ML18305A689

Transmittal of Documents Referred to in Florida Cities Motion to Lodge Documents

ML18305A689
Person / Time
Site:	Saint Lucie, Turkey Point
Issue date:	12/22/1977
From:	Jablon R City of Alachua, FL, City of Bartow, FL, City of Fort Meade, FL, City of Ft. Pierce, FL, City of Key West, FL, City of Mount Dora, FL, City of Newberry, FL, City of St. Cloud, FL, City of Tallahassee, FL, Florida Municipal Utilities Association, Fort Pierce Utilities, Gainesville-Alachua County Regional Electric Water & Sewer Utilities, Lake Worth Utilities Commission, Orlando Utilities Commission, Sebring Utilities Commission, Spiegel & McDiarmid, Utilities Commission of New Smyrna Beach
To:	Rutberg J NRC/OE
References
50-250A, 50-251A, 50-335A, 50-389A
Download: ML18305A689 (159)

Text

E SPIEGEI I

C-MCOI*RMIQ J. STRFBEL ROBERT A. JABLON JAMES N. HORWOOQ A~N J. ROTH Fi'I*NCES E. FRANC.'S QAMIEL,I. QAVIQSON THOMAS N. MCHUGH, JR LAW OFFICES SPIEGEL 8 McDKAR>QD 2500 VIRGINIAAVENIJE. N. W.

WASHINGTON. D. C. 20037 TELEPHONE I202I 333 4300 December 22, 1977 PETER K. MATT QANIELJ. GUT i MAN QAVIQ R. STRAUS BONNIE S. GLAIR QAVIQA. Gl>CALONE ROBERT HARLEY BEAR JAMES CARL POLLOClC Mr. Joseph Rutberg, Director Antitrmt.Division, OELD, Nuclear 'Regulatory Commission

'ashington, D.C.

20555.

Re:

I Florida Power

& Light Comoan

'(South Dade Plant),'Docket No.

P-636-A (St. Lucie Plant, Unit Nos.

1

& 2), Docket Nos.

50-335A and 50-389A; (Turkey Point Plant, Unit Nos.

3

& 4), Docket Nos.

50-250A. and 50-251A,.

Dear Hr. Rutberg:

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h Zn accordance with you the documents referred t'o in

. "Motion to Lodge Documents."

number in the pleading..

- request, E am sending you copies of Florida Cities'ctober 25,

1977, The documents are identified by'

-. Very truly.yours, Robert A. Ja(ion

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, Attorney for the Ft. Pierce Utilidj',

Authority of.the City of Ft. Pierce,,

the Gainesv'ille-Alachua County'egional Electric Vater and Sewer Ut'lities, the Lake Vorth Utilities Commission, the Utilities Commission of New" Smyrna Beach, the Orlando Utilities Co~ssion, the Sebring'tilities Commgssion, and the Cities of Alachua, Bartow, Ft. Meade, Key Vest, Mount Dora, Ne=berry, St. Cloud, and Tallahassee,

Florida, and the Florida Municipal Util.ities Association

.e RAJ:rb

~ Enclosures cc:

All parties;to the abo'e-cited proceedings

p lPilITED STATES OF A"AFRICA SEZOPE 7EjE NUCLEAR REGULATORY CO%~!ISS ION In ohe ~~rter of:

Florida Power

& Light Company, (St. Luc"e ~lant; Unit Nos..l

& 2)

'lorida Pow'er

& L-ght'Company, (Turkey Point Plant, Unit Nos.

3 &4)

)

Docket

)

)).. Docket

)

)

Nos; 50-335A

'50-389A Nos.

50-250A 50-251A

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4 MOTION TO LODGZ DOCUMENTS o

Pursuant to Rules 2.701, 2.714,. 2.730 and 2.206 of.:the.Co~ ission.'s 0

'ules of Practice, and. Procedure, the Ft. Pierce. Utilities Authority 'of the C.

City of Ft. P'erce, the Gainesville-Alachua County Re"'c"al E'ectric Vater and Sewer Utilities, the Lake.Vorth Utilities Authority, the Utilities Commission. of the'City of '.:ew Smyrna Beach, the Orlando Utilities Cor-ission,

\\

the Sebring Utilities. Co is~ion, and the Citiep. of Alachua, Bartow, Ft. ~!eace, Ke(r 'Vest,

'.lount Dora, 'Zewber~;,St.,

Cloud and Tallahassee,

Florida, and the k

Florida.'funicipal Utili'ties 'Association ("Cities"), intarvenors in.tne above-1 captioned proceed';".gs,'espectfully rendu'est that certain doc ments be pe~~itted to be lodged with the'Co~ssion and made part of the decisional record.

On behalf of this Notion, Cities state as follows:

At least since august 9, 1976, 1/ when they filed inca=.'ention 1/

In the con."eat of the South Dade units (F'orida Pcwe=

& Lizht Comnz".v

(

o

)

o o

(South Dade Plz".."), Doc'<ec

.':o. P-":36-A); these

=act -egat'a"..s

-ere ra=sed I

earlie (Arrl'

)..: "as "es e

e'a,.

c t ese p'a.

s.

However, F'orida Cities hopec

= " sc=e sort o" pre"'.".ar: sett

~ ent.discuss='o-..s before seeking further o.al Co~ission action.

"Joint Petition of Florid C'.'

For Leave to Inte:~ne a"c Request for Con"erence and Hearing," Docket 8o. P-636-A, pp. 69-73.:t "was.,"ecuestad t'.-.at

"..".is joint petition'be =il'ed in both Docket 4 s.

P-636-A and 50-3~P.

=.

petitions, Florida Cities have raised issues of serious antitrust abi se by FP&L in the'bove dockets.

In Docket No.. 50-389A, a licensing board has granted late intervention, but denied intervention in Docket Nos.

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r 50-3$ 5A, 50-250A and 50-251A. on grounds of sant of authority.

These rulings were affirmed.by the Appeals Boards and are before'the Commission on petitions for review. 1/

The fact 'is that serious claims of antitrust abuse of NRC Licenses (or potential abuse of proposed !KC'licenses) made well over a year ago still have not been addressed on their merits.

Florida Cities believe it would serve no useful purpose to attempt to generally supplement the record at this time to include a detailing of continued refusals to deal. by FP&L.

j t

1

'owever, on or about October 14,

1977, FP&L filed:proposed wholesale rate tariffs at the Federal Energy Regulatory Commission, which they are obligated to call to. the attention of the Commission.

The tariff s'tates 1/

Florida Cities do sot cite. the full procedural record.

The petitions be ore, e

the Cot~ission for review were filed in ocket 5o.

50-389A by F9&i on 'ulv 25, 1977 and in Docket Xos.

50-335A e

al. by

= lorida-Cities on Septe"ber 8,

977.

Tbe petition in Docket Vo. 50-339A waa granted'y Order, Octobe'r 19,'977.

t as follows:

AVAILABLE:

"Sale for Resale.

'Total Requirements Rate Schedule SR-2 Florida Power

& Light

Company, FPC Elect:ric Tariff, Original Volume 8o. 1, Fourth Revised Sheet "to. 5.

. 'To electric service presently acies supplied at point(s) oa

~ 'e1ivery for total power recuirenents or electric util'tv sys e

s for t'neir own use or for resale.

Such electric utility systems are Clay Electric Ccoperat've, Inc., Glades Ele'ctiic Cooperative, Inc., Lee County Electric Cooperative, Inc.,

Okefenoke Rural Electric'~5embership Corporation, Peace River Electric Cooperative, Inc. and Suwannee Valley Electric Cooperative, Inc.

This schedule shall not apply

~ as substitute or replacement cower to a aeneratir

~ utility system zor wnich interchanoe cower agreements are ave" able or to which Sale f6'r Resale Partnal Requir~ents Rate Schedules.PR is applicable."

{Emphasis supplied).

"Sale for Resale Second'Revised Sheet Total Requirements No. 7.

Rate.Scnedule PR.

AVAILABLE:

To electric service supplied. to electric utility systems zor thei" partial power require eats at any point of deli";cry to co clement the insufficient generatine caDacitv and/or zirm owe" purchases of such syste s for the'r own use

'r for resale.

Such systems are Florica Keys

~ 'ectric Ct operative Asscc'at'on, Inc., Utilities Commission o

the City of 'New Smyrna.'Beach,

Florida, and the City of Starke, Florica,

.This schedule snail not apply as subst<<tute or replace.-ant ower to a enerat n.o. ut'lity svstem for..h.ch full service

<<ntercnan"e "ewer

~areemenrs are apclicable."

{Emphasis supplied).

Whatever the legality wr acceptability of these proposed tariffs:

may be under the -".ederal Power Act, they conclusively show the following fac"s:

1)

.FP&L rezuses to sell to'tal requirements wholesale power to new customers.

2)

FP&L refuses to sell wholesale power to systems having genera-tion except to'eplace "insufficient capacity;"

and 3)

FP&L'ill not pe~>> t a "full service interchange power agreement" for systems purchasing wholesale pcwer.

These tnr'f= changes

<<culd prevent the pc ential sale of

4-i wholesale ele'ctr city to nearly every, municipal system in Florida.

For reasons stated in Cities'etitions to intervene, such refusals to deal plainly violate antitrust law and pol'cy as well as historic service obligations.

E.g., Otter Tail Power.Co. v. United States, 410 U.S.

366 (1973).

They present immediate concerns with regard to the responsibilities of the Nuclear Regulatory Commission.

Under normal circumstances, it would be presumed that a licensee or proposed licensee of this Commission would at the very least disseminate the benefits of nuclear power through normal sales of electricity.

See Atomic Energy Act,

$ 3, 42 U.S.C.

52013.

FPcL would deny such benefits to residents of municipal s'ystems.

Other documents demonstrate FP&L's policy is to sell. fire power onl where it can sell at retail, plainly an act of monopoli'zation as w'ell as an unlawful tCe-in sale.

FP&L is using the economic advantages from its licensed and I

proposed nuclear plants to re'cain and expand its retail service market.

Based upon its nuclear advantage, it actively seeks to take over the Vero

'Beach e'lectric system, independent since 1922, and has suggested the sale of other systems.

Yet by its FERC filing it would deny the sale of. wholes"le power, with the inevitable result of encouraging others to sell their systems as, the only way to participate in nuclear benefits.

This issue is not abstract.

The Ft. Pierce Util'ties. Authority 7

has requested to purchase wholesale power at potentially great cost savings.

P

.FPSL refuses.

Ft. Pierce, located adjacent to Vero Beach, has had discussiotts with'FPGL concerning FPGL's purchase of its sys'em.

Moreover,'he intervenor group has spec'ifically, requested the right to purchase wholesale power as part." of a settlement proposal (which includes other terms).

e Apart from any other allegations, intervenors respectfully lt submit'that this new refusal to deal in bas c services Qandates Co ssion action.

0

Moreover, additional documents not previously available have come to light demonstrating FP&L s awareness 'that deprivation of nuclear availability'to Florida C'ties is hurtful to the Citi'es.

In the context of..Florida Power

& Li ht Comoan

, Federal Energy Regulatory Commission Docket iso. E-9574, Florida Power

& Light Company, applicant here, has made availabl;e to staff and'arties certain documents relating to that. proceeding',

"some oG which have been 'proposed zs exhibits.

- The documents.

show motivation by FP&L to limit Florida Cities'ompetitive opportunities, including access to nuclear power.

0 Florida Cities believe that they. have supported a grant of inter-yention and hearing fully.

They therefore request that the Commission review the proposed supplementary evidence only if it were inclined-to deny intervention and hearing.

They do believe that the abuse of NRC licenses and antitrust

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principles shown by these documents are so plain that the Commission must consider these documents and take amelio ative action as a result

'f this evidence, even if it were inclined otherwise to rule against Florida Cities.

Examples of such documents are attached..

They include:

Document

>'r'280954, et.

sea.

This docu ent provides an April 8, 1976 summary of

. majer financial considerations for rPL in the

! development of cooperative'uclear power pl'ants, showing anticomp'etitive intent.

These consideratioqs include the proposition that it would probably be best'f FPL did not have any ownership interesg -in the plant.

1/

Document

!$280958; et. sea.

apparently prepared in JuLy, 1976, in relation to an FPL managemen't meeting on implications for t.

FPL of recent developments in competitive relations.

As stated at page 10 of 13, FPL may have contemplated th'at a shi t to coal would eliminate the Atomic Energy Act a's a route to municipals'n'.:est-.ent in generat'on, 1/. The document should be read in conjunction with FP&L,'s conte. poraneous Narcii 30,. 1977 letter refusing Florida Cities'articipation in the prop'osed

'P&L South 'Dade Yiuclear;Unit, but stating FP&L "would co"..sider being. part o=.

a joint venture to construct a nuclear facility. somewhere 'n the Centra'1 Florida area so as to be conveniently located. "or potential participana.'uch a project would be a true joint.venture from its initial inception through completion and would require full commitments of all participants commencing with the planning stages."

Many Cities considered sucn project in good faith, but FP&L ultimately requested public funds be spent on'.the project without its being willing to consider or agree to discuss. provision arrangements crucial to tne economics of the unit, even including provision of nuclear fuel, transmission and back;up..

Document

>r'280954 clearly shows that from its inception, FP&L recognized the joint venture'orm of the proposal would make the project difficult to financ'e for the municipa s, but itgroposed that form anyway, while resisting support for legislation to allcw for a joint a~cncy.

0

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e thereby undeiscoring the major thrust of the document:

that municipals should be prevented or limited from achieving practical access to nuclear generation.

FP&L further designates

'the municipals-co-operative'trategy to obtain statewide generation, planning, multiple-unit sharing, and full

,coordina tion.

~

e FP&L's, response:

FPL ma not be able to compete if municipals and co-operatives can gain access to generation investment with their'ow-cost capital.

Municipals presently having 'franchises with FPL will be encouraged to go public, showing'its intent to limit competition.

Document

Pr242627, a February, 1974 memorandum indicating a desire to limit wheeling access to the proposed 500 Kv line (between Florida and Georgia) to systems fully regulated by the FPSC.

(Florida 1

Public Service Commission),

thereby preventing or limiting transmission 0

access. to municipals.

Document Pr254384, 'et. sea.,

relating to interconnect~on negotiations between FP&L and Homestead in 1973.

These documents reveal FP&L's desiie to offset the. demand for wheeling as well.as avoid a long-te~

Firm Power gommitment.

(Document f/270832).

Document 8281505, et. sea.,

entitled S

trategic'lanning Department, Policy Planning - Background Paper, Strategic Issues in Inter-Utility Re3.atiorx.

Pages 13-14 of this document bear the headings Strategic Summary Interconnections - Joint Ventures.

It shows spe'cific intent to.avoid the sale of wholesale

power, thereby restricting nuclear benefits.

1/

1/

As stated

above, FP&L has, for ezample, most recently responded'egatively to pr'oposals to pure'. ase wholesale power by the Ft. Pierce e

UtilityAuthority.

1

Document

8273006, a December 5,

1975 memorandum from FP&L Vice.President E.L. Bivans to FP&L offic"al K.'S. Buchanan.

The memo expresses iver. Bivan's concern th'at proposed interconnections with Tampa Electric Company and Flqrida-Power Corporation provide for wheeling power at 'universal postage stamp rates.'ocument

>2212164, et. sea.,

Power Generation from iiunicipal Waste. Systems.

FP&L's participation is said to include deter entitled Guidelines for The principal value in the competitive threat of municipal generation.

Tn view of the. passage of time and. these new evidences of ant"-

competitive activit'es, Florida Cities request permission to supplement their petition-to in"ervene.

Specifica'ly, hey request tha't his notion be considered in part of the records in these cases and that they be 'allowed

,to file 1) the above referred to documents, including corresponde'nce concerning the Central Florida Unit, refusa's to deal with Ft. Pie ce, a..d possible settle-ment and

2) the testimony of Dr. Taylor'.

Florida Cities gave FP&L advance notice of this motion, Although Flori'da Cities know of,no basis for. such request, Florida Cities were requested not tp lodge the documents referred to with-the motion.

They therefore refrain from doing so to allow time for Commission ruling, but respectfully request that the Co~ission allow the documents to be lodged and made part of the record.

Scen'c

."'.udso.: Pres="vation" Confere..ce

v. FP" 354 F.2d 608

'1

(2d Cii. 1965), cert.

den.

sub nom." Consolidated Edison Co. of "few York v.

Scenic Hudson Preservation Conference, 384 U.S.

941 (1966).

Respectfully submitted, Robert A'. Jab on Daniel.Gut tman t

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.'Attorneys for the r h.- Pierce Util't es

'uthority of the City of Pt. Pierce, the Gainesyill'e-Alachua County Regional

~ Electric Vater and Sewer Utilities, =he Lake VqztnUtilities Author. ty, the Utilities Cozmssian of the Cit: of."lew

.Smyrna Beach, t'ne Orlando Uti>ities Commission, the Sebring Utilities Co~ssio=-.

and the C'ties of Alachua, Barto -, =t. ~ ade.

Key Vest, fount Dora,

'tewbe.y, St. Clc "

and. Tal'ahassee,

"-lorida, and the "lor"=

~ Hunicipal iJtilities Association October 2g, 1977 Law Offices of'pieoel GYcDiz'c 2600 Virginia Avenue, N.V.

. Vashington, D.C.

20037

'02-333-4500

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Nil3 ~ ~a C. Rise,

=sc.

Robe~

Ue r"erc, =s=;

Suite 200

'1019 19.h Stre., H.m.

.. 'ashing" on, D.C.

20035

." Linda. L. Eccce,

Lower.stein, Neman)

Beis

& Melrac 1025 Con.ec 'u:v

.ue,

. Nashinc on, D.C.

20035 N<11'a~;.'i Cha cle-)'=sc.

Chanc "e, 0 'e2.1, ve a, C av,

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=lo 'a 32501

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20530 4',

Lee 'Scott Dewey, =s-.

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.o= =zecutive Direc or

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'ashincton)

D.C.

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AGER DA

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deY, nUGUsa 5

30g~g Con-,erence Roo;, -

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FPL o-. Pcecent Develop",anw.'in R. 0. Gerdner

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2809qg RECEHi'IGHIFICAlP OEVE10PMEHTS IH CQ& ETITIVE RELATIOHS A <<W <<& <<<<<<<<&

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Grid Bill Docket.

e

'- Initiation of joint statevride generation pla'nning study:

"generation planning xi Pout regard to

'ompany boundaries".

'-.P]an

.i'll inc1ude a tinancial ana1ysis whereby

'each utility is assumed to cwn an individual

~..

interest in each unit which is join ly planned".

~

~

2. - South Dade anti-trust proceeding..

3.

Possible re-opening. of St. Lucie anti-trust proceeding.

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~

~

4.. Seminole determination to become a aenerating utility.

~

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0 4

S.

Spiegel 's clients seeking:

- Shares of many units to reduce risks..

-'Fully integr'ated pvaer poo1.

- Central dispatching.'

- Legisla.ive authoriza ion of municipal financing.

6.,

FPL o-, ea to manage joint project for other stat utilities.

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PROPOSITION 2

The traditional way of looking at our business is a single tightly int gra d

business

.serving end-use customers

.:.line(staff structure,

.and organiz d

'around resourc centers:

.hardware,

people, money.

PROPOSITION 3

An "X-ray" o our business reveals-the existence of two principal'businesses:

a bulk power bisiness'and an electric

'erv.ice business.'he two businesses

.actually. exis ~ within he f'ramework of

-. 1 third activity, viz. an inves~~n

'usiness.

~ PROPOSITION 4 There are important d'fferences between the Qo businesses in,the areas 'of

- the way they'are managed.:

- organi-ati'on.'

financing.

- marketi hgj'cus to.",er.rel ations.

- public affairs.

PROPOSITION,B Mhile thew ar important di feren os between the businesses, there. are also vital mutual dependencies which m st be understood;

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".'6 7j30/76

C+T ~)y.i

~80 Sag HUH1CIPALS ND CO-OPEPATIYES SLM~on Ancfph~

r

~ Too.sma11 to individually add economical generation.

~ ReTy on oil and gas. for fuel.

~ Fuel costs rising - supply in jeopardy.

~ Mage rates lever; exempt rom Federal minimum sage; optionally exempi from Social Security.

~ 'Size limits access to customer service efficiencies afforded by large utilities using automated systets.

e. Cannot support planning, project, procurenant,'nuclear organizations..

~ Ho tax obligations but municipa1s. contribut to ci y.

operation costs.

~ Lm'ost financing.

,~ Lega1 and procedural limitalions 'on financing (municipals).

~ Sunshine laws hamper management actions (municipals).

~

~

~ Co-Ops have easi es financing, 1 east management restructi ons.

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New New Gen.

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.AND CROP=RA'iiPQ be l

BUXX POWER PIC~

Advantages

"(for them)

- Access ta econ-omies of ZPL

'il<<fied gene ation {i~ oi' prices don'a up) plus exis ~>>lg nuclear economies.

- Access ta PPL economies of "scale Disadvantages (fo t)lem)

Can't use their los fixed charge rzkte>>

Advantages (co>> us )

Continued inves~~nt

~

opport~~+>>

~

Disadvan mes

~o gas>> e'v average cene:

tion casts f<

.FPL custcmer.

- Re have china.

bu-den.

UhiT POSER

~ >>

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access ta hev uni>>

c~~4~ {ic

..cheaper than averace cast)-

Access to FPL econ'omiets of scale.

CaIl't use their "-

law f'xed chz"ge

>>a~~

Need othe ariance~nts fo' sp eading>>

0 Can Hued inves".en oppo&>>~>>~(Q>>

~

Preserves lou cast exis"'ng pele-o FP" custar:.ers o'1 pr'ces don'. go up).

Se have ~-azl Sag bu=de".

Ki~T PO'tKR PURM~.

PLUS PR~~A~T

~ >>

UHZT SHAR TG

'Access to uni cos ts

{'heaper than average cas

).

Access ta

- PL economies o

scale.

~

~

\\-. Access M economies of scale>>

- Can use lcm fixed cha"ge

. rate.

- Can't use the='ee faced cha'rge rate.

- They have fi-.

nancing burden.

'- Heed othe ar angements for risk sprea'd'g.

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Need othe

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Can~wu~d inves ODDOr+ L>>>>li>>>>t >>

Preserves lcm

'as existing power for FPL customers (if OI.3. prices don't ciao up);

Reduced fiaanc.

ihg 3)urden>>'>>

t>>

Continued inves"=en opDortunity.

Preserves lo~

cast ex'sting pcwe o

FPL canto;ers'(if oil:prices don't go:uD)..

Reduced financ-

~

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(",'iG 7/29/76

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I IJHIT ADDETEOHS AHD GROMTH RA)cS m

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12,460 12,979

..". 13,'498 14,038 14,600 499'19

" 540 562 1,200 tw unit everv othe. year.

Add.

12,000 iw 480

'dd

'2,0QO m 640 " "

12,640.. 899

- 13,739 '62 14,701 1019

'15,730

. 1101

..16,831 1,200 nu Ltnit each year.

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'OF ALTERNATIVE ADDITiOH STPAT'c.GPES -

LOM GRQtGH (4~'}

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1 Plan 1

W & &

eI Plan 2

~

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. Single'Utilit 'Addition',

Shared Addition S

Av S/kw S

Av S/kw 12,000 12,500 13,000

.13,500 14,000.

't4,500 6.0 B

500 7.2 E'76 7.2 F 533

8. 4'. F 622

. 4.4 E '00 S.6 5'662 6.0 7 500 6.6 X 528

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578

~.. 8.'4 E'00 9.0 P 621

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$500/kw.

increment Additions, 1,200 rw uni w 8

$1,000/N.

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PROPOS!TIGN '-

In a.situation of rising real cost, the most economica'I capaci y expansion is to add each year the largest (and, I

.hence, lowest unit cost) amount of. capacity

~ceded to

'rovide for that'ear's peak load growth with sufficient rargin to provide r

~ ~

the highes accep'able loss of 'load risk (i.e., lowest possible reserve margin).

Annual 1oad increa'ses should be aggr'ega.ed in the s"mlles'ossib',e'eographical area until the optimum annual capaci.y. additions are equal to

.larest generating unit coim:arcially available and proven (1200 mw nuclear;

~

~

. 800-1000 coal; 250-300 combined-cycle).

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.The key issue for in.er-utility reIations is shat kind ot'nstitutiona1 arrange-abets will prevail for the purpose of aggregating the geographical loads.

POSSIBILITIES

~

. '8 Q Q Q 'p FPL present strata'~:

The loads ~ithin the FPL system are suffician+ to support the op.,imum annual capacity addition.

Problems

- -a.

FPL system may not present the smallest geographic'ara

'in yhich loads are aggregated.

h.

Reduction in peak load growth'rom the Danuary lg78-

~ -'..

.. 'orecast: will undermine the logic. of our s ~rataay.

2.

The municipals-co'-operativ~'trataa~:

Should have.sutawid genera ion planning,.mul aple-unit sharing, and full coordination;

.'roblems FPL may not be able to compete if municijals and co-operatives can gain access to.generation investment with.their low-cost

~'

capital.

Municipals presently having franchises with FPL Mill

be encouraged to go public.

3.

