year period, the industry experienced a growth of over 530%. Many of the new companies were small businesses.
Clearly, the deregulation of the telecommunications industry had a significant impact on the marketplace, opening the industry to small business. It is reasonable to expect a similar type of outcome following the deregulation of the electric utility industry. Therefore, it is reasonable to assume that small businesses will be directly affected by the regulations that are being adopted by the Commission. Accordingly, the Commission should have analyzed the regulation as if changes in the industry's structure had already occurred. By using the deregulation of the telecommunications industry, or other similar industry, as a guide for determining whether the regulation may have a significant impact on a substantial number of small entities, the Commission may have devised a more realistic conclusion about the potential impact of this regulation on small businesses. Although such an analysis may be prospective in nature, it is nevertheless necessary in order to avoid the implementation of flawed public policy. The Office of Advocacy respectfully requests that the Commission consider the potential affect that a regulation may have on small businesses as they enter and compete in electric utilities market, to ensure the regulation does not erect barriers to competition.
If you would like to discuss this matter or if this office can be of any further assistance, please contact Jennifer A. Smith, Esquire. She may be reached either by mail at the above address or by telephone at (202)205-6943. Thank you.
Sincerely,
Jere W. Glover
Chief Counsel for Advocacy
Jennifer A. Smith
Assistant Advocate
END NOTE
1. Federal Communications Commission, Statistics of Communication Common Carrier, 1996 Ed., p.21.