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Electrical Utility Deregulation Should Spark Interest and Re-energize Industrial Users

Spring 1996

The Federal Energy Regulatory Commission ("FERC") has issued a proposed rule that will authorize electrical utility deregulation of transmission services. The rule is necessary to allow deregulation to occur in the retail markets. The proposed rule is generally referred to as the "Mega-NOPR." FERC anticipates that it will finalize this rule by June 1996. This rule, when finalized, will be an important first step in allowing industrial users to eventually make direct purchases of electrical needs from generating sources that are not necessarily located within the State of Wisconsin (commonly referred to as "retail wheeling").

In another important development, the Public Service Commission ("PSC") on February 22, 1996, released a report to the Wisconsin Legislature on restructuring the electrical power industry in Wisconsin. The Commission’s report contains recommendations about how and in which order to proceed to create fair and robust competition in the electrical industry in a manner which also protects and benefits the citizens of Wisconsin.

Key elements of the PSC plan include separating the vertically integrated functions of investor-owned utilities into generation, transmission distribution and energy services (commonly referred to as "unbundling"). The plan also will include improving competition in electrical power generation, including the construction of new power plants, while ensuring that Wisconsin customers continue to have access to the low costs associated with current power plants.

There are many important legal issues presented by these new federal and state rules and Wisconsin Public Service Commission initiatives. The most significant involves the authority and reach of FERC into the transmission markets. Obviously, to allow deregulation and competition in the retail markets by numerous power producers (generators), the existing utilities that control transmission lines that service the retail markets must be required to make those lines available for use by generators not connected to the controlling utilities.

There appears to be a substantial dispute about the extent of federal and state authority to regulate the transmission markets. Federal law allows states to exercise regulatory authority over retail service markets. Federal law also gives FERC authority over transmission lines that service sales over interstate commerce, whether going to wholesale or retail markets.

The issue then is to what extent can the Wisconsin Public Service Commission and FERC regulate transmission markets and how will those markets be defined. This jurisdictional issue/dispute will likely become an important issue as FERC moves to finalization of its Mega-NOPR. There may be a need for Congress to clarify this issue if electrical deregulation is to proceed smoothly without litigation.

Another substantial issue that will be faced by electrical utilities is the need to separate functions of generation, transmission and distribution in order to compete effectively in the new deregulated markets (commonly referred to as "disaggregation"). One of the many question presented by this issue is whether there will also be a need for corporate restructuring to accommodate this disaggregation of functions by utilities. Disaggregation will likely get substantial attention by FERC, the PSC and possibly Congress.

All of these developments should be watched closely by large industrial users of electrical power. The manner in which FERC and the PSC deal with these deregulation issues will dramatically impact the ability of large industrial retail users to purchase electrical power at significant cost savings on the open market. Godfrey & Kahn is watching these issues closely for its clients. Anyone interested in receiving a copy of the Public Service Commission’s February 22, 1996 report should contact any member of the Environmental Practice Group at Godfrey & Kahn.

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