Herger:

FPL could merge with TACO and FPC to provide aggregate loads which

'would again support the isolation s.ra egy.'roblems They may not want to and who's going to end up top dog?

FPL statewide bulk power supply business:

FPL would plan site design, licens finance, build and.operate large genera ing plants and trahsr ission 'lines, and sall bulk pcwen to all other utilities.under. 30-year take or'pay.prepaid contr acw.;

,Problems. -

Me would have to sell he concept and we would have all De

-.. financing problems.

S.

FPL Ser'vice Co.

FPL would plan site, design, license, build, and oparat tf.

state bulk power system using funds contribu ed by all utilities.

Power sold on basis oi operating costs.

FPL receives a

ee for man gemen servic s.

Problems FPL survives as a service company but'o as an investment company.

6.

Coal:

A shift to coal would eliminate the Atomic Energy Ac. as a rou e to municipals'nves ~-ant.in generation.

It may also parfait us to ration lize.

. smaller unit'izes more nearly equal to annual.load increments..

Problems

- Air quality laws, coal supply, the'Grid.gill may even ually require the sama thing 'as the Atomic De gv Ac..

~

owl 7.

Politica'l.Attack 'e can attack the -laws which give"muRnc(pals and

'co-operati'ina'ncing and tax advantages, thus making competition r...'e'equal.

'roblems The laws are sacred cove and won'4'ive p;easily.'

~

8. '.Pooled Capital:

A hybrid institution whereby each utifgy would,inanca his share of'bulk power supply but the financing costs woul&oe.pooled and e ch u ilitywould receive power at the sama cost.

A o r

......Problems Great, for us.not so great for the'-,s. '

don't know how to do i-9.

Power. Authority - n state-sanctioned institu.ion with 'ac ss to financial rs=er

=

';o 'the basis o

sta'a guarartees and/or exemption frd~~xition.

Tha author<".-"

.;".woiild.sell.o "all retailers at the sa~e bulk power coss

== -".

'-:I"+robles -

The end of FPL generat.,qg business..: ~~/=.y is '

.'~ li ~

~ 0'+

o e

~ e'e

~ e ~

~ pO e

~

~

~ ~ e ~ ~ 'ebs

~

~

~

~

~

/

~

~.

~

~

Investors

'apita

'unds

Returh, Interest

~ e Costs Suopli es Pa roll Supplies FPL Fmp1 oyees

'ervices Servi c Revenue

~

~

~

~

~ ~

Service Territory Two-Business

. Model

~ 0 7, J

. Investors

~

~

J J

~'

~

Capi a.?

Fun

Return, Interes

~

~

~

~

F P L Invest I ~

0 ~

Services

~ ~

Se ices Capital Funds Capital Fund Cash Flew Cash Fl ox Supplier

-- Costs Power

~

~

Transfer

. 5'upy'Ti'em Empl oyees FPL Bulk Power.

Costs FPL Service Empl oyees Suoolies Services:

~, Jq J~~

Revenue ervl ces

~ J

~

~

Revenue Servic Power

~

J

~ ~

JH

+f'=J

~%g"

~

~

Resale Customer

'Hd-Use Customers

~ JO g

'State Electric Sys;em

~4q

~ O~~

J

~ Ma ~

C.&l~

Service Territory

~ '

44m.~>

~

o

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~

~J~tf 0 ~

~eever'

~ JJ

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~

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0 0 ~

~I I

& Jf Revenue

~

0

~

I

~

~

~

~

DIFFERENCE BEii'EEH BULK POWER AND ELECTRIC Sr RYICE BUSINESSES

~a v m v v v ~ v v v

~

I

-%36 7/3D/76 l'

~

(+7:j') p. /2 gled

.2808gg Bulk Powe'r Supply Electric Service

~'

. 'rganization'trix.

Staff - Division, Dis" rict.

Personnel Resources zy rechnical.

Legal.

Economi"c,.

(Harckare)

.. Sales.

Service;

'People)

SysiBms

~

~

g.s et'e em'Hanagement Practices

~

~

Cetic~]

Success F2ctors

~r

~

~

Planning - Long Ringe.

Project Contr"l.

• Capital Budget, Fue1 Budget. '

PTanning - Short Rang Perforance measure.ent-Cont. l.

Operating Budget.

Plant, Transmission Reliability..Distribution,Peliability, Resiorat Accura.e Forecast.

" 'ervi ce, 'Cor>...Jni cati on.,

Low Cost. Reliable'Fuel..

-..:Efficient'handling of )a ge Yolu' Low Cost External Financing..

transactions.

Plan and Con.rol Capital Spendina.

Barge inc/Customer.

Ro1.a tions Few cus t01iRrs.

Negus-'-i-a tions-Con ~racw.

Power at hi h vol.aae, Hany cu"torars.

.. Advertis'.ng, sales.

Franchises, tariffs.

100,GOO b+.

Power. at law voltaae, 5 kw+.

Financial Factors High capiul..

Declining real High operating cos'., lm capi.al, Long lead'tire, economies, of iniernal fundina (":).

'high risk..

'cale.:

. Short'lead'tom, low risk.

'ixed. charges predominate..

• Level or rising real economies o=

scale.

Operating cost predcmij~=.==.'

~

lh

Public Affai<

e Oyr

.FPC regula ion.

~ Federal, State 'facility regulation.

4nergay issues:

interes group oriented.

I PSC regu1ation.

Local facility regula ic,tj Pocket book issues:

pub..~c orien-r '

r Q ~

oP',.-

~

~ 4 qo

~

~

~

~ gal>

~

~

~ Q~

~V

~ g

~~

~ 2~

.s&

la 4q

~KS

~ Wf

~ear

~4~+-

Qv err v

~ ~

0 3'0

~y RJG 7j," '76

(+~~,.~;

f " ~t - tU'. z "C'at'Or 8 Vtiat knead af AS"~tv"'anal a~Pe

. revai~ fo" the pu~se o

aggregating the geographical'3.oads.

808 in 2~SX3ZLX~A FPL present st=a~:

.~ e oa

~

~

W Roads mi"'x~~

t'xe FPL systen a=e suf icient to,st~~

-the op. ~ ann ual capacity.addition (the No-px>3. o iso3.ation s"-ately)

P~l~

L. 7~ system may not present the smallest geog=apts.c a'ea

. in which 2.oads are agg egated.

b.

Reduc 'on in pe& load 'g owth f~ the January

2976, forecas v9:ll undrape the logi o4 ou s -a.tegv.

a

~

~

~

"We aunic pam/co-.opera ve s ni i

~ /

tive sc-a>>u Should have state'ide gene"ation pla." mg,

~tiple,-m'>> sha='ng 'nd ul'oorhnation.

~

~

Pzoble -

~ nay no 1

PP<

not be ab3.e to cocxte ifmnicijals and ~p a"~ves ac-ess to genera"'on investment with the'r le@-cos-can ga.n ca ital.

Hunicipaw~

presen"'y having anchises vx>>

~

v

~

be encou"aged to go publ'c.

~

~

.Berger:

FPL cou d merge w~

ld 4 T=-% and WC to.provide, agg egate loads vn.ch would again support the isola"'on st=ategy Prob3.m' Bey ~y not vent to,and who's going ~" end up top ihg2

~

~.....

Possible anA-t~t prob3.~.

~

4 p

buR e"

u olv busw~,ess:

7K.{or a $ ow~

vendue of'ZK, ~

c 'uild d

3.

d ~CO) would p an, site, design,

incense, inan'ce,b"'~

e to all other u~

gene atinc p3.an~a and t"a.-s-'ssion'lines

< and se 1 b~. ~e ties under 30-yea"

~Me o" pay prepa.'d con""ac" p"obl~ -.He would have '>>w sell Ne 'concept and ve would have all the Gala

)

5 lg problers

~

~

e Co.:

APL vculd plan, six, des g..< i>cense, bw, t

~L

~ -

~

~

-eceives a ree fo r~".agenent sear ces.

basis of opera

".g cosm.

cr~

2'~oblens ML saves as a se~zce conpany bu no s

o" as an inves"~ent co~~.y ~

a3.:

A shift to coal would e'"'='na.te the Atom.c s.nergy Ac as a

ou~ to uxd.cipam '"vesmen in generation.

Tt ray a so p Smalier'unit s'=es mre nearly equal to'mua o

~ '-'

laws coal suooly...&e Grid BiL~.way evenually

-Ze~"e'tNe sane.thing as the Ator~c =ne"gy.

c..

~

~

~

hach ive. 6unicipals and c~pera>>- ves

'2

'P liti

~ Attack:

Ve can at~ack the 3.aws whic tition mre.'~D ~,

d ~ advantages,'hm naming corpetiti f

~

1 a"e sacred c~s and won't g.ve up easily.

Problens

-iae aws A hvbrid i.-~titut on whereby each ut li".y would finance h~s share idb d

d o~ buIk power supply but the financ'ng costs wou ould receive power. a'the sa=.e cos"..

t

- at for then.

don't Jmcv hew'o do ='--

Proble Great fo" i:s; not so grea or

"'o'n'wi 4 access to financial rz=kea S:~e Au Mori y:

.on ae basa of state guarantees.

awe/o ex ~.on ron void se3.3. to a13. refers at

~N s~ bt&x pcw -,

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<<0 500 KV FLORZDA OP" RATMG.ACR-""I'"NTSUGG" ST" D HOPDOG 0-

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I-Any direct negotiati'o."i between tvo companies who are not direc ly intercornected must;, by necess'ty, take into

. account intermediate thi d parties; heZore any two com-panies vno.a=e not d'rectly i'zterconne

+ed could consummate 0 00

~

a'.transac io'n, such hi=8 pa t'es would. have to be 'm qg ee-ment.

'Th:s'means tha" no such th'ro pa"ty cou" d be inju-ec.,

either elec"rically.o

'~ancial'v 'hy any transaction.

~

~

~

~

~

~

0

~

Xf:.a hird party syst m vere invo'ver ~~ oisplac'ag energy

~ from the inst to second partv, nen m n thira par"y wou o

be a'eauate'ly.coiapensatad

""o='ucn t-ans&i sion use.

Sucn

'W

't w

g w

4

'"-vhee3.in'" would ~evolve only. systems. &'llvre@ la ed oy tne

~

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- '.ZPSC'.'and:would continue.only so'long as i" vas bene" c" a "o

~

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0

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the -system. own'ng the trans-,: ssior. line a=ter corsider~wg

. need. i4or sys em reliability md p=ovision

. or system grov"3.

'h

-.:.:is'e13..as'he acecpa'cy o

'cu-ran compensat'on.

0

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1 Zhh Plorida Opera"ing Ag cement w ll not supersede any hi'late='a3.. or mult la"-eral'greements for interchange service 0 ~

~ '

which currently'xist.'.

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/21/73

~ ~

<< t 4

~

~

\\

2 Hhat is the, load

~

~

36KB

~

4 W fl

~

~

su "'in eng~ neer d bv Jim Berry,'onsu

~ As es" image, --

su 1974 - 3S?>7

~

. '.~

. ~

3.975 - 43 >w 1976 - 48 T%i

~

~

~

~

3.'978 -, 53

'1979 -.72 ~

19SO 82'H

~

ue.serve at, ou ppresent 4

HoQ much loac can nect3.ons

~

~

~

'I<<4

~

North. Tie 3000 RÃ

'id Tie

- 3000

%'f Homestead

~

~

~ ~

~I to the City:

~

~

5 "n ee xntercon

~qpy o.= so"-"-sT=->>

quip v-(cr-'~)

(gz."he tion is i located in he l.

Propose~

~

d t~anspil ss on connec io City of FomesteadP SH'12 Street and SN 162. Avenue ws the The SN corner o

SH'"

the switching sta~io..'entative

.site o

ts in Dade.County, outside t e h

homestead C ty land s i

~

~

Sou~h Tie - S000 ~

ld the tran smuts s ion ti

\\

~

its and stimated cost for them to ux, 5 ~

Es 1m

'separa ed.

the interconnec mons

E r mill have more infox-this tirie.DimSerry mx, Sot available ai r

vx,

.'ation on 10/9/73.

a hah and estimated

~

t or them o genera e.a 6.

Fstimated cost or

.a cos se a

fo hem o purchase a

~ <<

1;25C' generate 3..45C on olq rate NH 2.13;C on -net.SR project d

cou factor)

~

P

~

'vith h3.She r loa 0 t

S o ~

~

( 6 7- 'I-'a OJ.d

~

~

~'

page 2.'.

2803.88 stion ey

.hey (Homestead) pose e

he ~eyes and wan i a tie to answer.

over what woul e

Hhen we meei, if to eyeball" that PPL'hee le o th e P

b " 1 t's talk about h's before, but e

1 - we nave h

never done t s

~

b "

Hel and 'fror~.~here Xt how much power an

~o 8.

e e e

~

e o

~

e o

~

~

e "He are in the 'process demand 'n 3.S74, bu" we e

~

~

~

~

e Hha is our answer to farm base load for the e<<

tu bines to meet; our check fur her".

of purchas ng will be glad 'to et

~

o

~

~>>>L) urnish 16 megawatts "willyou pN vears

1974, 1575 and 1976 o

e o

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Ga evesvil1e Ue'lieiee HYN S/2O/Va

>~y882 Jack Yaat"News suaaes s

hat we, keep ou appoin"went w'th ville.

He further sucges s 'at

~ we be in eres ed, and d'play "he eelinc 0= wan in' cooperate whe" eve" Me should a.sk hem how e =ec"ive "he2 is "o.=lorica what ideas "hev have on jo'nt ownership in ref'ne 'es, e

Ga'n s-sz"ive, possib'.

Power g

~C ~ ).e Ce Re:

Homestead e

Jack Ha tthews Echoes the Yaarshall heoryg "You can'sell wha vou ain'".cot

~here=ore,

~their request

~or fi..aPowo" caraot b'e granted as ve c:o no

.have i.

Ne shou'"

have, available ocr 3.pac es" i-iates anc es i...a'""ed rese ves to subs"antia=e Nese rema=ks He bel'eves tha" if Hom s" ea" is wi3.lin-". to spend the nec ssa~,

capxtal to cons ='c-tra..sm

~ ss on =ac

es ="- a "=e "hen we m s" oblige apd c've the;;.. a'onnec=ion.

egardin=.'he contract

-"or 1

Se-V~ Ce p

eOWB"2 I

2 'noul'C BO

" 2:n Z. 5 lB one aDQVB

'OroD-'2 1

vi h iw powe, bl t ha Eye are w'l'n-to sell anv awoun hey a=e

~

e

~

e wi'ling o rece:ve

'= '- is ava'lable.

Ne snou'd keep ';. m'nd possibil'tv o= t=ansm'ss'on di=ficu}"ies 'n wheel'n= powe" as "he cou=t ha.s s"ated an ii:i'ester-Owned u '

y ca. ~0 b

cec 0 wheel 0- s211 e

~

)reer 0 "ne ae-'=.ment

".ts ore c s"ome=.s a..

~ "s os.."system.

To sgmari~a.,

he bel'eves tha" our neao a 'ons wi-th Homes eac sho'e b=sed on the Vero con"ac..

3en =uaua men" one" ". a" we a=e no~

works a w'th three

=a"'2 oepar ~en.'s:

1) Lloyc williams, 2)==n'e

3ivans, ano 3) dolph'~>ulhollanc ']

s s

a p ec 0 s pos u

.l a..":.

he i:ill ask Gene Au"rey anc Al Aco-...a "o decice ju " who shou-'<

h'anc le the neco't " 'ons on powe" saies to. mun" c'p-1'ies an" 'coops.

Zr. Matthews asked what a=e the loa'c projec ious for the HA's ha-ve se~e.

~e

~e V-

~ e '

Bomestea"

<<.")et th's da"e with-Ben Zucua, Jack y>atthews, and Z,2oyd R'2lia..s.'~ck."matthews was now "a...iliar with he co...Dany's g'i3.inc o ra" e schedu'e SR wi h ae

=PC and our }e"ters to who'ale cus o~e s advisi~

ou

,n o" ioa

-o effec~ua in( sa'd ra"e Sg beginning Sep" e-.,De 1, 1973.

He al "o was civen and reviewed the letter o-Aucust 14, 1973 from Robe Jablon to kenneth Pl<~a>

eauesting a 10 day ez ens'n.

Jack Ha thew's.opinion of o = position is now chanced om his opinion s a

e ves e Bay 1e maiq

~ins g Q

a tg schsn'l A 5>

heine, e

ectuated that nones

ead, as all custome s on Sg, is indeed ece'v'nc wholesal e Down an f

~ hase owe=; tha we have no arcuanen

'n our contention tha

=omes"e d has been eceivin'e~er-"ency service h " thev have be n historical'y xeceivinc

'=z base once=

e-,ic'o-..~=ec neo=~-'is.

Tbe=e=o=e, oc neco ist'o..s snon16 cen:e'=e once

'ze =olla e'=

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l. I they'-recues i~ hase loau powe"<

hey are rece'v'n" base oadpowor 'ro gh ex's" inc distrih~ io;. connectio..s and caw con 'nue to re e've sa.=e hase load powe= plus any additiona base loa" power hev eauire.

All o which w'll be on wholesale x'ate SR 2.

Xf hev elect o const uc a transm'ssion 1'ne and connect mth ou" t ans-.,'on facility hey mav do so.

3.

X= they des're f:w hase load p we" via he t~an'smissicn connec"'on, we cannot ref=se.

Rate SR w'll st'll h appl'cable.

Xn h s even, hey would e

e i'vely be eceiving

"se saze base load power a

"'se s~e rz e (SR)

'ut w1 have aone to Ne expense of cons =uc 'ng trans-.,~'ss'on fac'ties.

4.

Xf they recuest a transmission in erchange,alone

'w.","4'.a

'~es fo= firm base load,

'zen Schedu'e D, wh" s"a es 'at the ra"'es shall he nero

-'a d,will applv, in which case w'e wil" plement ate schecule SR, The o he con =ac schedules for ante chance power (Schedules Ag3)C

& =) Dreclude "he =ac -'a" ho~2 pa="'es have power to exchange.

During neootia ions we shoe.'"

ask fo a ce pin a lou 1

o 'power h'at we;..av want "o buy 'some time.

He should earnestly

seek, wi 4 heir ass'

agee, whe=e "he

)nu ua,l bene '" 's derived.

Random Notes:

l'nolesale 's continuous Xnte chancre is limited du a 'on-Rate SR of=e"s i

... Do.e".

A Da:entl>'

comoany has be n Wonor-in/

he " "e.bluest

=o" a nu;..'"=-r o= yea=s an" s not in a coo"

=s'-

tion.to e" se to con"'"..

o'fcri."." firr:. hase lo " power o 12';"~

to 14?sss, which 's consistent o their prev'ous'emands.

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86198" Xt. ~ould. be in"e"est'n-" t the 3.oao ha" "he cc;..-anv facie'"'es..

P o cow-e=e

=a e

SR <o 0hai" cist of Z" zany. p=ove d'or"h~?" 'e o csee=

a.'n can su ply ove= ex's"in'd.'s"r'bu"ion

'ee Fugue "e~es"s ha" a

ego-" be weGe o h~ a~8 Jack F'.~" ha~.s as a "esuXt o= ay;..ecting vi-h Hc~es"eel.

on Aucus" 29.

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F~~':gA P~~PP + L)GHT COM

.ANY

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(gyPP~FP')CP CORRESPONDENT, '-.,; ~ ~ g ~

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COWlC$ 70 E.

L.. Blvans

. Hcssrs.

Marshall:MCD,nald

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E, Autrey Proposed tnterconnection C!tv of Homestead

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.. Mi 1 1 is l rw'i n'..'M.

M. Kle.in J: A; Lassete!

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t At the request of Mr. J. J. Berry, of Smith E 'Gil 1'~ie Engine rs, m

ting was held in Florida Power 6 'Lich'"mpar'y 'General 0ffice.

Attending the reeting w re:

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.- ". Florida Pcr~er, 6 L'icht Com"any'ity of Homestead E; L: 8ivans J: J. Berry, Consul:ant

'lark Cook 0.

R; Pearson, City Manager Villis frwin V. V..Turner, Ci ty Attorney.

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7he urpose'f the meeting was tc iden-ify an interconnec.'ton porn-and

~provide Mr.'

rry with prel imIinary'enc inc ring d tails mr the requl red switching station, and to outline, Homestead s possible power supply e"pansion program.

j Hr.. B rry said-tl t Homestead was buying two 8800 kV dieqels-for servic-

.in 1)74 which will'provide capacity to serve th ir'oad. through He estiraied'Ho'bestead's peak:)oad Ior lgly to be..from y>

M

. o cfependinc on he impact or the Turnpike extension.

Homestead 'is:current. y experiencing "an annua 1 'rowth ra e or 17 Homestead would=l"ike to negotiate, for.

irm purchase o

12 MV.

'l6 HV from

.lcl75 through 193~

According to Mr. Berry, the firm purchase would ski"p y their base loac~-.- ln addition they should like to purchase "Secondary E

o supply their mid-rance

load, and

reserve, rhetor diesel genera" I I o be

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'ors.for peakinc,and those periods wh n "Sccondarv Energy" would no e

ava i 1 ab 1 e

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ft was oin ed-cr:~

by the wri ter that the propos d interconnec ion would n'ot be'rutually aILdvan ageous.

The benefits would accrue prtmart ly to ead:

The bene fi ts to FPL would be minimal, s ince Homes tead wnu1

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1 r:="" reserve capaci ty.

There

o. e, as wi h th interconnecti tha 4'ero Seac.".'-ort Pip.rce, ard Lake @orth:".ave or wi 1 1 have wi th Fr LI

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Honestead wil I bc exp c cd to bear the e'n ir cos" of tb'e 138 kY

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.'witching station at the point of in'terconnection on. the Flori a

t:it -Davis I38 kV line, and their connecting 138 kYtie line. Sine

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133 kV breakers woul'd be instal led in FPL's linc, FPL'ould agree

~o operate and maintain the 'station as outl ineo in our agreer'ants wi ~h

'..'ero

Beach, Fort Pierce and Lake @orth.

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J it w s 'aoreed that FPL vill meet again with Hom stead during t e

latter:part of August.

Hr. irwin wi 1.1.handle, t"e detai ls.

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<<AItI'Jl I

Strategic Planning Depa tment

.aPolicy Plan~ing

Background

Pape S

'" f**" -~'

APPEmZx z 283.5Qg X

.Ove~iew and Summary Pul~OSQ

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Xn an ear3.'y 1975 meeting the Senio Management Plannin Council addressed some of the'ssues involved in government

'zegulation. of our business which aHect the way w 'design and expand the PPI electric sy tern.

This is.a policy area'hich

'ill be eferred to is."in e -utility relations" because it

~

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involves matters which concern the.way we deal vith our deighbo"-zg utility systems and customers.

This pape" presents an ove view of f

. our inter'u ilityrelations program and provides'documentati'on r

. of the above eferenced SHARC P ograra fcr future use.'

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. Defi a

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The term "inter-util.ity relat:ons program" refers to the plann=ng

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and management in the be"" inte est o." FPL o

- our in eractions with.neighboring

.u il'itiysystems under the oversight of govexnmen"

=egulatory agencies.

Since many neighboring util'ties' e also o-".

custome s, certain asp cts of ou interac ions with our custome=s

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znust'alsg. be considered.

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,The::qhar" on sliide l depicts.

or. our present purposes the

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h relationships between our company shown in the square in the middle.

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of the:inert,. our neighboring utility ystems and custome s, and.

~j the several governmental agencies"~~hie):

have a predom:nate in ere

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Ln th'~:~ ea.

ihe char~ "epres.'.nts the proposition that there

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'nte relationshl=

involved here wh1ch ce<<

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M "if c.".cAt areas oZ'ov" organi"at op>':hut wh1ch,~re mu ua3.ly

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$a I 3g J p-2 lip 281GOB Hterrel'a"'ed and therefo e impose a paiticular burden of inter-department coordination ~d need for.overa'1 managemen".

These

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re1aQ.onships are out1ined briefly be3.ow 'and wi13. be taken'up in some detail in subseauent sections o

this paper.

lIoolino; Po~al or.inforsaal 'ralat'onship soon@ two or gy-a

.uti3.5.ty syster'x whereby such sys ems are operated and to some I

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extent planned and coordina ed 'as a singele system to maxim'ze e

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economies of scale and operation of most e ficien units..

Zt can involve or lead to joint ven"ures, overlaps and. can e" ec"

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our philosophy of interchange service 'contracts, and'any o.,e=

implication's.'he PSC is the p inciple agency invo3ved.

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Joint ventures:

The joint develop@en and cons ruction o

'power plant or transmission p objects by two or ?nore'uti3.ities-can result from further ng the interests o

a powe -pool,

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'- or from a desire to gain greater econom'es o

scale, o=

rom ea xequirem nt to offer acces's to adjoining utility systems o

nuclear plants (St. Lucie Unit 2}.

-3.

Territorial acreemen" c:

Agreements between neighbo i..g-util' systems establishing a line of demarcation be ween thei" respect-

~e service territories,.jptended to avoid redundant-unsa~'e and as@

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uneconomic overlaping o

two or more electric systems.'Flo

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ee PSC must approve-involves a 'significant interface with ant'-

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trust laws.

