Competition and power supply: threats and opportunities for distribution systems.

There has been an increase in wholesale competition since the passage of the Energy Policy Act in 1992. In wholesale competition, distribution entities get to choose the power supplier. But we now face retail competition, where consumers make that choice.

Retail wheeling and wholesale competition can both have dramatic impacts on G&T and distribution cooperatives. Approximately 728 distribution co-ops own and have all-requirements contracts with G&Ts. One-hundred and twenty three coops buy most or all of their wholesale power from TVA or power marketing administrations. And 56 distribution co-ops buy power from IOU suppliers.

The key questions are these.

* How has wholesale competition impacted the G&T-distribution system relationship?

* How are cooperatives that are members of G&Ts impacted in states with retail wheeling?

* And how are co-ops that don't own G&Ts impacted by wholesale and retail competition?

The Energy Policy Act revolutionized the wholesale power market by giving wholesale customers vastly increased access to transmission, opening up new competitive power supply options. Wholesale customers include cooperatives and other utilities that buy power for resale to end-use consumers.

FERC Order Numbers 888 and 889, issued in 1996, set out general conditions on how wholesale customers can obtain transmission service. One result has been an increase in the number of power marketers and independent power producers seeking to profit in this new market. Another result is the availability of new power supply options, typically shorter-term in nature and often at lower cost.

Significantly, FERC did not nullify existing long-term power contracts, such as G&T all-requirements contracts. For the 728 distribution co-ops that are members of G&Ts, we can say something definitive. The passage of the Energy Policy Act and the emergence of wholesale competition did not directly impact the G&T-distribution system relationship with regards to the all-requirements contract. It has, however, had an indirect impact.

But the passage of state retail wheeling, while it does not directly impact the contract, it does impact the relationship - at least in one significant sense. If consumers have a choice and buy power from a supplier other than the G&T, the distribution cooperative will still recover its "wires" charge, but its power requirements will have decreased. In retail wheeling, the distribution co-op is still contractually obligated to buy all of its power from the G&T. It just may have fewer requirements, and that could be a problem for both the G&T and the distribution system.

Since the passage of the Energy Policy Act, the price of power in the interruptible economy and short-term markets has fallen significantly. In 1992, one G&T's average purchase price for this type energy was $25 per megawatt hour. By 1996, this fell to under $21 per megawatt hour. In addition, in some regions of the country, new 5-year firm wholesale power contracts are said to be available at 29-35 mills per kilowatt hour.

Cooperatively owned G&T firm wholesale power delivered to member co-ops has also fallen in price - from an average of 44.9 mills per kilowatt hour in 1990 to 43.2 mills in 1995 - a 4% decrease. But some G&T power prices have not fallen to the levels now said to be available, at least in the short run, in the wholesale power market.

The situation is this. Wholesale competition, combined with large amounts of surplus generating capacity, new lower cost, more efficient generation technologies, current low natural gas prices, and the existence of new players with deep pockets willing to build market share by selling at or below cost, have resulted in extremely low prices in the bulk power market.

In some regions, many G&T's are weil positioned to meet - and beat - this competition. But these low, shorter-term prices have led some co-ops to ask if the benefits achieved through joint ownership of generating assets through a G&T still exist. At the same time, some power marketers and IOUs are courting co-ops, raising questions about the unity and future of our program.

A similar discussion is occurring among some co-ops that buy power from TVA or power marketing administrations. Such cooperatives don't face all of the same legal obligations as those that are members of a G&T, but the planning and risk factors that must be faced are similar.

We do not preach unity for its own sake. Distribution systems lie at the core of our program, and they and we must act to ensure their competitive advantage and long term success. However, the wholesale power issues that impact distribution co-op competitiveness must be carefully examined. These are the issues we will address:

1. The nature of the all-requirements contract. What is the contract, and what are the rights and risks inherent in the distribution/G&T relationship?

2. The changing environment. Why has it changed, and what wholesale power purchase options are available to distribution systems and under what conditions?

3. ...