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. Hholesaling Refers t'o sales of power for resale to 'anot-".="r e\\ee

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iso3.a te"-

system which is'non-generating and which is e3.ectric e ~

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applies electr:cally onto the

=PL syste..

h

'GR Ra"e"

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federal Power Commissio."..gurisdicticn.

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281507 serve 'non-generat'ng municipal and co-op cps-omers.

Sinterchan e of ower is not involved.

The W ~

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5.

Xnt'erchar.ae service cont acts:

.Refers to agreements between self 'suffic'ent generating ut 3.ities whereby power can be

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Lntexchanged from one to the other under certain circumstances

~

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Each pa tv "carries his o~ +eight"

>ne SR rate does not apply.

I The FPC reviews fo reasonable uniformity -nd basic fai ness.

5 Franchises:

Our cont ac'6s with Hunicipal or County governments for distribution of power at retail to customers within thei bounda'=ies -an alterrative to munic'pal distribution of power bought at wholesa~.e from FPL or municipal gene ating'nd distribution with agreed interchar.-"e wi h FPL.'Our activities and pol'cies under t4e. six areas 'noted aboVe are

- reviewed on' continuihg basis by the'overnment.

3.

FPC and T'SC:

Ou. actions and policies must be consistent with

.providing reliable and economic powe to our cus ome=s.

2 Antitrust.

ev:ew:

Vnder ~We AZC Act Ne Huclea Regulato=y Commission and the U.S.',Department of Justice review the prac"'c.-

affect of our.pol'cies and actions o determine whethe he g".an-cf a petit to c'onstruct

a. nuc3.ear plant on our svstem wall -er'd io

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to "cieate"or'a'intain a situate.on 'Snconsis ent wibh the ant'-"us-:

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laws. 'his review focuses upon whether neTghborxlrg sr.".all ut

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Jag systems wil3. be able to obtain the benefits of nuclear power s

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. and includes review of our ac'.mons and policies concerning 9.terrIs "such as reserve

sharing, coordination, delivery se:v'c ales o

bulk power, and allow'ng acc ss to the ownership o

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nuclear genexat

~ on.

0 " polic e" nv t..e;~ou se c;= cea we hive established in conduc ing =ela~xcnsh ps s:hach as

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si~. d'sou'ssed above "re obvious>y o spe:=~ s'.';; 'c

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anothe diagram showing the interrelationships

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0 etween th several types of business arrangements that are involved e

Q g the several types of custume s involved and the agencies which.have juri,sdiction ove= "h's'a.

The basic charac e=istic c')f these matte s which relates to the management of the actions k

inv63.ved is.that a negotiation with a given customer or a policy or an action =concerning obtaining a branch:se, providing wholesale 0

rate', negotiating an interchange service contract or e ri orial agreement, or a discuss'ion concerning joint ventures oz pooling e

I e3.1 have implicationp" one to the other and each to the overall'egulation o

our business by either the FPC or the PSC and, to

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the particular review of ou>> business carried out bv the HRC,and

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the U.S. Department o

Justice in conjunction with the antitrust

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equi"ements. conce ni'ng nuclear plants.

The complex and crit col

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ature o

. these matters suggests tha their management must involve specific p>>ovis'n fo>> efficien and a

ect. ve coordination.

Xt you3.8 apnea= that because of the large numbe of separate organs"atio"...-

depa tments necessa i3y involved this could best be accomplished

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either by establishing c3.ear Read responsib:lity in one. department

')r by formalizing the. relationship a litt3.e bit further through

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~ WO the,estab3.ishment of..program management for the:~~ -e -utile y

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e e3.aeons progr'am..

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%o XX Discussion of 1975 SFL>C-.Progrkai.on 3:nter-Utility-.g lations 0

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-- A.

Na. or re ulato vo3.icies aHd recuiremen s.

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Public Se vice Commission:

ac% gi Zn -ddition to-s rany powers concerning the;ove a l regu i

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of -the 'lec"'=ac busine f

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.the ~BC'as g"anted co ";

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/ 8 cP/Q 283.508 The 'k'ey r

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e'stablishment of a Florida grid, system or power pool.

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~ 0 wezs are listed in Slides 3-7.

E Federal T'ower Commission:

The.key FPC powers and recpiremen s concerning in er-utility relations are listed in Slides 8-14.

. oXnterconnections'nd r c'Hholesaling - Slides eNheeling

-. Slides 13'n ezchange'-

Slides 8-21.

12 and 14.

and 14.

HBC/Jus ice De~artmen 0

The. HRC'nd Justice Depa tment. revie~i an application foz a

. construe ion permit for a nuclea plant 'to insure that granting

. the permit will not c cate or maintain a situation inconsis an t

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d

~> the ant'itrust laws.

This is a very broad charte-for ihese agencies.and they have used it o attempt to obtain broad s

a emen"s

'of pol'icy from private utility compan:es which would fuzthe

. their phk1osophies concerning public and p 'vate power.

The aove=nmen P

has considerable leverage in negotiating th:s area because the

.--- investigation and any potential hearings which migh" be involved consumes several. years and threa"ens the Belay of the plant con'struct'c:.

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The time consur~ng review process "c'n.o ten.be avoid'ed. if.;.

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a company ag ees to certain p inciples of policy which the governm n-'

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. considers'would render j.ts future behavior satis actory.

These

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prSncip1'es a

e focused at five areas:

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" Xnterconnection and Reserve Sharing e

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obhee1'ng

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Sales

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o Coordinated

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f 883.53.0 g3.ide 3.5 is' very condensed summary of the policies desired py the government (column 1) p the policies which ipse agreed

~w For Gt. Lucia Unit.2 (column 2) ~. and policies which have recently been agreed to by several othe utility companies'n

~

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o Slides 16-20 summarize the area-of joint propre'cts.,PPL'"

current 0

4 rincip'e interest in this area comes frc. the. act '~.at joint projects ay be forced upon us by regulato y requirements (Slide 1.6).

Zhe area is sum-...arized on Slide 20.

e C

Hholesalinc' SR Rate; P

While sales for resale represent'nly about 3% of ou curren"

.- revenues (Slide 2l), they are, neve"theless,

.o" co'nsiderable impor ance 4o us because they are growing at a'aster rate than our retail sales and because the rate a which.ve wholesale.{as'regulated.py~-

Che PPC) can a ect other way" in which we ao business with our'--.=

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customers (franchises and interchange service contract's) as vel3.

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>s our ability to co..pete with competitive systems.

Of particula="-.:

1 Smpo~tance" is the'act-that.She wholesale rate or SR rate is igned to apply tc.a cu to-...er whose ys"e= 's elec."-:calLy iso" a,.e'

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~ to. the FPL sys ei and.wlio ooes not have any'genera ion o

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De chborin~ u- ""tv s+$ tem which 'does'ha'.-

Qrs Own'ceneratiov'-:.

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t a self su=.

~ ".e."."'"n 'do bus'ness

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nuclear licensing proceedings (columns 3-6).

The negotiations on gt. X,ucke Unit 2 vere kn a sense unique because of the rathe=

advanced status of the projec at the tom the negotiawons e

occurred.

He can expect "an intense review.'by the government relatice e

eo the standa d government policies as we get. into the South Dade pjoject..

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..B.. Voint Pro.'ects.

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ant'entrust review.

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service

'con ract designed to provide for occasional interchange of power from one sys em to the othe=.

The costs for these C~o 1

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cfjewer sales are not a 'all the saw no a

e the ra The SR rate. would requi e modification if 4t werc to b

used, d'or sales to a customer who did have'eneration

( ee S11de.26).

our ability to.consis ently apply and to e plain and defend -he

. application of o"r SR ra e and our interchange service con rac-'

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po the large nus>er of sys.

~s we deal vith vill continue

~o be 0

Xn erchance Service Contrac"'s.

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elate to the area. of interconnections anc Xntercha ih"ough a system of intexconne"'tions and intcrc..

S3.ides 3l-38 r sexv'~ce'ontracts.

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0 of power it is possible for a number of companies to derive many of

~

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Qe.economic and technical benefits o

pooling vithout any of the forsnalisms and othe

'disadvantages of pooling.

FPL is currently involve'd in such-a system'as susnmarized on Slides 31-34.

'te al o 0

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have a s andard interchange se vice agreemen"

'which is outlined Ln the Tables on Sli'des 36 and 37; The status. of our negotiations

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to apply this stan'dard agreement: is shown on Slic'e45..

As in'the

't case of the wholesale -at it is cr:tical here tea~ we coritinue 0

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Co consistently insist upon fuLl recovery. of cost plus a fai=

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.unde these agre

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this eouires that the distinction'-between.vhnlesa""='ng and interch-.

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Power Poolinrr.

~ 0 Slides 39-44 cover the

a. ea of powe pooling as 9.t kr berg considered unde" the broad umbrella o

~A grid bill fo=

'. development in Flo id~.. There are obvious hnd subs" ztial tential &~lications to FPX and ou course of dealing concerning

~

~

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~s vo-k viD be subject.to scrutiny by tha govarnm nt, du ing the antitrus

. reviews views associated xi& thai planed nuclear plants.

Slide 45 Lists a basic st ategy. for this area and rel'es upon on=

"gbQ.Sty to cuantify the good parforrr~nce o

our existing system an5 to defend the 'existing sys em as providing most, if Fno a')3.,

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~

of the bene&,ts of o~al pool'Mg without the substantial -additional 0

overhead and complication of a formal pool.

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P Territorial A reements.

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1 PPL curxently as c

tl h

PSC app"oved ter='to ial agreements vith o

+

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f ll utilitias:

Jacksonville Electric Authority; &e 0

C3;a County Co-Op (in the vicinity of PalaU;a).; Florid X'ov Corporation; Vero Beach; Lake cnorth; the G~adas Co-Op, th

Lee County Co-Op; Homestead; the Keys C. p.

g "

o-0 Ar. ag-eerent.in the

=Vicinity of Live 0& vi"h.he, Suwanee River Co-p

~

p.

-0 vas disapproved

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In'addition

~'

hg the PSC 'and:hence'must be considered a-n+~

ts a~)'lea,st vi.th Peace'a have attemp"ed to neco"iate agxaement "u~.in completing d '& F Pierce but vere uhsuccess u

. n River Co-'Op and xa.

o'

~t 4

~ agreemant.'

)60's'-'-ha PSC made trong Xn a number if orders during the 19

~

ag ec - nts as ci 5;cans o-" r polici' aQQm n

5 favo ing e

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nba~

n "i=:hbo ing sys"e-...s fry='

~op o riate:"irci=.s"~woes,

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at> yes.'p'.ass)io 0

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.summari"e the objectives which we consider to be desirab3.e o

the efforts which are recommended to be carried out Xn erance.of these objectives.'

0 ~

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At.tachment Attache.erat Attachmen A --SY~~C Heeting Agenda 0

3 - Outline Titled "Regulato~

C Xisting of Utility Systems Xssues 5 Systen Design" in Flo isa, 0-

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SOT'L~L%RY OF PKG JLATORY PPOBLEH AR"AS

.'Rates - retail, wholesale.

Public policy.

Antitrust.

Pooling.

. Hholesaling.

Xnterchange.

Joint. projects.

Franchises.

All're interrelatecL.-

All relate to our competitive survival.

l. ~-.. 1f a2.

. lead responsibility (s" ategy manager) for dealing vith regulatory problem areas.

2. 'ooling - 2'PL response to Grid Bill initiatives.

3.

Enterchan e versus Nholesalin

- Criteria for application and =responsibilities.

Rholesalin versus Franchises - Development and coordination oZ strategies.

C 5.

O'.

Emxlications Assessment of long range ixnplica ions fo-corporate Qevelopmen

~

SmnEGIC SUM-'KR XHTERCONNZCTIOHS JOINT V YTURES

~

~

~ o Prese ve integ ity of exist'ng. system, territory and customers.

Xn general, we do not seek interconnections, except where mutual and eciorocal benefits will accrue o

our customers th ough lower costs or improved reliability..

.He do not seek inte connections which have minimal

. benefits to =PL or its cus-omers merely to obta'n additional business.

o 'esist within legal limits non-mutually beneficial interconnections.

0 Emphasize examining each inter'connection on i"s own merits.

~

~

insure non-discriminatory relationships, but xn so doing do not. overlook jus"i i~le d'e='ences or sake of uniformity.

0

~~~hasize

'nformal non-b'nding coordination arrange<<

ments based on mutual bene its.

0 Vne e law recuires access o

non-benefxcxal xnte -.

connec ion vigorously ass'ert ull cost recovery including compensation or the contribu"'ons of management anc 'nvesting in achieving the economics desired by the other-.party;

~

~

Presen estimated grow h rate

.aoes no make point ventures attractive.

Such ventures could be at~a mve-at greate= or lesser growth rates.

Consi'der acce s to sites for genera ing un s,

'ts,of othe s.

~

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STRATEGIC SUH'~Y XHTZRCONNZCTZONS JOXNT VENTURES Dirac. efforts to:

M~ ewing franchises.'lanning organiiation customer septic 0

Xnformal coordination arrangements.

- nonbinding corrjtment 0

-.insure voluntary benefi"s utilit es o

to isotated o 'Confine SR rate'to non-genera".ag portions of gene ating utilities.

hase ou

. wholesale ta xffs where negot ated con" acts.

~ 'o Te ri ori'al: o"greements covering d possible to substitu e

iree~ ~ y adjoining facilities.

Coo~dination of all re'sponsible Z'PL func sons..

oNegotiated in"erconnection contracts rather than who3.esale Apply znterc ange con e

ontrac"s utilizing appropriate schedules to all non-isolated genera"ing utilities.

Publi c Policv Conside" ac"ion ~ the olloving areas Obtain'ng eauivalent tax.status Liberalizing'.FPC regulations.

Obta ning the right to earn and at fairvalue.'ith municipals and REAs.

depreciate ut'lity p'nt e

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OWQA

'ljR L LICHEN COhltAkY

~ iRWFFlCg CORRESPOWDENC<

Q6 I-~ J AYYLNUJ.2L r Pc iqj 273006 LocATloH miami plo~ida orna December 5, 197S Esto Hr. Tracy Danese

.Pw..K. S. Buchanan E. X. Bivans COP!

Propo ed Un'orm Xn erconnection A reements FPL a TZC, r PL a FPCoro.

X have brie ly reviewed the draft copy of the prooosed

Xntexconnection between PPZ and T=C and between ZPL and ZPCoxp. i e

X am very much conc rned that apparently all Service Schedules provide for wheeling powe-a" "unive sal postage 'stamp rates".

Also the methodology for

.'alculating transmission wheeling'ates only provides

'ompensation fox losses..

X suggest that we have a meeting to discuss this urther.

~',

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cmpares favorably.wi"n average bus'ar cos s

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and is such 'at the esul ing.bus ba cos is

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uidelines for Power Generation

~Yom ViUT13.c1.Qa So 1 '

Haste Operations

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Fhe following are suggested guidelines or use'n planning in the area

-"... of our involvement. with waste disposal, power generation:

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FPX should own and'pera e the elec ric power generation facili ies

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Turb ie-Gene ator a'iliaries

- Lube-owl system

- i.Hydrogen sys em

~ r' i; 'Pzrbi'ne opera or foundation

". Condenser cooling system Cool.irig system

-.akeup an" co~cd ion'ng svs"e~.=

~ ':-'.-:::. -.'".Genera

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FPL should pay for s ear generated bv the'municipally-owne'd and 1

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FPL should no be re'sponsible

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..M regard':to contrac p ovxsions on technica3.

ma ters. and for'ost e

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The Treasurer

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UNITErD STA'ES'r P~~RICA BEFORE

'Zhr.

FEDERAL PORE.R CO?MISSION TESTXM3NY OF CORDON T.

C.

TAYLOR FEDERAL PObrR CO%'~SSION In the M-tter of

'.rlozioa Powe 6 Light Company E-9574.

August 3, 1977 washington, D.

C.

20426

1.

2.

3.

5.

'6.

7.

8.

9.

10.

11.

12.

13.

14.

15.

16.'7.

18.

19.

20.

21.

22..

23.

24.

25.

26.'

27.

28.

29.

30.

31.

32.

33.

34..

35.

36.

37

'8..

39.

40.

41.

42.

43.

44.

45.

46.

. 47 48.

Q.

Would you please outline your teaching experience' A.

Between 1964 and 1967,-while in graduate

school, i was a Teaching Assistant and than Head Teaching Assistant at the University oz Czlifopxia at Berkeley zor the Princ.'-

ples of Econom-cs cou-se.

rrom 1967 to 1969, i was an Acting instructor at Berkeley and taught ~Q.croeconomic

.Theo g.

Then zrom 1969 to 1974, E was zi st instructor, then Assistant Professor, and zinally Acting Depa tment Chairman, in the Department of Econom'cs at the Univers'ty of He~lmd.,

Baltimore County'Camus.

i taught Public rinznce, Environ-mental Economics, Urban and Regional Economics, znd Y~cro-econom-'c Theory

-i also had teaching experience wnile perzorming military service.

Between 1961 and 1969 i served. in the U. S.

Coast Guard Reserve includi g six months o

Active Duty znd ove seven,.years of Reserve Duty.

Wn'le on Active Duty, i was a student at the U.S. Naval Training

, Center (San Diego) and completed, as Eono G ac.uzte, t e Electrician's Class "A" Scnool.

After two years of Re-serve Duty; i was awarded'a D.=act Co~ss cn to Ens'~

=and T. completed my e" ght years o

se~ ca at tne rank of Lieutenant.

As an of=ic i had respons bility for my reserve mit's Enginee ing T=zinino ct~miculum and tzugh" shipboard electric systems.

Q.

Would vou please summarize your other p ozassional experience?

Zn 1962, i was an Endust ial Engineer at the Boeing Airplane Company in Seatt e,

znd worsen on =zc 3.it as plz'nning.

En 1965, E was an econo 'st for tne B~k oz Cali ornia in San r-anc'co and.completed analyses

'o=

zo.

potential b=znch bzW locations.

~ En addition,, i developed a newsletter for the Bank which znalyzad West Coast co-..o 'c growth and bus'iness activities.

In 1967, i was a'onsultant '-o Arthur D. Little, inc. znd helped p epzre the Szn

.= znc sco Tax Stud in 1970, i served as a consulta t-to tne Bz't-more P arming Council and p apared an znalysis, Pr'o

. <<v Criteria for Sewerage rzcilitias, which estzblisnea a method or se ecting p ojects suoject to rederal cost-snaring; 2x 1973, as 'a consultant to the Econom'c Anzlys "s

Division in the U.S. Znvi onmental Protection Agency (EPA),

i prepz=ed a chapter oz the A'trategy St dv entitled "Sulzu Oxide Emission Taxes as z Supplement to Regulations."

Also in 1973,

= served as a consultant to the Wate Progrz s

When aid you jo n the Fede "l. Power Commission staff and what e you cv ent. duties?

A.

En July 1974, E jo'~ed the PC sta=f as an E dustry Econom='-st in the Offi.ce of Economics; in Pay 1.76, i became'the Assistant to the Con's on s Chief Economist; in Febvxa-y 1977, E was appointed Act'sg Chief of the Divis'on of Economic Stud'es

.'n the 0 f ce of Pol'cy Analysis; and in July 1977, E wzs zppointed Chief o" thzt Div s. vn.

For the Section 80 (c) Study p epa ed by the U.S.

Wa,ter Resources Counci:

unce Puo ic Law 93-251, E co-autnored a

eport, "Opt'ns'r

- the D'comt Rate."

Fo the new National Powe

Survey, E helped to prepare the chapters on tne

=utu e

E ectric, Growth."

E have pre-pzred chapters on the."Economy of the P'ver Basin" fo=

Kern Rive~ Bzs.n Aov-aiszl Report znd fo-the Pit Ri

-e"'as=n A--..rz=:sai Ressort:

9~so,

i. co-authored

~~a =i'e" conents on the Co~ssion Rulem-king on Annual Chz=ges o

1. Branch, in the Office of.Planning and Evaluation at the EPA.

2.

E wrote the chapter entit'd the "Bene=" ts of Water Quality 3.

Enhancement" for.the Economics of Clean Water, a report to 4.

Congress.

5.

6.

En 1974, as a consultant to the EPA's Washington 7.

Envi onmental Research Center E helped to analyze the 8..

Eerthern Grezt Pla.'ns Resource P ograrn w" th regard to 9.

facilities sit ng and to socio-economic impacts.

Yzreover, 10.

E contr.buted to the Agency's critiaue of "he.AZC's Huclear 11.

Fast Breede Reactor'rogram Draft Environmental Empact 12.

Statement.

in,.8ddhtion, E served as a consultant to the 13.

Energy Task Force in the Office. of Resea ch and Deve opulent 14.

at'PA..

T.workec'with the Fossil Fuel and Huclear Fue~

15.

Groups developin~ resezr'ch and demonstra~ on projects "o

16, 'a prog m to achieve nat onal self-su=ficiency in ene gy 17.

supplies.

18.

'19.

'ater in 1974, E was a.consultant t'o t¹ Off'e 20.

of Economic impacts in,the U.S.

Fede al. Ene gy Ad~-'~istrz-21.

tion.

E analyzed crude oil. pi"'ce controls md. em o-ation 22.

incent.ves, a d woked on establ shing the level of price 23.

cont 'ols for un"'eaded. gzsoline.

24.

25. ~

25.

27.

28.

29.

30.

31.

32.

33..

34..

35.

Ny respons-baal't'es include analyzing ecorom'c

36. 'ssues for tne Commi.ssion, se~i-g as an e~~ert ~tress 37.. FPC hearings, and supe~sing the econom" c =esca-ch.

and 38.

the preparation of expert tes t'imony by. the Divis"or '

39.

staff.

.40.

41.

42.

43.

45.

46..

47.

48.

49.

~

g 1

1.

2.

3.

5.

6.

7.

8.

9.

10.

11.

12."

13.

14.

15.

16.

17.

18.

19.

20.

21.

22.

23.

24; 25.

26.

~

27-.

28.

29.

30; 31.

32.

33.

34.

35.

36.

37.

38.

39.

40'.

'4l.

42.

43.

44.

45.

46.

47.

I Use of Most 'Government

Lands, RM75-11.

I am the.FPC repre-sentative to the Econom'"cs Committee of the U.S. Hater Resources Counc'1.

In add t'n, I zm partic'pat'ng i national 'research ef'fort on peak load pricing, the Elect;-c Utility Rate De'sizn Stu~d on Task Porce 5 - Peak Loac Rulemaking.

Th's study is soonsored jo'ntly by the Edison.

Electric Institute and the Electr'c.Powe Research Institute at the request or tne National Association or Regulatory Utility Comm'ss'oners.

Finally, I, have prepa ed sections of: several Env <<onmenta" Impact Statements.

Q.

Have you testified in 'other cases7 A.

Yes, I have testified in the follo~~mg H'C cases:

Virginia Electric. Power

Company, P-2716 Bath County Pumped Storage Project.

I test. fied on the effects o" peak, load pricing on electric'ty consump t. on.

Sierra Club v. Nebraska Publ'c 'Power Dis" ct, E-8492, znd Neoraska Puolic Powe<< Distr" c'

-1835, Gerald Gentleman Steam Generat'ng Stat'on anc Sutnerland Hycroelect=ic roject.

(Combined or

-hearing.)

I testified on the socio-economy'c i~acts of constructing and ope ating the coal-fi=ed plan-,

and on the effects of peak load pricing on elec"=-

city consmtion.

E1 Paso Alaska Company, et al.,

CP75-96, et a

Alaska Naturzl Gas Transportation Syste~m.

I testified on the comparat've impacts o'r a -erna-tive pipeline.<<outes'on the r'nances of the state of Alaska and on Alaska's locz3; gove~ents.

I h

Blzndin Pape-

Cocrpany, et al., E-7671, Headwate= Benef-'s Invest'at

ons, Upper kiss 'ss 'op River. I testified on the payment ox inte est charges.

Northern States Powe

Company, P-108, Chippewa Project.

I testified'on the National Economic Development benefits and.costs. or federal takeover.

Xn addition, I have testif'ed at the request or the U.S. Nuclear Regulatory Commission (NRC) before the NRC's

~

~

s 1.

2.

3.

5.

.6.

7.

8.

9.

10.

11.

~12.

13.

14.

15.

16..

17.

18.

19.

20.

21.

22.

23'.

24.

25 26, 27.

28.

29.

30.

'31.

32.

33.

34.

35.

36.

37.

38..

39; 40.

41.

42.

43.

45.

'46; 47.

48.

49.

50.

Q.

Have you worked on any such cases?

A.

Yes, E have been assigned to two such czses for three years and to anothe fo two years, but they have not yet gone to hez ing.

1'ave worked on'these.czses as requi ed zt each stage in their development.

Tn

addition, Z have supe~so~

responsib 1'ty "or the testimony now being p epzred by econo 'sts in ~he...

Division of Economic Studies for czses invo~ymE p ice.

saueeze allegations.

Q.

Have you revieweci the Power and Light Company

(~&K) utility now owned ~d operzted zpplicztion of.the F"=o ida to acau.re the electric by the City of Ve o 5ezch?

A.

Yes.

Have you reviewed the hearing transcr"pt in Phase 1 and Phase 2 of this docket?

A.

Yes.

Q'o

tained, relevznt Have you also reviewed discove~

doctznents from part'es to this docket and other ciocuments to this applicat on?

Atomic Szfety and Licensing Board.

L testif'ed on projec-tions of growth in electricity consumpt on in each of the service areas oz the zour'applicant companies and in. the reliability area as a whole.

These dockets are:

Portland General Electric Company, et al.

HRC Docket Hos.

STN 50-514 and STH 50-515 Pebble Springs Nuclez Plant,.Units.l znd 2.

Puget Sound 6 Light Company, et =l.

NRC Docket Hos.

STN. 50-522 anci STH 50-523 Skagit Nuclear Power Project, Units 1 znd 2 T. also have testified regarciing the Utility Prog zm of the proposed Hz" onal Energy Act in hearings before the Subcommittee on Energy and Power, Coma'ttee on interstate and Foreign Comme ce, U.S.

House oz" Representat'ves.

Q.

Have you testifieci previously in a merge o-zcquisition application case, or in any othe case w'th the same sorts of issues such as competitive impacts, market power,. and ant.'-competit've allegations?

A.

No.

s l.

2-.

3.

5.

6.

7.

9.

12.

13.

14.

. 15.

17.

18.

19.

20.

21 22.

23.

24.

26.

27.

28.

29.

30.

31.

32.

33.

34.

35.

36.

37.

38.

39.

40.

41.

42.

43.

44.

46.

47..

48.

49.

50.

A.

Yes

.'ie're the discove~

documents and other documents that you present as exhibits selected by you o-unce your supervision and direction?

A.

Yes.

lItTere the other exhibits prepa ed by you or unde your supervision and direct" on?

A.

Yes.

Sow is your testimony organ"zed?

A.

My Testimony 's organized into five parts:

1.

An Econom' Framework :or Evaluating Ye ge s; 2.

Analytic Concepts Needed ia..a Economic Analysis D)r Evan.uat n fo revs Relevant Product: ~d Geographic

~~ l.ets the Structure o

the Electr='c. Powe Xncust~

h Fl Conduct oz'FP&i. in the Relevant Harkets; and

~Conc us 'ons.

I 5.

1.

An Economic Framework for Evalua nz He revs

Second, no alt mative to the acauisition should yield a la oer difference between the bene= ts and costs.'

For ezample',

an alternative such as Vero Beach purchasing part or all of its electric powe

. and energy from i~GL, might yield the sa e benefits but:educe t~e'osts imposed n others; 0

, If the costs

" om the acquisition ave large than the benefits, then either the application should be cen'd Q.

Under the Federal Power Act, &e approval o=

, an, acau"s=t"'on or me ge reauires that t:he Comm'ssion

="ind such action to be consist nt witi the publ'c ~te e ".

you= opinion, what are the economic issues iz th's application?

A.

There are two broati economi'c standards that should be met before an acauisition 's ec'oncmically".justifiable.

I

First, t:he benefits

=

om an acquis'tion should be la gir than the costs to all those aZfectec

. i' ectric "y customers in the Florida area may oe. affected by the acauisi-tion in addition to the customers ox FPGL and.Ve' 3'each..

1.

2.

'3.

5.

~ 6.7.

8.

9.

10.

11.

. 12.

13.

14.

16.

17.

18.

19 20.

21.

22.

23.

24; 25-.

26.

27.

28.

29.

30.

31.

32 33.

34.

'5.

36.

37; 38.

39.

40.

41.

42.

43.

. 44.

45.

46; 47.

48.

49.

~

~

or the approval of the application should oe cond' oned to reduce the costs.

~ Q.

Section 202 of tne rederal Power Act is entitled "Interconnect'on and Coordinat'on of Facilities; Emergencies; Transm'ssion to roreign Countries."

Are you familiar w th this section of the Act?

A.

Yes.

Q.

Section 202(a) requires the rede al Power Commission to promote and encourage inte connection

-~d coordinat'o..

in order to assure "an abundant supply of electric 'e~er~y throughout the Un'ed, States with the greatest possible economy and w't:h ega-d'o the proper utzation and con-servation of nataral -esources."

Are your two economic criteria compatible with this -mandate?

A.

Yes, they are compat ble and following the

=

gu'dance would achieve the mandate in tne Act.

To be specific, if an acquisition yielcs net ben ~its, the.. is benefit:s greater than costs, th's would mean an -ncrease in economy and in improvement in the utilization and conservation of na~~al resources.

In addition, if an a" ternatve fo~

of coordination and exchange y" elded even larger net be..e=i,ts this would ~ rthe increase economy and'mp=ove the ut'za-tion and conservation of natu=al resources.

Q.,'In general, wnat are the benefits exoected

="rom a merger or acquisition' A.

Customers. want low cost reliable el'ectric se~ ce.

There would be benef ts frcm a merger or acquisi" on '=:

the'economic costs of producing and deliver" ag e'ectric are reduc d, and if -eliability 's improved..=or ezwp e, the electric ene gy to supply Vero Beach may be procuced at: lower economic cost if rPGL s larger and more effic ent gene ators 'use less fuel or less ezpensive fuel: to meet aaditional load.

Although SPEAL '

ave age cos t of p odccing a.kHh is low, the incremental cost of meetin+~ additional load may be'h.gh.

rPGL may have to ourn o

1 to seme additional -loads.

In comparison,

howeve, another elec ric system such as Tampa Electric which now sells to ~MT'ay have'suff.c'ent excess capacity to be aole to meet adc't ona loads with coal-=ired gene at'on at a lower incrementa'ost.

In order to minimize its ene gy costs, rPcJ. may'al eacy be pu=chasin~

from Tampa Electr c all of the coal-fired electric energy available

~ca, therefore, the incrementa cost to rPE, woula be the bas's

=or any econom'c -be.efi-s = " 'd.

1.

2.

~3 5.

6.7.

8.

9.

10.

11.

12.

13.

14.

15.

16.

17; 18.

19 20.

21.

22.

23.

24 25.

26:

27.

28.

29.

30.

31.

32.

33.

34.

35.

36.

37.

38 39.

40.

41.

42.

43.

45.

46.

47.

48.

49.

30.

This example br'ngs out two points.

One, the economic benezits. of acquisition r suit not f om acqu's tion itself but from actions it facilitates such as bu1k power coordinat'on,'xchange, and re ated transact'ons.

Two, other institut" onal arrangements, short oz out= ght acquisit on, can also produce these benezits.

Q.

Xn genexal, what a e the economic costs

=rom an acquisition?

A.

An 'acquisition reauces competition in relevant markets.

Economists believe that compet'tion is the best means ou-society has to encou age and disc'pline producers to be efzic'ent and to provide high qualL'~~,se~ce at the lowest poss "ole cost.

Professor Alfxea E. Kahn in his book +fie Econom" cs 0

Regula on, Volume 1, s,tates that:

"Competition ~~ll weed out the inefficient and concentrate proauc"'on n the ezficient; it wLll detenjne, by the obj ect ve est of market surd-'

3,,

-.o should be pe="'tted to produc it w'11 force produce s

"o'e'rogressive and to.offe custome s De sexvices they want and or which they zre willLng to pay; it w ll assure the a1loca-tion of labor and othe inputs into the lines oz productio in which-they wi11 eke the max mum cont= bution io tot"-l output."

(page 18; foot'te omitted)

Competit" on appl'es continuous pressure on irms to achieve the lowest costs and pr. ces ana to '~rove the qual'ty o-".their products.

Za o~der to compete successfu<

y firms.must pu sue techr'olog cal innov'ations.

To t.'<e extent

.that an acqu sit'on reduces competition, the ma ket pressu=es.

for good,pe zoxmance on the rem-in'ng fims a e recucea.

without this pressure, fi~ m-y not ach've'he lcwest costs and oe as efficient or advance as rapidly technol-ogically.

Ve o Seach is a self-generating utL1i+i.

Acau'si-tion, zor example forecloses any ut"'lity othe than r="~

from sell'ng balk powe-to Ue o=-Beach.

Tn addition, ot.".er indepencent self-gene ating uti1it es lose the actu'a1 cr potential bene=" ts o'f coozc'nating, exchang'ng, and ouy.

bulk, powe= serv'ces

"-om Vero Beach.

This loss incr as s

the cost to t~e custo-e s of the incepenaent util'ties.

Yoreovex,

<<here a=e othe= costs

=rom =educed co-petit. cn

Thus, as acqu"'sit on imposes costs indirect y th=ough the 1.

2.

"3.

5.

6.7.

8.

9.

10.

11.

. 12.-

13.

14.

15-.

16.

17.

18.

19; 20.

'1.

22 '

23.-

24; 25.

26, 27.

28..

29.

30.

31.

32.

33.

34e 35.

36.

37,.

38.

39.

40.

41.

42.

43.

'4.

45.

46.

47.

48.

49.

50.

reduction in compet'ion on customers who are not directly involved in that acc,uisit'on.

Q.

Has the 7PC previously recognized the econom c

value of maintain'ng and increasing competition in tne regulated electric utility industry?

A.

Yes.

in'1966, in the Cotm"onwezlth edison merger cas'e involving Central illinois Zlectric, the'Commis ion stated. ir. 'ts Opinion Number 507 on p-e, 23 that:

>m the context.of regi~lzted publ'c

, utilities, the anticompet tive e=fect

'f a me 'er required cons cieration of at least thre different auestions:

(1) will the merger bri g a significart:

added concentration o" eco cmic powe

?

(2) willit eliminate any meaning:ul compet t" on which may e~.st e.ther

.directly or by ezample'a attracting new industries to their respect've service areas, in making wholesale

sales, or in pro~~dirg economiczl sexv'ce?

(3) w ll it have z

advo se ef=ect on competing energr sources?

On the same page the. Commission =urt e stzteci:

"The e is a leoitimzte publ c i t:crest in the c'egree of concent=at'Gr 0

economic power ir. )aerican inde.st=ies and, not-withstanding the safeguard o= regs at=on, even in the electr'c utility ~r'Kstry."

Mor'e recently', in ega d to an acauisition ap 1'ca-tion, the Ccmzvssion in its Cent al P~e.Order stzteci. on page 13 Chat:

"Xn any analysis of public inte est con-

'siderations, due weight must be given to the fzcts that devotion to competit'on is our., &rrdamen tzl economic pc 1-c7.

c ede al

'atitwe Conies 'on v. Seat=gin L-'..es, Ss?1

.S.

anc tnzt tne puo ic

, interest is d'sadvznt-ged when p= va"e enterprises are pe~t-ed to'ngage'n anticomp et'

've agreements and r es traints

'....City o=

afavette, Louis

--..z v.

Sec it. es and Kzcnzn=-e Co='ss o

4>4

.= c 941'.(..

~ r.

1.

2.

"3.

4.5.

6.

7.

8.

9.

10.

.11.

12.

13.

14.

15.

'6.

17.

18.

19 20.

21.

22;.

23.

24.

25.

26; 27.

28.

29.

-30.

31.

32.

33.

34.

35.

36.

37.

38.

39.

40.

41.

42.

43.

.44.

45.

46.

47.

48.

49, 30.

Q.

Ts the value placed upon competition by economists ganera13.y accepted?

A.

Yes.'conomists believe that free enterprise in a competitive econom'c system wi 1 result in the most efficient allocation of resources.

Court dac sions in antitrust cases have reflected the prazerenca oz economists for economic polic'es that. foster competit on in the regulated. industries.

The Suprema Court, fo-example, in Northern Paci ic R Co. v. United States 356 U.S.

1, staeac t't:

"The She~an Pce was designed to be a

comprehensive charta of econom'c liberty aimed ae preserv"'ng

="=aa and unzeeeared competition as the rule of trade.

Zt rests on the premise that the ~restrained interaction oz competit've fo ces

~~11 geld ehe oes" al'cation of our aconom'c

'esources,

'the lowest p 'cas, the highest quality and the greates material prog ass, while at the sara t o p oviding ai env'ron-mene conduc've to the preservation 'of ou

'emocratic poli""'cal ~.d soc'al nst" tuti s.

Sue even where open 'to oueseion, the policy unequivocably laic? down by the ace is competitive."

Tn anothe= decis"on raga ding a regulated ue'lity the District oz Col~ia Cou=t o 4ppeals desex bed: the.in.e ent-limitations of e..e ratamak a~ process:

Admittedly, tha Coczaiss'on

'possesses.

a rzte-ma~g power and th's powe-is desi~ac.

to.

'rotect tha const-ers...3ue it is clez tDat this power 's largely a negat-'ve ona'.

Thus the Commission may see a selling race +or a supplia= only after it has bean demon'serataci that the present cha ge is unjust, unreasonable, unduly discri-'natory or preferential.,

a heaw~-

burden evan for.specialists as f~~ 'lia w th the...ind stry as is the Commiss on.

On eha other hard, '= compet't'on ez'ses, albeit ir a

limited area, there would be incant.'vas

=or innovation by the rep lated compan'es themselves and for t..e r comirg zo ~ard with proposa s

for better se~ cas, lowe prie s or.both.

And

'nce innovations o

p-oposals are fo tncoming

'by a supplie=,

t?.e Couz ssion could more eas'1y act to i=:ivarsaliz these bene "ts than it could

~

J

/

I 2.

'3.

5.

6.

7.

8.

9.

10.

11.

12.

13.

14.

15.

16.

17.

18.

19.

20.

21.

22.

23.

24.

25.

26.

27.

28.

29.

30.

31.

32.

33.

34.

35.

36.

37.

38.

39.

40.

41

'2.

43.

45.

4&.

47.

48.

49.

50.

have acted to extract tham in tially.

Northern

• Natural Gas Co. v. rederal Powe-Commission, F.

D.C. Car.

at 3.

Moreover, the Supr'erne Court in its decis'on in Otter Tai also has addressed'the importance of. competition g

1 d

~ I.

w.

Xh C

"There is norhing in the egislative'istory fin Federal Power Act] which reveals a pu--

pose to insulate electric power comoan es from.the operation of the antitrust laws.

To: the contrary, the history of Par"

'Z7. of the Federal Power Act indicates an over-i'iding policy of ma'ntz'n'ng competit'on to the max qnm ext nt possCole with the public interest."

Otter.Tail Co. v.

United States 410 U.S. 'o, 37~-37 (1973).

Q.

Since elect c uti~'ies are.regulated, why should competition be protected and enhanced in th s industry?

The el'ect c utility industry is regulated because competit"'on for customers street-oy-street or how~ e-by-house would oe dupl'cative and wasteful.

To avoid this

waste, a single ut'lity is g'ven a monopoly french'se to serve a local area.

The industry is regulated to portect custome s from aouse by the monopol':st.

Competition to obtai-.,'and retain the franchise and in the production part of tne indust~

s possiole.

The purpose o

regula.-ion to achieve the results that would have accrued ulcer com-petition where'customers are protected by hav'ng -lternat"v s When there;.are alternative soi~cas of supply, tEe fi ~

competing for the bus ness of customers a st a'.t:ain good

service, keep costs and prices do~a and be efficient,

'rogressive, and inrovativa.

Compet '

"on assures good

,performance because those who lag oeh'nd will be.fo ced out of the market. by a lack of business.

The purpose of regulat.on is stated by Professor Kahn in his The Econom cs of Herulation:

"the 'single most widely acceptec rule for the governance of the re~~~zted industries is to regulate

.tham in such a way as to produce the same results as would be p oducad by e""ective com-petit'on, 'f it we e, feasible."

(page 17)

V * ~ '

1.2.

"3.

5.

6.

7.

8.

9.

10.

11.

12.

13.

14..

= 15'.

16.'7.

18.

19.

20 21.

'2.

23.

24..

25.

26.

27.

28.

29.

30.

. 31-32-.

33.

34.

35.

36.

37.

38.

39.

40.

41.

42.

43.

In the concluding pa agraph of his two volume study of The Ec'onomics o= Regulation, P ofessor Kahn states that tne g=eat majority:

"regard this market economy

[competition]

much as they rega d democracy'as a.

~ manifestly ineffic'ent system that is better than any o" the alternatives...

To the extent that it can.be relied on, the institution itse

-", 'rather than either.political or manager'al'ol'c takes"over responsibility or t. e puolic interest...=ven when h="ghly imper="oct, it fcompet tion].can often be a va3.uable suppleme t to egulation."

(emphasis in origina3.).

Unxor~~ately, regulat~pn does not creat the positive p=essures for good pe=formance similar to those of comoetit'on.

Re~lation is essent ally..egat ve.because

't:

sets maximum prices and does rot put p=essu=e.down-wards on p 'ces; establ'shes c~'ni~~ standa ds of service..

instead o" encouraging oetter auality; and oversees expenditures rathe tnan letri...g mar<et.returns cull out good f om poor investments.

Regulat'on does 'prove.the'perfo~ance o" the regulated incust=ies, but economists almost universial'y agree that at its bee<, regulation "'s.not a good substitute for competition.

moreover, there is general ag=eement among economists that we, should encourage coupe"ition wherever poss'ble in the repxlated industries.

'In'1~70; the res'cent s Council of :-conomic Acvisers in their annua1 report'stated that:

"more reliance on economic incentives and market mechanisms in regulated industries would be a step fora d" The.Council also stated that regulated industries have been more prog=essive w'nen competit'on has been encouraged by'he, regu'ato~ atuhorities.

'I 45.

46.

47.

48.

49.

50.

Since the ourpose of regelation

's to achieve the performance of competit've indust=y,'ompetition shoulc,'e enco raged a..d protecteci because.it complements anci.

,rein=o"ces the "-oals o= regulation.

ncou ag ng a--c p=o-tect

-..~ competition

's also the objective of ant t=us-policy'-.'he appropriate relationship be~ween compe"'"'on and regulation has been summarized by==ofessor James'=.

1.

2'3.

5.

6.-

7.

8.9.

10.

11.

12.

13.

14.'5.

16.

17.

18.

19.

20.

21.

22-

~.

'3.

24.

25.

26.

27.

28.

29.

30.

'1'2.

33.

34.

35.

36.

~

37-38.

39.

40.

41.

42.

43.

44...

"Xt is submitted that an appropr ate antitrust. pol'cy for the elect-ic power indust~ is one that preserves

'hat degree of co+oct ~ion consonant" with realization o> available economies of scale.

...a careful application of ant trust concepts can supplement regulation without sacr f'cing ava'laole econor'es of scale."

ln suzmary, co~.etition can prociuce an ef= c use of our nation's resources rore read" ly than re'~~~1 Thus, cormetition shou3.d be protected and encouraged the regulated industries wherever it would not block achievement of econor~ es of sca e.

at" on.

'S, I

&40 tne

~

~

(

Meeks in his article in the Colu~b'ia T.'aw 'Review (Uol. 72:64) entitled;

."Concert at on in t e r.xectr~c ower Zndust g:

the Xanact of Antit~t Policy.".

He states on pages 75 and 76:

45.

46 47.

48.

49.

50.

~

~

~

- 14 2.. Anal tic Concepts Heeded in an "conomic Anal sis or Eva uatin~ Her"ers 1.

2.

"3.

5.

6.

7..

8.

9.

10.

'1.

12 13.

14.

15.

16..

17.

18.'9.

20..

21.

22.

23.

24.

25.

26.

27.

28.

29.

30.

31.

32.

33.

'34.

35.

36.

37.

38.

39.

40.

41..

'42.

43.

45.

46.

-47; 48.

49.

50.

5I..

Q.

Mould you please e~lain more fully what the value of competit'on.'s to t? e economy?

A.

Every economy must cont'nuously solve th~ee fundamental probl'ems.. These proolems are:

(1) what consumer products and se vices to

produce, and how much of eaci to produce now and in zuture ti e periods; (2)

(3) how to produce eacl oroduct in the sense of selecting the technolog'es oz production and the apportion" ont of the economy's scarce huinan, natural, and man-made p oductive resources among a'er~ative uses; and how to -divide up wha't is produced among the members of society..

%hat society wants

~rom the prod.uc'ers of goods anc serv ces is. good pe fomance..

Good perfo ance includes at least the following:

,:(1)

- the decis ons by produc s

as to what to orcduce, how much oz each, orocuct to proc ce, and t' choice of what. technology and. combination of productive resources to use shou d oe e"f.cient in two respects.

First, ro scarce p=oduct ze resources should be was~ed

Second, the auantity and auality o~ procuction should reflect what consumers 'want.

(2) producers should be progressive by adooti".g

, new technulogy for increasing output per u4't.

of,. input anc making available to consume s

impr'oved serv.'ces and products, and in bot a ways assist in izorovwo per cap ta real income.'.

A pe fectly competit ve ma ~et has many buye=s a-..d many sellers of an identical p=oduct and entry into th's

'Compet'tion is valuable because it is a st ong fore wh'ch leads in an automatic ash on to a'n ootimal-solut'on of.

the'hree fiwdamental p=oblems.

ia aadit on,. comoe".'zion is thought to be a gooa met"oc'of ach'eving the pe =o== ce desi ed

==om produco=s.

"r.". contast,'onopo y fwst=ztes acn'eving the comoetitive iceal and social"y good pe=-

formance from proauce s.

Q.

En economics, what aoes the term "perfectly co:="pet.'-

tive market" ean?

~

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market is unrestricted.

Moreover, no single buyer or seller is suzz-'ciently la-ge.in that markot to 'oe able to have an influence on p-ice.,Thus, a competitive market is a type of market or organization

~ wh'ch there are severe limits to the power or cont=ol that can be exercised by ind'vidual firms.

Economists also recognize that compet t on. in the sense oz rivalry can exist 'even when the ma ket stn.enure is not perzectly competitive.

Zn these ape

= ct mark s,

each c'ompany consciously make's product'on and pr-'ce decisions only after considering shat. those s~e decisions by their close rival's will be.

Even competition in imper'feet ma kets,

however, promotes e"f.c'cy, '.. ova-

tion, and technological advances that result in better products at love costs.

Q.

How is the elect=

c industry o=gani ed?

A.

Electricity mist be produced, t-ansmitted, and distributed to end-use custome s.

Each oz tnese functions in the chain o

supply is dist~met altnough t'ne st~~ctur of the industry 's characterized by large vertically integrated systems vhich do aD thre

?lany small ut'1'-

~

~

t~es only dxstr~outc e'ect=

c ty; t..ey purchase ou" k power and t=ansm'ssion services.

These purchases either may oe for full reauirements z=om a single supplier or may be parti:al requirements

=cm each oz seve-al su plie s.

The largest elect ic system in the U.S.

~-: t'ebs of kHh sales is the Tennessee Valley Autnority (TVA) which only produces ana transm'ts electricity..

TVK'does not sell at retail although it does sel: bt"lk po~er di=ect>y to large industrial and governmental custome=s..

P..e'onneville Powe Administration (SPA) neithe-gene"ates electric"'ty no-reta'ls it', except to a few la=ge adus-t ial fir s.

Xt only t=ansmits bulk powe BPX ma cets powe produced by the U.S.

Corp of Enginee s; 'the Bureau of Reclamation, and publ'-owned ut'ities.

3PA; then t-ansmits and sells this bulk powe for resale.

Some fims only generate elect icity and sell i" to oth s

to transm t and cistr bute.

Although the electr-'c indus y is doGv~ated oy 1 arge firms which are vertically integrated, electr'c" ty obviously cou a be supp 'ed without vertical inceg=at-on as cemonst ated oy t..e institut'onal organization of TVA and SPA'.

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"3.

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36 37-38.

39.

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Q.

Mould you please ezpla'~

what is meant by the tern "structure?"

A;

.The term "st ucture" in economics refers to the organizational character'sties of the market which might subst:aniially inz uence the behavior oz f rm within t..e market.

E3.ements of market structure would include such things as the number of sellers and buyers, product difzerentiation, barriers to ent y,'ost struc'tu e,

and the amount of vertical and hor'zontal inte ration.

Q.

Vou3.d you please define and explain the concept of - vertical integrat~ on?

. A.

The pr'ocess oz ez~ acting raw materials and then re zing and using them in Jnu aci ing finished products can be conceptual'zed as a veriical chain of sepa ate activit'es.

There a='e ms at each level in the vertical chaw.

A firm that integ=at s back.-ard undertakes the production o" the. ra~ materials o-semi-

~abricated mate ials nee'ed '-. i,ts'la. ts, out wh'ch previously we-e purchased z

om other f.=s.

A zirm teat integrates forwa-d move's to produce mo='e 'finished or final products'and perhaps moves into the whol'epaliag and retailin~. oS its products.

'he reduction of costs is the prima y motive ""or vertica n'xa @ion a t ough f" zs natl ally p efe enhanced control over'heir economic enviroment.

Back-ward integration insw~-es the supp1y a"" raw materials, improved predictability. of the cosi of these materials, and.protection f='om a p 'c sau eze oy monopo 'stic supaliers.

Forward integration insu=es an ouilet ~or a firn's product and educes a f'm's vu~ae ao" lity ".o being shut out from the market by wholesa e=s or reta.-. ers with ma ket power.

As i mentioned, the large investor-o-w d, elect-..'c systems in the U.S.

ar'e vert ca'ly integratea since. th y generally produce, t=ansmi,t, and sell elec

" c ty at wholesale and retail.

Zn addition, some eztract the r own zuels, 'bui none manufactu=e generators and turbines.

Ye 44.

45.

46.

47.

48; 49.

50.

51.

The enhanced cont=ol o

ma=kets through ve tical integration also pzov. des a means for abuse of that coni ol.

Thus, a vertically integ=ated fiw may be able to restr"ct the supply o" raw mate=ia~s to less

~.tegr~.ted competitors, to shut oct compet to=s from c =>ain aa=k=-.ts,

. or to.establish a vert cal price structure wh~ ch sauce;:es

. the profit margins of its potential competitors.

'%us, ve tical tegra=ion can prov de a firm with market pow =.

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49.

50.'.'ould you please define tha conc pt of economies of scale?

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A.

economies of scale exist fo-a firm i average unit costs decline as tha scale of product'on increases.

Stzted differently, tha concept of econom'es oz scale expresses a technological relationship in which an increase in inputs produces a mora than proportional change in outpi t.

Production raqu res inputs 'such as la'oor znd raw mater. als. If an additional amount of zll of these inputs yields a moxa than proportional 'increase in output. there are econom.as of scale.

'Assuming t'nat the cost, pax unit of tho inputs remains tha same as motto inputs are purchased, the presence oz economies o

scale implies that the average cost oz the good, being produced w.'ll fall; Ara the e economies'of scale in the electric power indust y?

I

~

A.

Yes there are out they result from quite di. aren" facto s in each pzrt o" the industry.

L~ the distr" oution of elect ic power to retail customers there zre economies from servin~ mora custome s pa= line mila.

Tha more customers there ara per mile tha zawe-miles oz distriout on lines that are needeci per custom r.

n addi"'ion, one "=ans-former can serve moxa custome s if the~e 's g eater c ~s-

tozer density, znd transformers also are o

e econc ic pe=

it oz capacity as th "- size inc eases.

Tf aacn customer takes more oowar then the costs also w~ll fall per kilowatt hou since th0 f.'wed costs of the distribution system zra spread,over more units.

This fzctor is particula ly, important "f, along with increased consmt on, there is also an increase in load factor.

Tf cons~tion increases, bu the peak load on each line does not, than no zddit ona size to the distribution lines or t=znsfowars would. be required'nd. these fixed costs would oe spread, over more kilowatt:-hours of energy.

P En 'transmission the a zre very lax'ga economies of scale because doubl'g tha voltage of a line w ll i.crease its carryin~ capac' oy the squa a o~ tha change's capacity. 'ince the cost oz trznsm'ss'on

'nes increases in proportion to increzses in vol tage, the cos" pe of capacity falls zs design voltage is increased.

~

~

'a the production'r generate.on oz e'act

~c ty "here also zra la=oa economies of scale...e e the bzs's 's.

both diffe ant tec.'".nology as czle inc.eases zs -e as changes in inputs.

At very low outputs diesel or combust'o..

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turbines are economic., As output reauirements i>crease fir'st small coal and oil 'ooilers become econom'c and then 1arge coal units aze less costly.

Fina3.1y, at the largest output levels high pressu e coal and nuclear units become economic.

There aze also economies of scale as sales grow from being aole to have many generat'ng units that can oe operated on a coordinated bas s w th ceni a economic dispatch.

Whet is the relations¹p between economies oz scale and natu-al.monopoli s?

The ex'stence oz economies of scale means that the average cost declines.

If ave age cost continues to decline over the entitle ang'e of prooable output levels then it is efficient to have'his supplied bv one fi~.

Tf two or more z w~s were allowec to serve th's output, then neithe fi~ would reach a scale of output giv'he lowest average cost attainable.

'A "natu=al"

o. o~oly ex-'sts when

" is more eff"c'nt c=

ess cost y or single firm to supply all oz. the ou"put.

For example, it would oe ~aefficient fo two or <<.ree e ec"=ic disi =-

bution companies to serve a single to~~ since

" would prooaoly result in the needless duplication of. faci 'i~s.

Thus, electr" c'y d'si ibu,-ion in a particula geog api c

a-ea is usually thought to be a natu-al onopoly..

Transmission lines also are natural monopolies bec'ause of their economies of scale.

Horeoyer, 'he d'cplicatior. of t"ansmission lines is aesthetically u~mleas~cg,

-was~es, scarce land esou ces, and has higher elect=ic.3.osses, A11 three zactors impose nigher costs on soc'ety." For

.'hese severa3 reasors transm'sion 1'nes should

'oe 'con-structed to voltag s h gi. enough to ca~

the. loads o=

all those util'ties wanting to use them rathe 'han. bud-ing duplicate lir.es, each to serve a single util'ty'.

From the viewpoint oz econom'c ana ysis what. s the expected relationship between economies of scale and the st~cture of an -inciustry?

A.

Economic analys" s would pred'ct that wh re the=a are significant economies of sc"-le there would be re atively i'ew fi~s in that indust=j, or in the case

=oz. a na" '=a monoaolv, 'one fi La a natu al monopoly s'tuat.'on,

--. e"e a

costs ccntinue to fall over tne releva." =ange o= ou=put, society woul'd be better ozf having a s'-.

e fi~ prodi:ce

- 19 1.

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. 42.

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this.product.

Si ce'the fi~ with the monop'oly would have no competition, society could either produce the good itself in a government n~a enterprise or regulate tha private zizm Q.

Do economies oz'scale provide an econom'c rationale for ve tical mtegrat~on?

A. 'if there are in fact economies of scale from vertical intagrat'on tnen suc..

econom s 'do provide a

rationa'ta; Vertical integration, howeve does not necassa-ily resu~ t 'n econom'as o= scale.

or ezarmla, there probably a=e no economi s of sca' from vertical integration for a d'stribution utility that installs its own g'enerating plant.

Q.

How do economies o" scale, the ex'stance of natural monopol's in some factions, and regulation affect the analys's of the struck-a of tha elect='c utility indus~

A.

Twd features wb ch stem om the characte is""'cs you 1'sted d ffe ant" at t¹ elect ic industry f om most other indus ias.

First, prices ara large y.sat. through

=

a regulatory agency rather than in di ect bargaining between producer and customer.

Second, the ut 1'ty has

a legal'bligaeion to s ~ply elect=

c" ty to anyone located. ~~chic its das'~at a sauce area even if such salas a

e not financially attractive.

Q..

What is, meant by horizontal inta~ation?

A.

Tn. the genera~ on of electric'ty or example, horizontal. inta~ation mea"..s that a single utility owns a number. of plants i a g'ven a=ca or distributes to a number oz dizfe ent local areas.

Xs horizontal integration at the generating level of.the indust y necessary to achieve economies oz scale?

Ho.

Separate firms that each have thai=

o~~w plant can ach.eve economies of scale by interconnect'on and coordination, particular~.y if they ope=ate: as a

pool wi"~ ca..t=al economic dispatch of their'genarat='ng units.

Owz.ership by a sing'e

=irm of a>>

these plans s may give an advar.ta=a ove= the cent=a dispatch type ox pool o gan'za"icn i have, just desc=

bed if the a

organizat'onal proble s gett'-.g the seve a

. f~~s i.. a pool to.work to~cthe cooperatively.

There are dif=e=ences of opinion on. this point since power pools with -any s~

utilitias and. la=ga syste" s as members in a single.poo're

'now'wo"k='.g s~ccassfu'ly.

4 l.

2.

"3.

'5.

6.

.7-8.9.

10.

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24.

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29.

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31.

32.'33.

34.

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36; 37.

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41.

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46; 47.

48.

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50.

Q.

You have characte ized the present structure of the elect ic ut lity industry as oeing dominated by large vertically and horizontally integrated electric utilit'es.

Do you think this st~cture has come about.

because oz monopolistic'activities on the oa t of these large firms?

A.,There is no basis "for an'verall generaliza-

tion, one would have'o look very carefully at the activities oz each, firn separate y.

There 's a natural monopoly at the d'str'bution level in each local area.

There is not, however, a natural monopoly from hori-zontal integ at'on and the ownership or contro of several local ar'eas.

Thus, the motivat'on for horizonta>>ntegration -t "he distribut on level does not come zrom economies of scale in reta'ling.

The need ror a transmission grid and zor ~enerat~ag capacity depends on what the z~~ can sell at reta. 1 or can sell in the bulk power market.

Zf it generally were the power industry.'s pol'cy. to allow wh cling, there would be much less reason to believe,"hat the exercise of ma ket power could explain pa-t oz the concentrated structure of the indust-y.

Q.

Mould you please ella w the meaning or" tne term "conduct" in econo-ics?

~m econom cs the term "conduct" refers to t..e behavior patten followed by f~~s 'n ooeratinj

~w t¹ market in wh'ch they sell their product.

"=xamoles o=

market conduct would incluce sucn things as p-ice behav or, product strategy, research

~ad imaovat-'mi, advertising, legal tact" cs, and coercion pol'cies toward rival f"'4s.

The potential for ant -co~~etitive conduct o-behavior cepends primarily on thethe=

a firm has ma=ket pover.

Q.

%hat is the diffe ence between the te~~s.~mrket power and monopoly power?

A.

En econom.'c analysis, market power and monoooly power mern,.the same thing, and so these terms are employee intercnangeably.

What is ma ket oover?

A.'arket pover 's tne ability of a f~ to a"zect the res 'its that othe

-"'se would occur a

a come"='" ve market.

Possess=on of market power,

however, does not imply that such'ver necessa 'ly is exercised.

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e 1.

2.

"3.

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6.

7.

8.

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12; 13.

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18.

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27.

28.

29.

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31.

32-

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34.

35.

36.

37.

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39.

40.

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42.

43.

. 44.

45.

46:

47.

48.

49.

50.

Market power can be exerc'sed 'i several forms.

Examples are:,

charging excessive o-discrimiratory

prices, excluding competitors, refusing to engage in economica y.efficient transactions, and restr cting output oelow the competitive 'level.

Electric rates are commonly 'subject to regulation but, oeczuse oz imperiections in regulation, t¹, exerc. se of ma ket power over prices whi e limited may still'xist.

Xn the electric power ~industry, three issues re~axding market'ower predominate; First, is the refusal'o wheel-.

To whee" means to transmit someone else.'s electric.'ty 'for them on your Lines.

Second i.s the'ezusal to deal.

This taRes the fo~ oz'refusals to sell bulk powe,for resale',

to coord ~a".e, to

exchange, or to. engage in other bulk.pcwe trzrszctiors.

A refusal to w'noel is'lso zn.example of a refusal'o, deal; 'it is stated.separately beca~me a refusal to wheel en crees re szls to deal.

-Vi tho t t ansm s'on

services, a utility carrot secre oulk acute seduces om alternative sou-.ces.

Tnird is denyin'g access,

'hrough joint aIwership or unit vower sales, to nuclez hydroelectric, or other uniaue generzt~~g resou=ces.

Only through access to these'~~cue

.ge e=zting resources are small utilities znd the'- custome s a'ole to obtain powex a" as low a cost as the la=ge systems.

Market power is eva equated

~~i-cor.ozrison to the results. 'p-educted under perfect competitio-...

L~ a perfectly compet't"'ve ma=ket no or.e v'en has ~rket

power, much less uses it.

To have zr~et powe, a

zirm mus~ have an zdvantage over h's actua or potent""

compet'tors.,

An example is cont ol ove the use oz m-esser.tial

'acility or the supp y of an essent'al esou c

Vnere there a

e competitive alternat ves, a z='~ cannot

'achieve 'a pos. t" on oz advantage..

Market power always is exercised with--espect "o

some particular market-participant or potent" al par-ici-pant.

l:f a seller has market powe

't means that h.s customers 1zck competitive alternatives to his produc"s or servi, es.

Q.

As a firm grows does 't necessarily obtain increasing market powe

?

A.

Ho, not recessarily; althougn it could,.

First; "the firm may be e:~branding into'.new geographic markets.

Second, it may be expz..c'ng into net p oci ct mar!<ets.

Third, '~~e" total market sales in the produc-and, geographic

22 1.

2.

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8.

9.

10.

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14.

15.

16.

17.

18.

19 markets it se~es mzy be grow ng as fast o-faster than the fir'm's sales.

Tn'this 1 st

case, the fi~'s share of the market would be declin'ng.

Concentration ob-viously is not a measure of absolute size out rather it is a measure of size relative to the market, a measure of market share.

%hat does t:he conc pt of ccncentration mean?

A.

Concentr'ation refe s to the share of a market held by one'r a few of the largest fi~s.

A pu-e monopoly means a single seller. ~d therefore comolate concentration.

Other things being eaual, the la=ger

'he share of tha relevant market a firm has, the-greatar its market power.

As Z stated.

ez 1'er, just because a f ~ has ma=ket powe,

however, does not mean that it necessarily wi11 usa th's power in an anti-competit'va a.d monopolistic fashion.

(2)

(3)

Q.

Can a~stance of

.20.

Q; Boas inc easing concan at cn resi lt only f om 21.

acauisit ons and merge s?

22-.

23; A.

Ho. 'n inc ease

'n concen"=ation may a so occ.-

24.

when fims leave the indust y either because of failure, 25..'or, from liauidzt on for some reason other the; failure, 26.

in g cate numbers than those entering the.industry 27.

the electric powe industry util' as may stop selling

28. 'ilk powa for several rezsons:

29.

30.

(1)'etail loads g=ov to the uti"=ty's plznt 31.

., capac ty an

..ew add t ors to czpaci.ty to 32.

supply wholesale loads are n'"t ti ougi:t to 33'e economic or reasonab a fo= some 'ason:

3'..

35.

competing sources of bulk powe supply 36..

become less expensive; o

37-'

38.

wholesale cust:omers

&sta11 thai crw 39.

generating capacity and no longer vane to 40.

purchase power.

41.

42.

meas's of concent=ation estzbl'sh the

.43.

market powe

?

. 44.

43.

~ A.

Such measures can help, but viewed zlone t..ey 46.'re not definitive.

Tne afore, concentration 'idices 47; are only

a. rou h indicztor of market power ard their 48.

use must be 'comb ned

-~a~~

common sense.

Concentration 49.

ind"'ces may ove state ti.e degree of conoantra"ion 50.

substitutes are excluded, or i=" competition prom.

1.

2.

~3 5.

6.'.

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9.

10.

11.

12.

13-.

De.

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21.

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24.

26.

27.

28.

29.

30.

31.

.32

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~ 34.

35.

36.

37.

38.

39.

imported goods is signif cant.

Conve sely, the deg ee of concentration may be unde stated if ma-Bets include non-substitutes,'f meaning~~'1

~~ Bets are 'local or regional, o-if there are special institutional zeatures-such as zxanchises.

Q.

'Does a hign dej ee of. concentration in an unregulated industry support tho inzerence that monopaly power exists?

hg A.

Yes.

Xf there are only a few large firms or a single fi~ in an industry, arid if there are 'effective barr'ers to crt~ of new competitors, then without any evidence to the cont a~-it m-y be "nze red that the existing firms have 'market. power.

Q.

Doesn't the existence

'o ma-bet power mean that the firm can set prices above Levels that ~='ll prevail in a'pu-ely competitive market and therefore they could earn monopoly proz-'ts'?.

A.

Yes,,in general that s

~ ~e, but regulation may l mit such

-ction in the e-'ect

',+" 'y indus t Harket power,'owever, can be used to protect exis"~

g markets or in other ways to <rustrate r vals.

Mould you expect that a single " r~ auld tera naturally to. own a n~e of plants 'rde to achieve managerial and technical econom'es of scale,

~ed

~ orde to i sure the achievement of the economies ava'Lab e

"=cm inte~ationl A".

Certairily;,I can see a &~ wanting to do th.s.;

but that does not argue that t e

same economies cawiot'e achievec equally by caardinatiori.

There 'is ho-

'onta3.

integration at the gene a"ion Level or.'the indust=y,'u"'his concert=ation does not necessarily came 'from economies of scale.

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28.'9.

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Q:

Since there are economies of seal at each level oz the industry;

'does

~his imply that there are also economies of scale from the.ver"ical 'nteg=ation of tnese three functions into a single fi~?

A.

There may be some managerial savings but T..

expect they would -be quite s~ll.

Thi,s does not take away. from the natural, tendency oz. z ~s to strive for vertical. integration, to try to control the t ansport of their electric power, and to attempt to insure that they will always have a market zor the powe from thei=

plants.

For'xampl e, the construction of electric power plants is expens've and it mignt have been eas'er in

the, past to obtain zinancing zor new planets iz a mar<et

.;for the plant's output is assured.

Altho. gh t¹s tyoe

'oz r'sk m'ght have been 'ortant in ihe deve ooment of

.'the indust=y,

'ce tally these risks'now have g=eatly I

dimini'shed.

Q.

Vhy don't new i rms always en.'industries ike the electric power industry whose markets are i".creas.'-.g?

C A.

Yawny industries, including tne electr"'c po--e indus'=y, are. very difficult'or new fiws to. enter

.successfully.

zae difficulties encountered in attempting to enter a

e called oarrie s to ent~.

T~ the elec "

power industry the most difficult.ba.;~ier probably 's obtaining a francnise.or the va 'ous government perm'~s. ons tha~ 'a='e required..There

-=e a number of othe" barriers to entry such hs:

'0>>

~

31.

32.

33; 34.

35-36.

37.

38.

39.

40.

41.

42.

~ 43.

44.

45.

46.

4 (2)

(3)

I (4) a very large investment per dollar of sales

="s requi-ed; a few large zirms have a very la-ge percei.tage of the ma ket'ome critical product ve resources that are required,. or are requi=ed to ccmpete success-fully in ti.e.indust~,

a e controlled oy one or a few suppl'er zir s who themselves prod ce and market the f""nal products.oz the wdustry; and 4

I economies of scale are very substantial t~'

requ'r'sg a new firm to enter on a ve=y la=ge scale in order'to compete successfully.

~

~

~

~

~ 1.

2.

3.

5.

6.7.

8.

9.

10.

11.

13.

14.

15.

16.

17:

18; 19.

20.

21."

22.-

23'.

24.

25.

26.

27..

28.

29.

30.

31.

32.

33.

34.

35.

36,.

37.

38.

39.

40.

41.

42.

g3.

46.

47.

48.

49.

30.

In the elect ic powe<< industry most of these

.barriers exist in varying degrees. 'n.try's usually controlled by a state o-fede=al regulatory agency which must g ant a franchise or a certificate o"

-conven. ence and necessity to the prospect've entrant.'

new munic'pal util'ty may have to show that no legal actions are pending against it in orde>> to sell the bonds recessa<<y.for financing e try.

Hew franchi'ses

-may be challenged or legal suits with o without me it brought against municipals.

Th se ba riors restrict entry because regulato~

agencies may not want to

~franchise new ent=ants.for fea= of excess capacity and because o= the expense of litigation.

Entry into the retailing of elect ic powe>> is di==i-cult when a lar~'e ve<<tically,integ=ated e'lect=ic system refuses to sell bulk 'power or to:wheel bulk power generated by another producer.

Mithout access to. large eff ci nt generating plants, and to the necossary re "ted bu k-powe seduces,'

new dist="oution util"'y would find it difficult to-compete or, indeed; to survive.

Q.

Mould you please e~lain what i.s meant by a t'-

competitive behavio<<or conduct?

A.

There are various types of anti-competitive conduct tha" can oe employed by a f~~ or g=oup of f-~s.

Such conduct is desi~od to frustrate or eliminate t.'

competit.ve abilit7.of other irms wh'ch a e act~ a or potent'al compet'o-'s.

Ho eave.,

this conduct 'acluces actions to innibit or eliminate a competitor's ability to increase its -ma-ket sha e or to g ow ia steo with the growth o-the ma ket.

• In add'tion, ant'-compet't='ve condh:ct incluces measures design d to fo<<ce the =ailure of a competito or to corner a competitor

>to 'oe

.g acquired:

Acquisition is an ef ec"ive sc'"erne to e adicat campet tion.

Anti-competitive conduct may not be.as effective where the barriers to en~ are low.'ew firms wi

%t C~

emerge in any growing and profitable market.

In con-tras", la-ge ="its w"'th ma ket power in conc ntrated.

markets tha't have s gni icant oarriers to entry can pursue anti-compet tive conduct.

Q.

How does nodal compet tion differ from ant competitive. conduct?

A Xn no~1 cczoetition, fims. also 'attempt to al 1

inc=ease sales and gain customers.

0~ course not a

2.

".3.

4.5.

6.

7.

8.

9.

10.

11.

12.

13.

14.,

15.

16.

17.

zirms cubi'nc-'ease thai-market secures simultaneously.

Some gain and some 'lose.'n normal competition the gains ensue from increases in ezzic'ncy permitting lower prices, improved product quality o- =eliabil.'ty; better service, superior planning and timely expansion o

capacity, et cetera.

Some f'rms decl' ox'a'1 because they are laggards or make serious ousiness er ors. 's a result, no~1 competit o.. weeds out firms that are inefficient ana. -~ose prices, ard the quality and reliability of. their service or product is judged by consumers to be infer.oi.

Vieedizg out

~>a inefzic'e t does not =educe competitior.bacau e naw f~~s will ante the market and ex sting

= ~s mus" compete both with.. w ant=ants and with other exist'g ezf'cient fi~s. -No=al compatit'on is dynamic and.'ompels an ongoing attention to ezfici ncy in order to su~ va.

18.

19.

20.

21 a 22.

Tn sta-k contrast, anti,-competitive conduct to debilitate and c=ippla tne 'vigorou's ef=icie..t which suave the rigors oz a norma3. competit ve asp3.res s

parka t 23.

24.

25.'6.

27.

28.

29.

30.

31.,

32.

33.

34.

35.

36.

37; 38.

39.

40.

41.

42.

43.

45.

46.

47.

48.

50.

Q.

Ghat are soma behavior and how mig' utility "nd'try?

principle types'= anti-co-pe"" "a they be mani=ested in tha elect=

c 4

~

A.

There ara seve a". types oz anti-competit ve business practices wr'ch a=a mtanded to =educ con=et'tion and to eliminate ccmpetitors.

nasa

'p act-cas are a 'ta different zron, normal competitive conduct.

Some. of these anti-competit"ve practices are:

1.

Pricesqueeze.

A pr c saueeza involves, both price discrxm~aacion ard an anti-ccmpetit:ve a=fact.

P~ce disc='ination'cc ~-s when a salle= charges h"s customers diffa ent prices when the differences in price are not cost just fied.

An anti-competit"'v'e ef=ect:

s a weakening or elimination oz a wnolesale customer as a

rival in a rata~ 1 market.

Thus, 'p ca 'saueazh may occ-in a situation in wh ch 'a vertically intag=ated fi~

sells directly at retail and also se"'ls at wholesalo to another (non-integrated) firm which 's competing in tha same rata'1 market.

An ezampla would oe a vertically integrated electr='c system compeCirg for retail loads with its own bulk power c storer, an elect=ic distribution utility.

A pr.c saue za occ =s.n th=s s. t ~at on

= " a

~

~

tegrated syste charges the a st= out cr u" ty a p='ce fo-oulk. rower that -'s ir'~he in proport or to tho cos"

~

~

~

~

~

of serv.'ca t'r.an

".he price the system cha=g s

s rac-customers.'he

-'ist-ibu~ util'ty is thereoy unfairly

2 7 l.

2.

"3.

5.

6.

7.

8.

9.

10..

11.

12; 13.

14.

15.

16.

17.

18.

19.

20.

21.

22.

23.

24.

25.

26.

27.

28.

29.

30.

31.

32 ~

'3.

34.

35.

36.

37.

38.

39.,

40.

41.

42.

43.

44.

46.

47, 48.

49.

50.

squeezed-out in the competition to retain or attach loads because the price of wholasa e bulk. power is artifica ly inflated.above'cost while the integrated system mainta='s a smaller pzofit margin in

~ ts retail sales.

Alternatively, the retail price for only ceriain loads such as la ge industr al, institutional, or com-mexcial custome s can be set so that the distribution utility buying at wholesale Crom the integrated.

system finds it is not compensatory to compete for these particular retail loads.

. Finally, price squeeze c~a.occu even wnan the tegraied system does not sell to tha disirioution utility. If the system refuses reqt ests by tne ut. 1" ty to trans "ar ox.wheel third pa ty power; io sell bulk, power or energy to "-ive access to.nuclear o-otnar large'scale plants; o-to t=arsact or other se vices that are technically feasible a-..d Cor vhich 'the charges are compensatory, then these seve al instances of rezusals.

to dea" cm.

ef~ect..produ a a price squeeze.

These refusals 'to deal resu'lt

~a maecassarily higher costs of bulk po'wer to tha d'str""outor.

2.

oraclosure oz Markets.

A. foreclosure is a for of veri ca>>rto~=at='on and refers to a situation in wh'ch two (or ore) firms are compet'".=

or tha sa as of a third, but the. ore o.

the c'~mpdtito=s acquires or merges w'th the th'-d.

Alternative y,. access to t..'s thi=d firm can.'oe foreclosed by a contractual a=an"-ament.

The oihar competitor 's foreclosed Crom competing or these sales.

Fo" example, if two prodacars of electric power both could seal bulk power to a distribution u""'".ity, then i one oz tham'acau='"es o

me"ges w" th that d'stributo=

the other is zoreclosed rom compat'~g fo= t..a sale ava.

if it is mora ef=iciant ~~d could. sell bul'< power for less.

If the fi~ that forecloses ts actual oz'otential comoetitors from max'eats in th's manrer ace~>>res enough such. markets it may "orca the other produco= oui of the industry or into oei"~ acau'red itsalz.

Obviously, an acauisition of dist=ibution'acilities along. w,th an ezclusive lor'g-tern Cranch"se eff ct"'vely Corec osas an r potential competitor o= years to come.

3.

Zrmos " on oz

. zt -competitive Conditicrs.

A

'ertically i te"-ra "ac -'~ s~x l~~ at rata=>

may sal" a

'ecessary'nta=ac'ata product o= se vic at v..o asale to a nonintegrated reta'3.

ma k,et ccmpet'to" only iz t at

1.

2.

"3.

5.

6.

7.

8.

9.

10.

13..

12.

'3; 14.

, 15-16.

'7.

18.

19; 20.

'1.

22 23..

24'.,

25.

26.-

27.

28..

29.

30.

31 32.

33.'4.

35.

36.

37.--

38.

39.

'40.

41.

42.

43.

45.

46.

47.

48.

49.

50.

potential. competitor accepts conditions.'uch conditions would, be des med to,orevent th nonintegratad firm from compe'ting for ca=tain business.

Tf the nonintagrated firm rezuses these conditions it: must chen turn 'to less economic sources oz supply, if any, and its compet tive condi,t'on is weakened.

For example, a vertically integrated electric utili J may whe 1 o-se3.1 bu~R, power and energy to z dist ibution utility only if that utility agre s not to sell electr c"'ty outside of 'a spec'fied geograoh'c area or to certain classes of customers.

Control of t ansm='ssion is suff c'ent to block, wheelin'g but power pool members may also make gentlemen's agreements or employ other means oz alloca"ing territory and custodia s,

thus making a refusa~

to.wheel unnecessary to impede ~d restrict compet'ion.

Q.

Ara you aware or" any institut. onal. factors whicn distinguish the elactri'c utility industry rom other indust=ies, and wh ch give rise to significant ef=" ". e..cy problems when competition is introduced?

A.

Yes.,

T. am aware of so a character"sties of this industry that are allaaed to inter=ere with promot" competition.

At the oucset, however, I should emphzsiz that competition already ezists in th s indus't y and ch's

.the cont zry, where there is competition it improves

~

~

e+'z c e..cy.

There are several alleged.problems..rst, thai regulated electric utilities r'zve a legal. obl'gat='on to serve unde= unizo i~ rates znd spec'fic cordit Gns to a who reau st service.

The alleged problem here 's thz" some customers are more prozitabla to serve than othe s,

'ou" that'll must be se~ed.

Zt is asse cad that, in cone zst, unregu a"ed comoetitors face no such constraints.

There are several problems with this allegat'on.

One oroblem is that the utilitias do not in fact nave to.sewe a

1 industrial custcma s.who reauest servic Put ratner, specific rites ara negotiated with each ~industrial customer tnat appl' for service.'he=afore, re'he the reauiremant to serve nor the uniform rata allegation is usuzlly applicabla on these large loads.

In add't.on, regulated utilicias mzy not oe reauired,"o sell at whole-sale to di'stribut.on util't.'as. in their se vca a=ca.,

'out only may be reauired to sell at retail to re'atively s all domest'c loads.

P~ unregulated competitor, normally a

municipal dist=='bution ut-lity, wil3. serve a~ 1 loads within. its geographic area.

Although i~ similar zash'on

1.

2.

~y3 5.

6.7.

8.

9.

10.

11.

12.

13.

14.

15.

16.

17.

18.

19.

20.

21.

22.

23.

24.

25.

26.

27.

28.

29.

30.

32.

33.

34.

35.

36..

37'.

38.

39.

40.

41.

42.

'43.

to the re@ lated utilities, the munic pals have some choice whether or not to.accept

'new industrial loads.

Q.

Do electric utilities have to serve

• 11 custome s

although they may have wide vaxiations in thei-p o itabil ty?

A.

Yes,. this is twice but with the exceptions 7 noted earlier. 'adustrial customers may pay ates that a e

bargained zox'n an individu.-l basis.

XZ a utility.'s not under the regulation. oz a regulatory ccmmission, can it engage in c e~-skimming?.

A.

Xn the elect=ic utility indust=y the

~g7e of competition tnat you were talking about for profitable loads comes in the compet. t'on fox'he retention or the attra'ction o" large industrial, commercial, and gove..-

mental loads.

Presumably, each, of these types o=: custom =s has fairly sophisticated management that ba g..s w'th "he var" oz s utilities that ca.. suoply.them and attempts.to obtain the most attract ve rates.

Thus, every uti ity has an eaual opport-nity to compete zor these loads.a..d this type of competition is obviously ve y healthy for the indus t y.

t maRes the competitors.more efvie~ ent in t-y~g to ¹ep their cos"s down to be able to ozfer rates tha.t will attract and retain these la=ge. loads.

ror these reasors,

" do not thin?c that cre"-m-sk~~ zg is wide spread in the e ect="'c utility industry Mhat is the second institutional factor tha.t you are aware of'

'I A.

The second all.eged problem comes from. an apnea ert.

fear by the large utilities that the small compet="'io=s wi13. be able to obtain comparatively zavorab e costs by gainin~ access to large bzseload generating t~'ts,'a=t'c-a ularly nuclear gene=ator un'ts.

E!e e the a=@went 's t~mt rates i the elect=

c utility industry are oased on the cost o= "ac'it~ es us ed jointly by a lax ge. numoer o=

-customers because al'1 custome s, whethez wholesale o=

retail, jointly use the bas c gene at" ng and t=ans-mission svstem o

tne utility.

Therezore,

n most situations the cost o" a pa=ticular o~

ce of eauip-aent cannot be assigned di=ectly to a pa=ticular 1.

2.

"3.

5.

6.

7.

8.

9.

10.

'I 1M 0

'2'.

13.

14.

3.3.

'6.

17.

18; 19.

- 20.

21..

22.-

23:.

2+ ~

25.-

26.

27..

28.

29.

30.

31.

32.

33.

34.

35.

36.

37.

~

38.

'39.

40.

41.

42.

g3.

'5.

46.

47.

48.

49.

50.

customer.,

Since the, cost of all facilities,must be recove ed, eacn customer

'group is allocated a sha e

of the joint cost of the system, The conclusion of this line oz argument is that to permit individua customers or grouos of customers such as the wholesale class to obtain access to a low cost facility, instead of sharing an allocated share of the cos" oz all facilities, would be discriminatory.

L pa t'c'a it is alleged that th's woulci allow the small.elect=

c uti,'lities that gain access to specific faci ities to have an unzair competitive advantage.

There are two problems

"~acth this argument.

First, iz the utility gaining access gets only su fic e. t capacity 'n 'the low cost facility so as to have ti e same impact on its total generating costs as that plant has on the total generating cost oP the sponsoring utility, then no competitive advantage youlci ace~a to either.

Second, the othez generat'ao facilities of th utility ootain ng access may be more expensive in te s

of cost per k lo5att-hour of oe. e a't an compared to the sponsoring utility's cost or its othe generating facilities.

Xn this case the large ut'1'y still would have a cost advantag Q

Hhat is the t;"rd institut anal conside ation.

~

A.

Xt is alleged.'that municipal anci coooe ative utiliti'es have advantages in. financing, and in.exempt'ons from particular taxes, that are. not matched by sim 1-"=

a'dvantages to the investor-or~wed utility.systems.

"onds used to zinance municipal facil't'es are grated an advantage because their inte=est payments a=e not taxable zo-federal income tax purposes.

>>or th's reason, t'

interest that munic'pals hive to pay is generally lowe than that paid oy investor-owned systems in. addit'c municipals a

e usually exempt f om carta' types of property and other taxes.

investor-owned sys-ems also have advantages.

For example, they have an investment tax cred"t.'and accelerated ciep-ec'a,tion for'nvest=ent facilit'es.

Horeover, tnese orivate z ws are g anted condemnat on oowe s for the construct'on of transmissior.

facilities.'"wally, the pr.'va.t systems are ab e to obtain low cost -unicipal.

'chancing in many cases for their po llu"'n cont ol facilit "es.

Xn an evaluation of ma ket powe-and the evaluatio o" competition in general,

howeve, the economic rule 's

'hat compet'to=s should take eacn othe='s they find thea.

Industries located in dif=erent states or ocal a-eas

1.

2.

~3

~4.5.

6.

7.

8.

9.

10.

11.

12.

13.

I5.

16.

17.

IS.

19.

20.

21.'

22.

23.

24 25.

26.

27.

28..

29.

30.

31.

32.

33.

34.

35..

.36.

37.

38..

39.

40.-

41.

42.

'43.

45.

46.

47.

48..

49.

50.

1 within states may be subject to differing c'orpo-" te income taxes, zrznch'e

taxes, oroperty

taxes, water and sewer'age

taxes, etc.

Horeove

, the costs of constructing facilities and trarsporting resources also. mzy difzez great3.y by reg'on.

In a competitive

economy, simply because one competitor has one kind of advantage and a secord, competitor has another,'oes not imply that either would act differently.

They s~~ply take each other as tney are.

What is the fourth nstitut. on~

a<<rangement t is said to lead to unfa'ompetition' A. It is alleged that cooperative a<<rangem nts between neighboring lz=ge utilities >wve. develooed over ti e. yea s and heve been encou=aged oy Dubl'c policy and'by the ~nerent econo'm'cs.of such a-range-ments.

The individual te~s in these "angements a-sz'd to very widely.

Tnerefore, '" :s alleged, these te-Rs ca noi be taken as

?c cztive 0

zDDioor"ate terms.

For examole the dollar amoun"'cnarged ta a neigi boring uti'lity for use in an emergency o

=eserve capacity might be auite low if that ne"'~hbo=ing.utility normally had spinring reserves too-wit. -h'ch it could reciprocate

<<n an emergency.

A util ty usually without suzficiert

'capecity to meet its own loads could not recip oczte and, therefore, does not have erne gency reserves to ba<<te The dezic'ent czpac'; utility would oe expected to pay more dollars zor erne<<gency.

reserve service s zce t has notning w" th wh cK, to pay for this service in k'nd.

Xn s~z=y, the ex'st'-g dollzr rates tnat assume reciprocate.on are;a legea.to.

be d'seri inatory zor the extens. on o se ~ic s to a 1..

who ask for similar arrange ents.

The argument is that these agreements have been formulated on the 'oasis of D

mutual ty.

When boiled darn>, this argument simply states that ca<<rent a ranoements a<<e either economically out oz cat>

and no longe compensato~,

or ere reserved fo the ~actual benefit oz those w a'pecial g oup oz ut 1"'ties orge. iz'ed to exclude competitors.

ken,cooperative arrangements zre of value th's simply means thet when you coooerate

-ith anothe ut"'lity you o ov-'de thea w'th a service zrd you get paid back with some other service.

The matte at imbed is'" ply=to t anslate the value oz the expected retu~

services into a cost and hence fo= zrd offe the sz=e se<<vicos a". a, cost-based rate to those who app y fo= the~.

Simply because'a='ter zg=ee ents have been wde in the past does not mean t.".at a no wl competito

. would turn down

~

~

~

I w 32

dollars, the normal medium of exchange in the U. S.,

and 1.

2.

"3.

5.

6.

7.

8.

9.

'0.

11.

12.

13+

15..

16.

17.

18.

19.

20.

21.

22.'3.

24.

25-.'6.

27.

28.

29.'0.

31.

33-34.

3.5.

36..

3.7.

38.

39.

40.

'41.

42.

43.

'5.'6.

47.

48.

49.

50.

51.

52.

53.

offer the same services to any ut lity that applied for them.

To. not offer the 'same services for dolla-s is a refusal to deal.

Hut isn't it true that'prices in tne electric utility industry are regulated?

A. 'es.

'.Q..

Since the electric industry's prie s are

'egulated, and thei

'monoooly oroz'ts a

e controlled, why.is the ~stence of

--2 t power important in this indust=y?

Tf a utility earns a dif=erent rate of reeu=n from serving diferent custome

classes, o

dif=erent customers',

does this demorstrate that it is pricing in a

'.'crota to~'asnion.

A.'o, but certainly we would wan to.find out ihe reasons for having different rates o" ret'm on di--erent classes of service.

Rates 'oz ret~ are oased on i bedded co'sts; but the econom'c a"alysis o 'rice discr.~ination should be based on differences oetween p ices and margina costs.

without a detailea an-lys's of the margina cost of serv'r.o each customer class t wo'uld oe d== cult tc make an.inference rega=ding,price discrimination.

'A"'

=2&

s retail ra"es regulated oy'~e:lor. da Public Service Comiss'ion, and a=,e :PGT.'s wholesale raies regulated by the.=ederal Powe Commission?

Yes..

V I

I

~ '4 ~,,

~

I 4

A.

Market powe still is'moortaat because the exertion of market po'wer may be Lor reasons other than to, obtain monopo y outfits.

=or esca'mpole; firms may wish to protect.the amount of ous'ness they now have and to -exclude competito=s.

Tw the unregulated indust=ies the focus in tne analysis of market power's on tne.

ability oL the firm to set prie'es at monoool'st"'c 3.evels and to earn monoooly orof. ts.

'Za a regulated indusi y,

however, the zocus is somewh" i d-'e ent.

~r."r.'ile ootentia or.moropo y p-ic~zg and prozits exists both prices ana prozits a-e regulated.

hius, tne focus the analysis of conauct

'a r '~~lated ind~str es is on exclud'ng actual and potent al coupe"actors and competi on, and on d'scr"'-~'atory p=.'c'.

Electric utiliti s are allowed 't'o price on "a discriminatory uas's, oasea en-d zferences on cost.

But th metnod of cost ~g ~ ". e industry is not readily a~enaole to deters'a~

whether "n fact prices. are unduly discrwinatorLy

h 3 3 1.

2.

"3.

5.

6.

7.

8.

9.

10.

.11.

12.

13.

14.

15.

16.

17.

18.

19.

20.

21.

22.

23.

24.

25.

26.

27.

28.

29.

30.

31.

32.

33.

34.

35.

36.

37.

38; 39.

40.

41.

42.

43.

44.

43.

46; Q7.

48.

4.9.

50.

51.

52.

Q.

Pith this extensive regulation, how could a price squeeze be implamenta'a even if a utility wanted to try?

A.

Until a recent Supreme Court. decision in the

~Coowa

case, the Pedetal Powet Comm'ssion atgued that it was noe its responsibiliey to compare wnolasala ates w th what the utility was cha=ging at retail to ies,d.rect industrial customers.

Althou~K wholesale tariffs and retail rates ware rag>lated, they we e not regulated on a coordinated basis between ji isdic ions.

For that

rezson, chare was a gap in regulat on'nd it was possible, and pa haps still is possible in particulz

cases, fo a price sauaez to exist.

Ln add='cion, the=a is ena problem T mentioned aa lier; price discrimination prefer-ably should be analyzed in te~s of differences between prices anc. marginal costs.

G'ven tha'wa do not as yet have adequze marg.nzl cost data in the relevant cases, the analysis of price squeeze will be di = cult.

Q.

Khze 's the econom" c int rpretat"'cn of monopoliza-tion and how can it be idantifi d.

A.

Zn economic ana"ysis.,

monopolizae cn is any attempt by a fina to mon'opolize, chat is, eo eze cise ies m-ruat power.

Simply possessing mar!~ae powe= mzy not be eo monopolize, bue any action to enhance or.emloie mar~at po--ar is monopolization.

T.t can be identi=i d oy acticns of tha fi~ chat ara anti-competitive 'n.af ace.

ei-competitive affect 's tne result of ebe'xo c=:se'f market pcwa that fruseraeas any buyer or seller from ach.eving ti a outcome that wou d have oc'ca=ed in a ccmpeeitive mz hat.

Q.

Ts monopolization.-a single. act or does -it"raqui=e several'aces or development over time?

, ~

A.

iNonopolizaeion is the m'suse of market powe..

A, single act is suffic'ent to ehraatan competitors and.

ineimidate them with tne knowledge that a ~jm.with market power will use it;

Thus, a single act ehzt could produce an znei-compeeitiva efface is suffic ene eo idaneify monopolization.

Q.

Does ma=%et powe davalcp through a continui.g course of conduct?'

A.

Yes it does.

Ho~ally to maintain or to extend m~kee power requ.ras a continuing course of conduct.

This coo se of cc:st"uce e'the= t""y be actual anti-competitive acts or smply tha'ontinued threat of such

? Ces.

1.2.

'3.

5.'.

7.

8.

9.

10.

11.

12-.

13.

14, 15.

16.

17.

18.

19.

20.

21.

22.

23.

24.

25.

26.

27.

28.

29.

30.

31.

.32.

33.

34'.

35.

36.

37.

38.

39.

40.

41.

42.

43.

45.

46; 47.

48.

49.

50.

Q.

How far back in time might..the economist track gati-competitive conduct wi.e,e the prese vat.'oa or enlargement of an electricity market share was at issue?

A.

Xn an economic analysis where ant'-compet.'tive conduct by an electric system was alleged, it probably would be necessary to ezamin the c.

cumstanc s surround-ing the formation of that f'rm or 'its predecessors.

this manner., 't'could be determined how the system ob-taQxed its original ma ket status.

The circumstances o-the formation og. the'fi could help establ'sh how the fi~ could be e~ectea to react to compet t ve pres.,u es.

Certainly the t='-e period zrom tne original oblation up

'o the present also would. be relevant, but.t¹s may'e

~nec ssary since.

Bn.analysis oz coaauct ia only the past few years:may clea ly establisn the e~e c'se oz ma ket. power ana resulting anti-competitive effects.

Q.

Hhat is'eant by a tying arrangement, agreement, or'contract?

'I A.

Under a, tying contract

.the purchaser of som product or service agrees" as a cond tLon oz pK'chase of one -product or..service to also. buy the seller's suppl'es of semp other cmodity.

Xn -e"zect, the agreement fore<<

closes the opportune. ty of competing sellers to

-rket the "tiec".commodity to that purcha.se=..

ro-example, if a dis "ribution utility is a zull reauirements bulk powe customer o

an intelsat d electr"'c system, then obviously the utility is buyia~

'a combination or bundle of bulk power services includ ag t=ans iss on.

'h distr but oa uti 'ty may then att mpt to uat> e.this

'undle

'n fu'tme cont=ac.ts

.th the supplier, and to purchase only t=ansmission, in orde to i ansfe powe from another suapl" er.

T~ the wholesa ing system h-.s market power it may refuse to wheel any thi=d party power and continue to'offer transmission serac s only'hen tied to the purchase oz other bulk.powe services.

~

Under an alternative type oz tying contract, the purchaser oz some proauct or se

~ice.'s forced to agree, as a condition of purchase o= that p'duot, 'to not compete

~wth the seller in certain product ana geograpi 'c markets.

~or example, a utility tha" asks to porc..ase bulk power may oe =orced to agree to geog=aphic territo='a'estraints or to not seme ce-ta a types oz custome s

as a condition t ed to the sale oz the bulk power.

'l

~ ~

~4

• 1..

2.

"3.

3.

6.

7.

8.

9.

10.

11.

. 12.

13.

14.

15.

16.

17.

18.

19.

20.

21.

22.

23.

24.

25.

26.

'7.

28.

29.,

30.

31.

32.

33.

34.

35-

': 36.

37.

, 38.'9.

40.

41.

42; 43.

4'4.

46; 47.

'48.

49.

~50.

Nhat are the advantages of interconnection and coordination between generating utilit.'es?

I A.

Through interconnection and coordination electr c

utilities can realize economies to become more efficient and thexeby to reduce costs while maintaining or improving theix reliability oz service.

Coordination may be in'ia~ed for improved reliability through emer ency support or reserve sharing.

Coordiration may then expand to improve operat"'ng efficiency thxoug'n-economy exci;anges, dai y and sea'sonal diversity exchanges, maintenanc scheduling, et

'etex'a, and can develop fu-ther to the central disoa" ch o'

all oower and ener~.

Finally, coord.'tion can encompass the joint planning oz capacity and transmission staggered construction of large ef=ic" ent generating units, lait power sales, joint ventu=es, ana lorg'e~~ power exchanges.

The major benezits oz'ooraination result rom the, ollowing:

1.

Emergency support service, 2.

Central e onom' d.'spatch and economy exchange, 3.

Short-te~ capacity exchanges, Reduced resene reaui

ements,

~ 5.

Load diversity excra. ~es, 6.

Scheduled maintenance service and exchange, ard 7.

Staggered construct on schedules azd joint ow. er-ship of la ge e "f'cient sized generating units.

Q.

%hat is meant by economy exchanges'?

.A.

-During some periods oz the day, 'week.,'or yea-one utility may have excess generat rg capacity and lowe inc cmental energy costs comp~ed to the'h'=he ewe.=gy costs oz anothe system.

=ne gy costs a=e t".e variao costs of operat ng a gene-at"n~

w~" t ud a=e mostly. =uel.

costs.

By'elling energy

=or more than incrementa

'cost,'ut zor less ti~ the amount saved,

.the d cremental.cost, of the higher cost utility, both utilities can. gain; Econ&my exchanges are sales o

energy betweer. genera~in<.utilities on 'this bas s with the. price established on some sharing of the diffe ence in energy costs.

Q.

How are coordination 'and firmpower related?

A.

Coordinatiori is a set of bulk power services wh"ch may include such ele ents as eme=gency

power, sp nning and standby'eserves, seasonal o

d'ers ty interchanges, ma'intenar.ce

power, transm ssior an" wheel'ng, economy power, and others.

-Adeauate coordinat=ion seduces plus non-fw power can ecual the eauivalen 0

2 pcwe

~

Thus, obviously, coord'.iation is not a substi-ute zox zull reau're-

~

~

q 0

0 l.

2.

"3'.

5.'.

7.

8.

9.

10.

11.

12.

13.

14.

15.

16..

17.

18.

'19.

20.

23--.

22.

23.

24.

25..

26.

27.

28.

29.

30.

31.

32.

33.

34.

35.

36.

37.

38.

39.

40.

42.

43.

45.

46; 47.

48.

49.

ments firm power, but coordinat:ion se~'c s along ~ith-partial selz-generation or non-firm powe-sources might be combined to achieve a lowe total cost supply of bulk power.

Q.

Qhat economic importance attaches to access to nuclear power 'for small electric systems such as municipals?

II A.

At the present time, and'probaoly in <he &xture, nuclear gene at ng units will be essential resources.

A nuclear Cait of large size that can be constructed without undue delays. and. then operated at e; high annual capacity'actor is probably the least cost method of generat.'ng elect icity.n Florida.

Small vt liLies'ar.. ot use th output oZ the very large scale at wh'ch nuclear units become e onom'c.-

Thus, the s~ll.utilities need to ga'n access to a Do~~ion o'arge s cale.nuc1ea= units t ough joint:participation or their customers will have to pay unnecessarily nign costs o-electr c powe Yo cove the small utilit"es may not be able to.remain competitively viable.

'Q. 'hat i5 you-unde=star dir.~ of t..e Federal Govern ment's role i.n supporting the development of nuclea power!

A.

Ny understanding is that the Gover.-ment has nad.

a.substant'al role in the devel'opment o

nt'cl ar power.

This role has'included. financi.g--cf <nuclear researcn and development, subsid'zation oz u-anima en 'chment,

~ad expend='tv=es zor the handli.~

o= ruclear wastes.

addition, utilities'are prov'ec.th fece 1'y gua ant ed insurance. for damages resultin~ frcm a'nuclear accident and are exempted f=om liability beyonc the ~~omt that is covered. by this insu ance.

Q.:

Are there ba~iers to the construction an8. owner-.

ship of nuclea plants?

4 A.

There are.,two barriers which make it: dif=icult for'ost: electric util'ty systems in the U.$. to oem and operate nuclear p an'ts.

These two barr.'ers are t..e high capital costs oz these plants pe VrT oz capacity, a..c the need for a very large base load, dern'and to make a nuclear unit economical to construct and operate s'nce t.."'s tec.".-

nology's only econom'c in ve y large

~='ts'.

The res. lt of these two barr ers is that only the la=ge electric utility systems a

e able to.const=act a~d operate nuclear units unless joint ventu=e a=an~ements,can oe obta'red by the small ut '

t es.

'I I

4

37 1.

2.-

"3.

5.

6.

7.

8.

9.

10.

11.

12.

13.

14.

15-.

16.

17.

18; 19'.

20.

21.

22.

23; 24.

.25.

26.

27.

28.

29.

30.

31.

32.

33.

34.

35.

36.

37.

38; 39.

~40.

41.

42.

43.

46..

47.

48.

49.

50.

Can economic analysis deal with the impact oz patent rights on co+petit'on?

. A.

Yes.

A patent is an ezclusive ighe to one' invention, including the derivative right to prevent others from using it.

The term of a U.S. patent is 17 years from the azte oz issue.

The ef ece of a patene is to conzer monopoly power to the hold r of the paeent.

Thus, even though cerezin econom'c

=oals mzy be achieved as a result of patents, one major d"sadvantzge is tnae they eliminate or seve ly restrict competition,.

The economic question relzti..g to patents is do tne benefits to socie~~

om tne invent'on and development of new products and processes due to patents ouewe'gh the costs due to the monopolist"'c cont=ol over prices and output by patent holders.

Patents or technologies developed at public ezpense should of course be. available eo everyone eaually.

Are there any economic similarities between a

patent and owne sh p of a nuclear plant?

A.

There are two six lzrities.

First,

= ce e 'n c"rcumstznces they can boen be classified as zn "essential" economic resource.

A resou=ce may 'oe classified as essential zor either of two reasons.

0..,, it cannot be

.reproduced physica'l~y such as a seaport occupy ng ehe only ha'bor in zn area o-a hyd=oe ectric s t

~o, because const uci ion by r vals of an -identical o-sub-stitute resou ce, whi3.e ohysic"lly possible=, plainly would be illegal such as a produce cove ed by patent, o-uneconomic, such as a nuclear plant constructed by a s~~ 1 ueili"y.

Second, ehe'ther sin la ity is that it 's possible for both the holder oz a patent znd the omar of a nuc2.ezr plant to have ma-fiet power.

The holder of a patent clearly has Ramie't power

'LLle owner 0

a nuclea plant "also may have market power iz small uei ities..ave lim-ted 'o no alternative sources oz as low a cost'supply and are denied access eo the nuclear plz-.t.

~

Q.

Xs such joine ownersh'p economically des.'=aole?

~

~

A. If joint ownersh'p can educe the cost oz ootz~n..g power for at least one pzrty without increzs'ng the.cost eo o'thers, then the arrangement will oe des aole

=om an econom: c efficiency stzncpoint.

Such a result, iz ach'eved, would De due ma'ly eo opening up the aconom~'es o" sca e

i'enerat'on that the'nuclea plant or unit allows to

-38,-

~

Q.

Vould a re&zsal by FP&L to grant maicioal utilities in FI.orida part c'patory access to nuclear units have a..y effect cn competit 'n?

utilities that are too small to build such units by themselves.

"3-Another potential econom'c oenefit of joint ownership is thzt it may maintain o-strengthen tne

6. ability of munic'pals'to be compa ative with 7.

la ger private utilities in certain retail markets.

if,.

8.

in the absence of joint ownership, the'munic pals costs 9.

of service are highe-than those o> the private utilities, 10.

'then the customers of the municipals wou3.d be forced to 11.

pay unnecessarily high costs, and the muni:cipals might

. 12.

be forced to sell out to. tne private utilit'os or restrict 13.

their operations to fewer and smaller retail markets.'4.

'S..

Q.

Shoulan't the munic'pals build t>eir own 16.

nuclear units?

17.

18.

A; As stated earl:e

, the municipals have neithe 19.

the demand to suoport nuclea un ts nor the

~ div dual,

.20.

capzbility to finance them.

21 22..

23-.

24.

25..

26.

A.

Yes.

A refusal by FPGL to grant to the mmic'oals 27.

a comparable deg ee of access to nuclear units would provide 28.'PGL a competitive advantage since only rPGL would have 29, th's relzt'vely low cost source of suop3.y.

30.

31.

Q.

Ple se explain what is meant by a bottleneck 32.

monopoly' 33.

34. '.

A bottleneck monoooly exists whe e entry into 35.

market, or si~ccessful participation in a market, requi=es 36, the use of some specc essential facility or product and 37.

wh'ere those who control tnat fzc.lity can prevent ent~ into 38.

a market or threaten a fin's su~val by re&sing to deal.'

39.

The're&zsal to deal can be eitner an outright refusal or 40, it can take the form of agreeing to serve out only on 41.

inequitable'erms.

Moreover, a firm can put tr"nsact"'ons 42.

cost at such a h'gh level that a potent'al entrant finds

. 43. "it too expensive to attempt to obtain tne se~ce.

45.

The transmiss on of elect=ic powe s

a class=c 46.'ottleneck monopoly because it is inc=

cient ana prohib'tive;-

47.

expensive to install parallel or duolicate t ansmission 48.

facilities..

The attemot to t anszct short-t m bu c

owe=

49.. serv ces can oe blocked by ma¹ng the transactions cos=s 50.. prohibitive by ins'sting in eacn case 'on seoarate ne opiatic"..s 0

~

(

'e

.1 ~

'2.

'3.

5.

5.

7.8.

9.

10.

11.

12.

13.

15..

16.

17.'8.

19, 20.

21.

22.

'23.

24.

25.

26.

27.

28.

29.

30.

31.

32.

33.

34.

35-36.

37.

38.

39.

40.

'4l.

42.

43.

44.

45.

46; 47.

48.

49.

50.

for the use of a transmission Line.

Such high tran '-

'ctions'osts can m-ke it so expensive and,time consumirg that it is not worthwhile o

a potential user of the transmissz.on Line to ask fo-seneca, pa ticularly short term transact'ons.

By the ti-e negotiations are completed, the opportunity for the transaction may be lost.

Stalling potential transactions unt'1 they are no longer availao e

is as effective as a rezusal to deal.

The control oz a bottleneck zac. 'ty or se~i.ce by a company or companies is sufficient to establish monopoly 'power., The 'rezusal to deal or to grant access to a bottleneck acility wh ch has ~ effect on competit on in a final product market is'n exercise. of market or monopoly pover.

The compet'ive advantage accorded by

,cont-ol oz the bottleneck, service does not need to be indispensib1e to competitive survival. it is suz icient that w thout access to it that the 'e'xcluded competitor is at

a. competitive disadvantage.

0 Are you amiliar w th any dec'sions oy the.Cou t regarding refusals to deal by a'onopolist n the electric power. ~>aust~? '

~

Y

...Th D'*

0

T:

found that Otter Tail was a ve-tically integrated util'y and possessed monopoly -over in the <<elevart ma k t and, ma'nta'ned th's ma<<ket powe by =.e~u~;~g to deal.

Otter Tail vas the reta' dis+ribu or o" elect='c"'"y '.. abouc 465 to~s' d sold bulk, pow.'o 17 m.nicipalities else in its operatirig area wh'ch did -their o~~ distribution.

Otter Tail owned all cf the t ans 'ssicn Lines.'n its operating a=ca.

%hen some of the towns that Ot"e Tai was se~ng'at.retail deciced to undertake thei o~w dis-tribut.'on, the coumany re~ed to sell them oulk pove Tn addition, Ott r Tail ze fused to sell t=ans-'sion se~ ces and thereby blocked theci =rom ootain'ng power from othe suppliers.

ghost towns had no alternative source o" bulk power and either had to renev Otter Tai's zranch se or install a small isolated gene ating system v th tho attendant-high costs per kilowa,tt-vatt hour. 'he District Cou=t found that Otte Tail 's efusal to deal a bulk power and transmiss'on services was illegal monopol'ation unde Section 2 of the She~ Act.

The District Cou=t enjoineci Otter Tail =rom these refusals to deal w" th the isolated municipal systems in 'ts operatin~ area, md the Sup"e" e Cou=t affirmed.

Q.

VTould you cons'e denying access to a nuclear

~it ply~ ~ed zo-cons"= ction to be a bottleneck z:onopoly?

- 40.-

0 1.2; "3.

5.

6.7.

8.

9.

10.

11.

12.

13.

14.

. 15.

16.

'7.

18.

~

19; 20.

21.

22.

23..

24; 25.

26.

27.

28..

29.

30.

31.

32.

33.'4.

35.

36.

37..

38..

39.

'40.

41.

42.

43.

'5.

46; 47.

48.

49.

50.'.

Yes.

A nuclear gererating unit is essential because ie is ehe lowest cost method eo the ueility o" pxoducing electricity, its costs are pa ely subsidized by the fede al government, and w" tho t access the customers oz small utilit es would have to pay more or electricity'nd could, not share ecgxieably in a natioral resource.

Distribut on ueilities requir'e a sou ce o

.bulk powe

%hat are the alternative ways tha;t they

can, obta~

th~ s power?

A.

The e are seve al ways.

First they may buy the firm power at wholesale

"=om anothe electric system'.at engages in tne business of producing fi~ bulk powe for sale.

Second, ehe ueil'ey may prodce all oz ies own powe if"ie is economically'easible to do so or no alternae ves are available.

Third, a utility may proauce pare of its zirm jove requirements and ouy t:he remainde".

Fou-"h, a ueilie7 may 'ouy d'f erene types oz poie>> f=om several difzer'e..t systems that wi"1 sell eo it.

Xn this last:

case ehe system essentially puts togethe-the various difzerent tripes of oulk power services 'n order to obtain firm po-'-er sufficient to me "

ts fu

=equi emenes.

~

Q.

Tf t:he electr'c power industry we e competitive wh'ch of ehese alternat.ves would be available to distribu-tion systems?

A. All of these alternatives wou~'d be ava'lab e 'f the market were compeeit.ve.

Viith access to the'eref'es of coordinated operation and development, a syseem wou d have the ability eo choose ehe bulk power'upply alternae.'ve or.mix of alternatives which it.believes eo be the most economic ana ef=ic'nt fo it.

3.

II 1 d d*

-dd ~I'.

d d

the'tructure oz the FTectric Power Tnaustr in Florida Q.

%hat is the p~~ose of analyzing markets and tne struc-ture of the electric power industry in Floriaa?

Q.

- %hat is "the concept of a market in ecovomic analys:s?

\\t 1.

2.

3.

A.

The primary economic impact of the acq 's:t'on oy >PG=

5.

of the Vero Beach utility wou d..oe the higher cost of e ect=ic 6.

power imposed on all electricity customers in Florida.

Highe 7..

costs would stem zrom reducea compet tion in specizic electric 8.

power ma-kets.

Competition provides alternatives, promo" s 9.

economic ezf ciency, and, ihereby ho as costs to

a. ~nimum.

10.

11.

12.

13.

A.

The concept oG a market in economics's an analytical 14.

device.emoloyed in order to ga'n nsight into comolez relation-15-ships. 'h's basic covcept is useful

=o study ng a broad range 16.

oz diverse actual mar4e'ts ranging from the stock ezchang

'.7.

to a local zlea. ma'r'ket.

18.

/-

X9.

A 'market is where actual or potential competitiov. can 20.

occur.. A particular 'product mark t 's a set of products tha" 21-customers

v. ew as be"~g essevt"ally interc'~angeaole.

'Z~ customers

=22.

are willing to interchange avy =:teM w" thin a set oz oroducts

'3-r sponse

.to small price or quality variations then t'his set 24'.

cov~titates a

s ngle product market.

25.

26.

Every mar'met has essential character'sties.

The-e must 27-be at least one seller and ove buyer of a distinguishable p=oduct 28.

or se~ ce without. close substitutes..

~t-,-.addition, the pa " es 29" must have the r ~ht to exchange the p oduct.

The econom. c -odel 30.

used zo-an'alyzing a market aepends largely on the number of ouye=s 31.

and sellers in the dez'nea market.

~irony s lie s, each with a 32-.

small part of the ma ket, would dcall zor usivg the competitive 33..- model; a single seller vould dictate using t'oael o= monopoly 34.

behavior.

35.

4 36.

For analy in~ the imoact of an acquisition, the geo@rap~='c 37.

extent of the-market must also oe identified.

This is;=he a=ca 38-that contains.the buyers and sellers; this'rea is dete:w ed 'oy 39.

the location of the product be're and aft r the sale, and not the, 40-corporate headquarters of the companies.

Thus, the geographic 41-:

boundaries of a product market snould "'nclude the a ea whe ein 42.

actual or'otent al buyers realistica'ly can turn zor alternative

, 43.

supplier's oz the product and within wnicn the suppliers provide 44..the product.

An. area that includes most oz the buyers and

..e lers

,45-is adequate.="or analysis; not every last one must be included.

46.

47.

Xn summa~,

a market

"'s a set of products that are.'nte"-

48.

changeable,'nd its zeoz=aphic eztent includes the locat'o.

o" 49.

act"al and potent'a b ye=s'nd se 'le=s.

50.

51.

Q.

Do economists define and identify ma kets for 52.

des criptive, purposes?

0 A.

Yes, that is one puroose; but it i,s not the prima g

Markets are defined znd ide..ti ied primarily or 3.

analytical purposes.

A firm may oossess market oower in some mazkets and not in others.

The p"roose o" m rket analysis 's to allow making an inference whether, based on the structure oz the market identified, a firm has market power in that particu zr 7.

market.

8.

9.

Q.

Zn a merger or acquisition czse such as this one would 10.

all of the markets n which the parties participate have to be examined?

12.

13.'4.

15.

16.

17.

Q How should markets be defined for the purpose of 18.

assessing market power?

19.

20.

'.. First,'the product markets must oe dez"'ned a..d then th

21. 'eographic extent oz each identified.

22.

23

'4.

25.

26.

A.

The>>e are three main crite ia for defin:ng product 27.

markets zo th" s pu>>pose.

The product in a define>i market should 28.

29.

30.

=31.

32.

33.

The product defired must be >>elevznt to th "context ir 34.

which the ma=ket powe is to-be zssessea..

A "im, and part"'cu z="y 35.

a vertic-11y integ ated fi

, can oota'n and ezerc"'se mz ket powe 36.

at different level.s in the chain of production.

Market powe>> 'n 37.

the electr' stowe industry may ez'st, fo ezzmp e, in accuirirg 38.

xuels, transport'ng fuels, obtain.'ng electrical generating equip-39.

ment.

supplying bulk power servic'es, supplying retail powe se 40.

.vices, o>> another area.

Only some 'of these products may be 41.

relevant to evaluating the 'mpact of a particular acquisition on 42..

market power.

Thus, apply'rg the criterion oz.relevancy ider.ti-43.

fies the oroduct or sem ce markets in. which the impact of t.'.e 44.',acquisition potentially could be signi icant.

45.

46.

'he product ma-ket defined must only include p oducts 47.

"hat are close substitutes; products that are inte chare able.

48.

For. industrial se~ce, fi~ power znd inter~pcio e power ~~y.

49.

oe substitutes in many uses, out not n othe= uses

'.".e e. sa=

50.

securi'ty or health a=e involvec.

Similarly,'lectricity as zr.

51.

ene-'gy sou=ce has no s bstitutes in residential uses'or light'ng, A.

No,.,the only markets that need to be analyzed

.'n detzil are those which are relevant to an assessment of the be ef" ts and costs of the acquisition.

Q.

Mould you please describe first the conside at"'o. s necessary zor dezin'ng product markets.

l.. relevznt, 2.

interchangeable, and

'3.

coGG)lete.

~

~ !

~W 3.

5.

6.

7.

8.

9.

10.

11.

12.

13.

14.

15.

. 16.

17..

18.

'9.

20.

21.

22-28.

29.

30.

31.

32.

33.

34.

3S.

36.

.. 37'-

~

38.

• 39.

40.

41.

42.

43.

44.

4S.

46.'?.

Q.

>/hat a

e the relevant product -arkets

"'.. this c se.

A.

There are two broadly def" ned ma kets that are relevant, but each consists of various sub-markets.

These two are the retail power market ana the bu k poser market.

in the retail marke",

the 'ouy rs are end-use elect= c'ty custome 3 ava sellers are distr'but'on utilities ard the captiv-aist=ibu"ion centers of vertically integrated systems.

w the.bu k power market the buyers a=e these same distri>utors plus the -bulk powe=

suppl'e s;

the selle s are bulk power p=oducers an supp "'e=s.

in ident"fyin~ relev~~t markets, both the demand ard.'he.

supp y'a ticipants, that is, the custome s and the sell rs, muse be studied.

Does FPK recognize two distinct markets sim'la= to 'you breakdown?,

A.

Yes.

F &L views Zn Exhibit (GT-1), pa e

.that:

the market in an identical'ashion.

3, Yz. R. J.

Gardner of rP&" states "An "X-ray." of ou-busine'ss reveals the existence o" ~~o principal, businesses:

a bulk vower business and an elec"'"'c service bus ress."

\\

I television, radio, and other small appl'ances, but has subst. tutes which are of diminishing interchangeability going from space heating,to wate heatin~,

to clothes drying, to cook'ng, to conditioning, and to refrigeration.

Since all homes use elec-tricity, the ezistence of inte fuel competition in some res'den-tial uses is not particularly relevant to the proposed acquis't. on.

The product must be complete in the serse that sufficient elemerts of the'whole p oduct must oe includea to make the. oroduct of value to use s.

For ezample, some bulk powe s'e vices -ould.

be incomplete without the transmission element to deliver t..e

'other elements of this service.

Tn contrast, some othe-elements of a product may not be absolutely necessary to make the othe elements of value.

Here an ezample is cent=al ecorom'c dispa-cn which, although it.ncreases overa~ 1 efficiency, is not necessary to make an 'nterconnection of value.

Hevqrthe1.ess, a product or sem ce market: should not be defined so na=rowly by aoalyi g the criterion of interchangeability too strictly.

Such narrow defiri-tion,can make a 'product incompl te ard of lit'tl value to custome s

by itse'f.

d'or ezample, now-firm bulk power may be useful or.

complete only if emergency and maintenance can also be obtained.

Hon-f'm power is not a market by itself because it is ircomp1et and'not useful oy itself to m-ry customers.

~

Q.

.Vhat is the definition oX. the geog aphic market =or each oz the product markets?

l.

2.

3.4.5.

6.

7.8.

. 9.

10.

11.

.12.

13.

14.

15.

16.

17 ~

'8.

19.

f 2O.

'1.

~

.22.

23.

24.

25

~

26.

27.

29.

30.

3 1 0 32.

33.

. 34.

35:

36.

37.

38.

39.

40.

41.

42.

43.

45.

46.

47.

48.

49.

A.

The geographic dimens'on of each product market is deter-mined from the location of the buyers and sellers of the p=oduct-in question..

There are two types of geographic

markets, actual and potential.

An actual market is defined as the geograph'c a ea within which transactions are now taking place.

A potent'al market is dez ned as the geog aphic area nothin which transactions probably would take place if all participants in the market be-haved like normal competitors.

To dete~ae the exten" of an act

=-

ma='et, tne actual buyers and sellers'currently in that market z=e.

identizied.. it 's not necessary to isolate every sing> e buye=. and seller to isolate the market; identi ying a high pe centage generally 's suffic='-ent.

Thus, the actual ma K t is th extent o

the area necessary'o include (1) all present customers of the product wno are pure..asing little'o< the p oduct'rom outs e th's zrea znd, in addition,. (2) the sellers oz the.product in t'~is area who are market'=- little of tne product o~~~side the area.

~

'The second type of geograph' mark t encompasses the actual ma ket out also includes the. potential ouy rs and sello s

who wou3.d 'oe in the market if no one had mark t powe to excl d them.

The pot ntizl geographic market conta'ns customers who would buy, and p=oduce s who would sell, i= they were not frustrated by the ~ ket power oz some fir~

Q.

Are you suggesting that retail competition should mean that each home, foz'xample, could choose wno would serve him?

. A.

Ho.

Duplicate or triplicate distribution

'nes thro'gh-out a local area would be wasteful.

Fach local area is, econom-

'cally, a local 'natural monopoly.

The choice of most custcicers is expressed in the vote fo-who should be g-'ven t..e =':.;-'..t -o serve all customers in the local a ea.

A zew customers a.;o may Q.

Xs the retail powe market relevant to F 6L's appl'catio"..

to acquire the Ve o Beach util'y and to serve Vero Beach a" retz-.

A.

Yes it is.

The reta'1 powe=- m'=!<et is relevant

'ooth because the e 's competit cn n this ma=cat and beca se th acquisition o

the Vero Beach utility by r2ci could adve=se y

impact the competit ve structu=e c" th s market.

FP&~ 's market power would be increased, other ut 1'ies

"~cold be

="or close f=o-serv'ng Vero-Beach at retail for 30 years, large direct industria commercial, and governmental custome s would.eave less cno c

as to whomto'have serve them in locat'-g in eastern and suutne Flo-ida and compet'tion by the comparison oz ates and quality-of service would be lost to both customers and the regulatory authcri

~

S 1.

2.

3.

5.6.

7.

8.

9.

10.'l.

12.

13.

14.

15.

16.

17.

18.

19.

20..

21.

22.

23.

~

24.

26.

27.

28.

29.

30.

31.

32.'3.

34.

35.

36.

37.

.38.

39.

40.

'3..

42.

43..

. 44.

45 46.

47.

48.

49.

50.

chose whe e to locate b'zsed in part on comparative elect ic power costi.

'Does 100 percent cont ol of a local area retz:1 market by a distribution utility or captive distribution center rule out competition?

Ho, the distributor "an be '<<eplaced aad therefore the e

is competition to be the util:ty chosen to serve.

Although on local monopoly replaces another t¹ e is continuing compet tion to be that monopoly in each. local area.

Q.

Doesn't the fact that few if any municipal systems have been acauired in the last few years by PP&L, and thzt PP&= has not had its franchise areas desert them in o ce-to fow m~~icipz utilities, incicate that there is no compet.'t='on to serve at retail?

A.

Ho, there is compet. tion.

The lack o= changes to m~i-cipzl syste'a may oe partly ezplzi-ed oy =P&~ having obtained 30 year franchises from the 165 m~zicipalities it serves.

'i oreove=

it may be ezplained if "r"-" eze c'ses market power to 'oloc. or to 2~stra"e, and mz'<e unnecessarily ezpensive, the formation of ew ~1 c i ozl svs tems.

The 1ack of such changes to s e~~ ce oy FP&L 's now of course b oken with the appl'cat'on to zcaui e

Ve o Beach.

without access to the bulx powe-servic s that wou1d be available in a normal cometit~ve market,

however, i<<e re'maining mu 'cital systems may sooon a1so have to tuw to r" for acauisition.

Mould you please desc ibe the competition that does occur on the demand or customer side of the retail power market.

A.

The e are several types o= coupetition.

."irst, as T

t mentioned, c store s in a loczl a-ez mzy as a

g oup deci e

h th.

pz ticulz-d st-.buto=.

7o ex~~le, the cit. zens of Vero Beach have voted to authorize rP&L to d st=ioute retai them.

Alternatively 'the residents in one. of tne 165 municipalities that FP&L serves at retax.l under a

~

~

~

-"-anchi s e could vote at the expiration of, the franchise to form a municipal distribution company..

The possibility that the customers of z municipal syste may vote to se11 that system to cP&

should serve as a spu to h

. i 1'anagement to improve economy znd <<elizbility o=

S'mi1a<<1y the potentia1 tnat zn rP&L <<etai maree~

s exec e, i

J, p

~

~

~

franchise could sw~tch and become a mun~ cipzl ut lz.ty should "sly to encou age

.=2&

to oe mo:e e" icie..t.

Xf market power is ezerc'sed bg rP&~, however, the potent-.z creating a viable new m~~."cipa~

G str'oution

~

ty '=

n utilit is g=eztly

I

- 46

-5.

6.

7 ~

8.

9.

10.

11.

12.

13.

14.

15.

16.

17 18;

~

. 19.

20.

21.

22.

23.

24.

25.

27-.

28.

29.

30.

31.

32.

33.

34.

35.

36.

37.

38 39.

40.

41.

42.

43 45..

46.

47.

= 48.

49.

50.

51.

A.

Yes, FP&L s acutely aware of the'otential loss oz 'ts franchise ar'eas to municipal utilities.

One examp e from an FP&L document concerning "inter'utilityre).zt"ovs summarizes FP&L's recognition and zea<< of competition f<<om municipal take-over oz thei-zrznchise,a<<eas.::"La FP&L docv~ent prepa<<ed by R.J.

Gardner shown in Exhib~ t (GT-l), page 13 states as ore of nine possibilities that could prevail for the purpose of aggregating geographic"l.

oeds:

"The mmicipals-co-opera, tive strategy:

Should have statewide generation plann'g,.

mu tiple-unit shar'ng, znd full coo dination.

Problems - FP~ may not oe abl to coxrpet if mn.'cipals ard, co-ope atives can gain access to gene ation investment w th the r low-cost czpi;tzl.

i'9 nicipals presently hav'ng zranchises with r9<.~

~ 11 be encou aged to go public." '.-

Q market'?

Arethere other 'types of competition'in the reta. 1 power r

A.

Yes.

Anothe important type of competition's closely relzted to the fi st type.

Th's is competiti on by coma=-'son o=

ya-dstick cocqetitior..

Yz dst'ck competition 's clear y defined by Professor James E.

~ifeeks in his article in tne Columbia Law R ',"C

=

I.B

'.Moact oz Antitrust Policy" (Vol. 72:64, pzge 77).

He states

'Yardstick compet't'on exists by v.

~

e o=

the compar'son as part of the -egulztory process of one utility's pe formarce w'th that of another....

'he efz=cienc's of the compared systems could g ve much insight into thei= re3.ative pe formarces,

. prov dLn~ a UzlÃform mezsu ement Us e u

'n setting re~:.lztory stzndz 'ds.

(foot-

~'4e~

note om'..:ted).

diminished.

FP&L can totally frustrate this kind of compe '-

t'on eithe by refusing to sell bulk power services o-Dy refusing to wheel third party bulk power.

Lz this anti-comp e-titive environment, a new municipal ut 1'ty would probably also have to instal its own generating plant with the attendant inefzicienc es of small scale production.

Thus, there is competit'on to serve at reta'1, but it may be elztively inzct've if FP&L has exercised its market power to suppr'ess '.it.

Zs there any'ecognit:on by rP&L of competition to serve at retail'

~ 47 2.

3.

5.

6.

7.

8.

9.

10.

11.

12.

13.

16.

17.

X8.

19.

20.

21.

22.

.23-24.

25.

26.

27.

28.

29.

30.

31.

32..

33.

~

34.

35.

36.

37.

38.

39.

40.

41.

42.

43.

44.

45.

46..

47.

48.

49.

50.

On t:he next page Professor H'ks goes on-to say about ya dstick competition that:

"this form of competitior. car. serv z very valuable unction 'n the regulatory process, and should there"ore be encouraged oy pro-hibiting structure or conduct tnat ~~Mes such compax'isons ur~ealistic or impossible."

Zn addition to.its usefulne'ss as a regulatory yarastick, competition by comparison is the means 'by wh'ch vote s

awk@

decisions'n wnom to have; serve them.

Prozessor Alfred E.

K=-hn in his treatise,

'The Economics of Rem lztion, in Volume.TZ, page 319 explains yarastic

- competition:

"Xt is comoet'ion oy eza~le:

each comoa.

y's.con'ceded thzt the way in which '

t-eats its ozhi custome s

compa=es favo,ably w'h the corresponding oer""ormance of its rivals, in the hope o

f-vorable political dec'sions whenever the ouestion z ises oz which kind of utility system.

-. s to be ce t cat d for future service areas, or to serve the e:ma'rd-ing needs or i. deed. the presert aequi ements of ezisting ones."

Q.

Are the e othe types of competition?

A.

Yes.

Ut"lit'es co~etc at the 'edges' the'= servic territor es to-e:iward their se~-:ce n"o new -reas.

Tais ty e

of competition alsc is recognized by =PK since "PGL hzs zttempte=

as a cond'tion oz bulk power seer'ce to force maicipals i.to te ritorial agreements..

This territorial ezpzrs'on

's one fow of 'the more geno'ral competition to attract ard eta'n customers.

Zn his article, "Prozessor Reeks states at page 99 that:

'"The most 2~it&1 kind oz ccmpet't'on is that Co attract potential custome s to locate in one area zs opposed to anothe However, -his kind of compet t on which is very prevzlent today amon"- all systems primarily benefits large lozd users s'nce they are the ones with sufficient demznci to make such co~~ et t on worthwhile."

(footnote omitted)

I Q. 'Hhat is tne geographic extent of the actual reta'1 power market relevant to the acquisition?

A.

he actual geograpn c r ta 1 oo -er

.ari et

'FPc ~ '

operating area.:?-"T 's ope=ating a=ca s aez ned to inc uc

'e 1.

2.

3.

5.

6.

7 $8.

9.

10.

11.

12.-

13.

14.

15.

16.

17.

18.

19.

20.

21.

22.

23.

24.

25.

26.

27.

28.

29.

'0.

31.

32.

33.

34.

35.

36.

37.

38.

39.

40.

41.

42.

43.

45.

46.

48.

Yardstick competition would also be a facto- "o the extent that comparisons among utilities inzluence dec's.'ons by the state regulatory cormission in regulat ng FPK's rates, x'ate of retu4,,

etc.

Competition between FP&L. and the other distrioution ut:ilities probaoly also goes on in the 'attraction and retention of large 'naustrial, commercial (in'eluding residential commer-cial),

and governmental loads.

Zf a large electr c "oad customer wants to locate in eastern o-southe~

F"orida it probably would compare elect-"'city costs among tie seve al retail distributox's and airect bulk power'uppliers w'hin thzt zrea as a consideration in its locat'on decision.

Q.

%hat analys's dia you perfo~ oz the retail electr cit7 sales market?

A.

T. analysed the market f om two pe spect'ves.

Fi=st, identified t:he shzres oz 'ooth the'etail e" ectricity kilowatt-hour.sales and the neer of etail,customers servea by each utilitywith'n the geog=aph'c z ea oz the eastern and southern po tions of Florida dezineci as rPGL's operating area..

Seconc.,

T. identif ed the comnities

-'th'n th's a ea zo= wnic,. the utilities compete to serve at reta'1.

rrom both v'ewpoin"s, ezamined FPK's ma ket shz es ana tne ezfects or FPci's zcauisi-tion or Ve o Beach on market shares.

Q.

K:at is the relative import:ance o~ FPU. in se~ng at reta.'1.'in the actual r tail market?

A.

FP&L ciominates the etz'1 electric power market 2 have defined in caste~

anci southern rloriaa.

I have prepared Ezh'bit, (GT-2) wh'ch cons'sts of two pages. 'age one is an electric system mzp of the State oz Florida prepa eci'y rPK.

On that mzp, T. nave dra~w a line indicatirg irene ally t:he ope zting area oz FPL.

Zn add t'on, 1 have identif'ed with a number'o-

each, the othe e ect 'c sy'stems both within anci adjacent to the FPGL service ter "tory that I have inclucied in the actual retail ma ket x'elevant to the oroposed acauisition.

Page two oz th s ezhibit shows the.

names of the utilit'es corresponaing to the numbers on the map.

have also prepzyeci Ezhibit (GT-3)- which 's entit1ed "Retail Electric.'ty Sales and Pwrket Shares in Eastern and Southern F1oricia-1976,"

Th's ezhibit prov."ces ciata for the actual retail market T. have

dezineci, and t:hat Z have ciepictea in my Exhibit (GT-2).

l.

2.

3.

5.

6.

7.

8.

9.

10,.

11.

12.

13.

14.

15.

16.

17, 18.-

19.

20.

21.

22.

23.

24.

~

2S.

27.

~

28.

'9.

30.

31.

32.

33.

34.

35.

36.

37-.

38.

39.

40.

42.

43.

44.

45.'

46.

47.

Xn Exhibit (GT-3), I present retail electr city sales by utilities ~n eastern and southern Florida to residential customers, to commercial and industrial customers, to other reta'1 customers and in total.

T. show separately the sales data zor Florida Power 6 Light and for the City oz Vero Beach and have classified the other utilities within the geog aphic market into two general are"-s-those geographically surrounded or isolated by FP&L and those geo~aph'ally adj "cent to FP&L.

Vi~ thin those general class'-

zications, T. have further identified utilities 'oy the degree of vertical integration and by ownership type. i do 'not consider these latter classifications as constituting submarkets, but only as one way to analytically group the gati~ ities withi~ the whol'eta'1 market.

Exhibit (GT-4) shows the neer oz retz' custo e"

to whom the elect icity sales shown in Exn'b' (G -3) were mzd As show< in my Exhibit (GT-3);

FP&L has 75 percer.t o

the relevant retail ele t=.'c"'y market.

T.'have measured market shzre in te~~ of annual kilowatt-hou

. 'sales.

Hy Exhibit (GT-4) snows that if market shares were instead measured iz te s-of custome s that ~&L has a 76 pe c nt si'z of the relevant market.

Unde either measure, Vero Beach nas about a 1 percent snare.

Q.

Do market shares dizfer signiz cantly zor serv'ng the d'fferent customer classes?

A.

Ho they d'ffer, bu" no" siniific-ntly.

FP&L dominates l

~

~

~

in sales to all of the retail custome-classes w tn' rang shares f-om 73 to 81 pe cent wi"i.'n the custome

'classes that l: have reportod separately.

Q.

Hzs FP&'s share of the market cnanged over the last ten years?

K A.

Yes, FP&L's share has i crezsed a 1ittle.

'From 1966'o 1976 the ownership struc.ture oz utilities ~>thin FPFc" 's eye at" ~=

area remained almost the same.

The only change was in 1966 -wi.en, FPK acauired the City of

dgewzter, a non-gene ating uti =ty with approximately a

2 1fw peak load.

FP&Ihowever, 'has: increased its market share oz retail sales and customers over this perioci primarily through the mo-e rapid growth of k~r7n cansunotionby its customers.

Zn,1966,

-P6L sold 74 percent of the retail e ect'r"'c

sales, znd by 1976 :.P&I.'s share was 75.

The percentage of total

,custome s in the area served at retzil by FP&T also increaseci over the same time period, rising from 73 percent in 1966 to 76 percent in 1976.

.his growth in market sha=

s has

come, n

part through acauisit'on by FP&L of line sections. from coope a-tives znd otrer uts and zccluisition oz various types o=

publicly znd p, vztely o'rv ed e" ect '

zzc" =

es associz~e w"-t-.

nosoitals, schools a-.;~ unive=s'ties,

airports, shopping ce..ters,

1.

2.

3.4.5.

6.

7..

8.

9.

10.

11.

12.

13.

14.

15.

16.

117 ~

18.

19.

20.

21.t 22.

28.

29.-

30.

'31.

32-

~

33.

34.

35.

36.

37-'8.

39.

40.

41.

42.

,43.

44.

45.

46.

'7..

48.

49.

30.

indust ia plants, residential housing subdiv s 'ons, ofzice buildings, trailer parks, s tree t 1'hting systems, race tracks, churche and private clu'os.

Q.

You stated that ir the relevant etail market you also have identified how many communit'es are served by FP&L.

A.

Yes.

Since comoetition to serve retail loads is focused on obta"nirg exclusive z=anch'ses to serve local areas it -s instructive to identizy how many such communities are served by FP6i and other util.'ti s..

FP&

serves 165 comanxnities unde= "n exclusive z'ranchise... According to the 1970 Cersus of Pooula 114 oz these have a"population oz '00 pe sons or more.

Zn aad'-

tion, FPK serves another 93 communities according to the

'sting of commun ties w th pooulations of ove= 1000 persons served by electr'c atilit":es in.Florida in

~ lectrical ':io =" 's D'recto r o=

Elect ic Utilities o-1975-1976.

Thus,

."PGL serves'o~ni-t es oz. over a

- pe sons ara the othe utilities i, ~&L's operating area se~e.another 22 such.communities..

Gut oz t e total o"" 229 co~xi"ies of 1000 pe sons o~ more in FPGL's operatin~ area in eas"'em and so~them Florida;'PH. se~es

~0 percent of them and 'holds "=anchises or nearly 50 percen" o= the total.

Did you include the co~unities served

'oy ru al elect=ic cooperat'ves in th's analy'sis of communities?

A.

Ho.

For the most part, rural.-cocoeratives se~~e ur.'n-coroorated rural areas i n the sta o

El ectrical

.worl d' Directory does.not list communities serv d by coooeratives, so l; aia not include any corn 't es "which t.ey m'ght same my analysis.

T. did, 'weve

, look at the o oportion o~.= ra>

population to total poou'tion in the eastern and southe~.portion of the State md zou.d that less than 20% o the oopulatior. was classed as 'rural.

This pe centage also would include the popu-lation in the comm>it. es smaller than 1000 people wh'ch are served by FP6Z,;

Q..

Can you make an infe=ence concerning market power f=om this data, of.ma ket shares and concentration in the relevant actual ret;ail power ma ket in eastern and southern Florida?

A.'es.

Based on the data, of market shares, FPGL alo.

dominates the retail power market rel evant to the acauisitioz of Vero Beach; FPGL the=efore has ma"ket power because the=e s

no information to indicate othe w-se.

This data on ~"=Bet con-centration and dominance aooears conclusive, but 'n o=at on o..

FP&L's conduct can serve to oin down my conclus'ons he"e which l have

'oased on '-.'".

ceno ol'stic structu e oz tre =elevant "e

='arket.

~

~

~

52 1.

2.

3.

.4.

5.

6.

7.

8.

9.

10.

..11 ~

"12..

13..

14.

15.

16.

17.

18.

19.

20.

21.-

22.

23.

24.

~

25.

27.

28.

~ 29.

30.

31.

32.

33.

34.

35'-

36 37.

38.

39.

40.

41.

'2.

43.

45.

46.

47.

48.

49.

Q.

Does the potential eta'iX'arket'if er in geograph'c extent compared 'to the actual retail market?

A.

Yes.

Tt is conceivaole that it could be larger, but this result is not probable.

Two types of competitors

could, enter the supply side of the actual ma-ket if ~PKL allowed the wheeling of th"'rd party power ov. its system.

Thus "ar, oz

course,

~&K has only allo~ed one wheeling. transaction awd this is only second party wheel'ng wherein New Smy~z Beach is being allowed to bring ~n "'ts own powe produced at a

remote site'.

New.Smyrna Seach is obtainivg access to a Florida Power Corporation nuclear generatirg wait.

Xf FP&L allowed wheel'ng,

'then rlorida Powe>> Corpora-

tion, Tampa Electric Company, o.

some other entity might compete to serve at retail 'n =PAL's operating a=ca, but terr~ torial ag eements probably would continue to frust-ate new ent ants wKo could compete in th s m"rket.-

Q.

Since Vero Beach has only 1 percent oz the retail ma ket, would it make any difference in the reta 1 market

'P6L acquires it?

'A.

Yes it would make a diffe ence.

Although 1 pe cen" is small, it nave theless-would enharce FPGL's market powe=.

Viould you ru e out any acquisition that enhances mar~et power?,

A.

No.

An acqUisition that evharces market power could be acceptable if there a=e signif'cant econom'c bevezits, but wou not be acceptable

'= tne benefits could be obra'ned through an alternative act.on that. avoids enharcing the monopol stic ='

market power.

l.

2.

"3.

4.5.

6.

7.

8.

9.

10.'l.

12.

13..

14.

15; 16.

17.

18.

19.

20.

21.

22.

23.

24.

25 26.

27.

28.

29..

30.

3lo 32; 33.

34.

35.

36.

37-.

38.

39.

40.

41.

42.

43.

45.

46.

47.

48.

49..

50.

Q.

You stated earlier that the bulk. power market also is relevant zor analjzing the benefits and costs of the proposed acquisition.

in addition, you stateci that thi.s broad ma-ket concept actually consisted of various sub-markets.

Mould you please define these sub-markets?

A.

Yes.

For analytical purposes it is usezul to segregate initially.the bulk power market into five sub-markets or, simply, markets:

1.

2.

3.

5.

requirements ma ket exchange market seduces ma=ket enci-,use sales market transm'ssion se v ces mar'ket The bulk power serv ces market on the demand side is defined as d'str-"out'on ut~ ~ities v'.. irsu f'cient generation to meet the'= own loads or resene

neecis, and includes distr oution ut"'lities w thout a.y s'gn'ficant amount of, generation,

~ho purchase the elements of bulk power serl~ces

"=om more t.".an one supplier.

The supp y side includes elect icity procucers with bulk power services to sell.

The bulk side 3.neo poratcs customers who ca-.

vower end-use sales ma=ket.on the demanc incust= a~,

coe=c'a",

and governmental take power at transmission voltages.

~ne The bulk power.regni ements max'wet on the supply side is defined as the mar<et zor tne sale oz full reit.'--

ments whoI,esale-for-resale power.

On the demanci side are dis t=ibution-only util' es and. the cap tive d"' tr'ution centers of integ ated systems.

%e bulk pover exchange armlet or'he su"ply sid is the market for t..e var~.ous separate e'ments o: "nter--

med'ate products zrom elect c'y produce s which oecom the inputs that together produce a

el'able oulk po --=

supply.

These elements i=elude ma'ntenance

powe, eme=gency

power, coord nation, economy ene gy, and others..'v. t.e demand sicie are generat'ng utilities vho can ower the'=

costs by pc chas'n~

va ious elements tha" make,up 'oulk powe services.

This exchange mark t,.however, is res.~r.cted by dez'nition to generating util'ies with, capacity'"'xcess oz their ne ds, at least during ce tain periods o.=-

the year, who there ore can exchange o-ba ter bu1k powe sertxces with simila'y sit ated utilit"'es.

Ezchan=e 'n this market may be zor money as well as for.seduces.

,1.

2.

"3.

5.

6.

7.

8.

9.,

10.

11.

12.

13.

14.

15 '

16.

17.

18.

19.

~

20.

21:

22'.

23.

24.

25.

26.

27..

28; 29.

30.

31-32.

33.

34.

35.

36.

37,-

38.

39.

'0; 41.

42.

43.

4S.

46.

47.

48.

49.

. 50..

supply side includes not only bulk po~er pxoducers but also 'distribution ut'il'ies.

The bulk power transmi'ssion seduces market on-ce d

.d

'd '8

• 'E 11 purchasers wno need to txznsport bulk powex to deliver or receive the procuct.,

This market ivcludes the transmission of= an integrated f'rm's own power and the wheeling o" second and tnird pa=ty powex'.

Second party wh'eeI.ing is the txansmission o

another utilitys oower wnere tKe power is for'hat other util tys own use.

rod example, a

utili~. with access to a nuclea unit may requi e wheeling to bring 'the oower to i"s seer'ce area.

Third oa ty w. oem'.'ng is the transm"'ssion of anothe ut'ity's oower to a thi=d party.

The supply side or the transmiss.'on market covs'sts of all those who own transmiss'on 1'nes or systems.

Transm'ss.'on services z

e a necessary element to deliver to reta' distributors, a..d to di ect industria or other customers,.

the intermediate outputs or clem nts

~

~

~

~

of the production part oz the xncustg.

=or D

v. ty, t.e direct retail customers wil'ot be discussed,.

A distribut

'comoany in 'a competitive elect ic irdustry should be able to buy'arious elements of bulk, power and piece them together to minim'ze its bulk oower costs. lf a distribution utility is blocked rom obtain'ng t ansmiss'on, 't is de facto excluded f=om the oulk powe exchange and requirements

markets, except to deal with tne utility that owns the transmission that is block"'ng access to other suooliers.

Past transmission sem ces a

e internal accountiv+ entry for the large vertically irteg zted systems.

3ut in cost allocation 'r ratemak ng by these syste~,

the tota transmission costs are allocated according to which custome-;s are using them.

Q..

Do You believe that the products n.-the f've sub-markets you have defined are close substitutes and are intexchangeable?

A.. Some of them ax'e,'ut the various, products defi'.ed in the sub-markets included urder the ove=all mora" la te~

of --bulk power market-- axe not all close substitutes for each other.

For example, oower s not a substitute

=or transmission.

moreover, some of the elemen"s o-inter-med ate oroducts w"'th'n a sivgle sub-market also are not substitutes.

Fxamples in the exchange ma"Met are the elements:

spinning resevres; ecovomy energy; and ma'tenance power.

<";ese are "ot substitutes or iv.te changeable bu".

are defined to oe within the bul'~ power ex '~'an~e sub-market.

The problem in applyirig tne mtercnavgeaole cr" ter" ov.,

l.

2.

'3.

6.

7.

8.

9.

10.

12.

13.

14.

15.

16.

17, 18.

19.

20.

21..

22..

23.

24.

25.

26.

27.

28.

29.

30.

31.

32.

33.

34.

35.

36.

37.

38.

39.

Q0.

41.

42.

Q3.

45.

46.

g7.

48.

g9.

50.

order.'to define a mar'ket eo include only close substi ~tes, is that ehis criterion may conf ict m.th tne criter on oz complet ness.

The complete useful product of the bulk power market is delivered firn~ power.

The, many elements-that go into making the bundle,cz3.led firm bulk power can be obtained e'¹r as a single pre-assembled bundle delivered from a sole supplie or the'arious elements including eransm ssion czn be ourcnased or self-produced, d the b'undle assembled by the customer.

Reg'axdl ss o" how the'lements a

e obtained,

however, C&e important point is. that the overall complet produce 's firn ou k power and, there are no close substitutes for it.

Defining suo-markets within the.oulk power ma=kee is..simply a dif""erert t=ace-ofz oetween the criter'a of completeness ard interchangeability.

The use vlness of tnese 'var'ous de in e'ons depends on wnether thev "zc. 'ta insights into the extent o= market power, and the impact f=om ezercis '

that power.

Tzz analyzing the se.

ct re of the bulk oowe

.mzrkee, each of its sU-markets should oe stud'ed separately eo dete~ne whether,.the produce 'n thae ma=kee is relevant for evaluating the. proposed accuisieion.

Th~s the SM~cture in particula sub-markets is the initial bas's zor zn inference oz" the existence oz ma ket oower.

Tf we z-'. d an areificizl distinction being made between sub-markets, tais may snow thzt ma ket pare.'c" oants a

e ezereing their ~armlet powe and making zreificial product diseinctions'n order eo exclude certa'n potential customers.

For ezzmp e, a

company might try.to sell partial eauire~enes fiw powe--

only to a ue'liey thae is self-sufficient in orde eo =orce small utilities to mainta"'n costly excess generat rg capacity.

The ove all bulk power market s ehemarkee chat is p~rily relevant.

A distribut on utility may 'oe in the rendu"rements ma kee, bue then install generation

=

irsuzficient to meet ies needs.

Mi~s utilize then charges into t¹ services m" ket.

Later, ehe same utili>i. may install su-"ficiene gereration to meet all of ies needs and moves by dezin'ion i..eo ehe ezch~~e mz kee.

We utility may move between tnese sub-ma kees eacn yea=.

Zn all.thre cases th"'s ueiliev also is in ene transmission market and competes in the end-use sales market.

Thus, distribution utili"ies usually oper-te in three of t..e sub-markets simuleaneously, and shift in and out oz ehe other ewo over t'=e.

Since the objective oz ehe d"seribu>>

tioa utilities 's to obtain Jim bulk powe=,

and because.

thev are, or.potentizlly are,,in all of the sub-markets,-

1.

2.3.

5.

6.

7.

8.

9.

10.'l.

12.

13.

14.

15.

16.

17.

18.

19.

20.

21-.

22.

23.

24.

25.

26.

27.

28.

29 30.,

31.

32.

33.

34.

35.

36.

37.

38..

39 40.

41.

42.

, 43.

44.

45.

46.

47.

48.

49, 50.

1.

Coordinated operations:

\\

a.

emergency capac'y excha..g

b. 'ant=al economic d'spatch" c;

spinning reserves d.

economy nta=change e.

partial requirements fi~ powe ard ena=~

f.

maintenance power g.'aily or seasonal diversity exchange 2.

Coordinated planning and development:

a 0 b.

c ~

d.

terconnact ons expansion of bulk power supplies unit power common o-joint owne ship of bulk genaratic..

facil'ties (and transm'ss'on faci 'ies) nstallaa reserves Q.

How then does tha bulk powe sauces market from t:he exchz"=e market?

~

~

a3.f the broad concept of a bulk power market is the relevant product ma kat'or analyzing the proposed acquisition.

Analys's o~ tha sub-markets is relevant: if it inaicatas market power or anti'-competitive conauct.

Xn t'e bulk power exchange market wh. ch groua'f generating utilit es sells seBi.ces and wh'h groua buys them?

A.

Each participant in the'exchange market usually is on both sides of th ma ket simultaneously buying soma services and selling others.

Because each participant can be both buye and seller th.'s market is quite inusu'al.

The same is true fo the bulk cower se~ ces market.

A non self-suff c'ent utility neve thalass may sell, fo

instance, ma ntanance power au="'ng certain seasons.

Q.

Plezse describe the elements that: make up tha 'culk power exchznga market' d tne bulk power se=w ces ma kat.

A.

Xn general, the elements sold anc traded in the exchange mz kat and the se~ ca market are'll of the elements of ou k power supply.

Transmiss'on servic "s'ecessa~,

of cou=se, to delive these elamarts and also is tradea in oa t = or cash salas.

The basic elements of the excharge and se~ cas market can

'oe grouped; there are oth elements ard some are partly interchangeable with each, othe

/

~

57 1.

2.

"3.

5.

6.

7.

8.

9.

10.

11.

12.'3.

14.

15."

16..

17'.

18.

19.

20.

21 22.

'3.

24.

25..

26.

27.

28.

29.

30.

. 31-

.'2.

33.

34.

35.

36.

37.

38.

39.

40.'1.

42.

43.

44.

45.

46; 47.

48.

49.

50.

A.

The primary diiference as X have defined it is that one of the utilities is limited

~ n its abi

~ ty to exchange servic'es becai se its generating capacity is 1'ess that its own requirements.

(l: have made tnis d s-tinction, although believe it to be a=tificial, because it helps to analyze some contract distir.ctions that FP&L attempts to impose. ) Therefore, the dependent uti' ty wauld have to purchase more of the elements it needs rather than prima ily'aking baxter exchange t'ansactions.

An interchange agreement wo(rid be written differently if. one party rarely ~ould have capacity in excess of its own n eds compared to an intercha ge whe e ooth part:

es normally would have reserve capacity in excess of their own needs.

Rather than emphasizing tne differences between the services anci exchange

markets, nowever, it is more relevant to st-ess

.the similarities.

These markets are essentially the -same ezcep" for

+.".

method oF payment.

To 'repeat, repayment in the ezchange uzrket s primarily through reciprocation w'nereas repayment ir'he se v'ces market is with 'money.

Although 't is useful to'oxa."y to view these bu'lk power sub-ma'rkets separately, this analytical convenience certainly is not a oasis for asserting that'adependent util='.ty can t purchase ror -oney an el ement being supp 1 ied to ano ther ut~ 1'i througn a

barter ag eemen-in the exchange ma=hat.

Q..'hy do you conside the t:ranspo tation or tra.s-mission-of bulk power r=om

@he prod

~ ers to the distr'butors to be a part of the bulk. power market' A.

Alt&ough tx'ansm ssior. is a d'st nguishable

~rk t, the unique technolo~.of t e electric powex industry makes 'it necessa~

to include the tr~asportation secto=

of tne indust~ simply as a pa t o production.

Tho unique technolo~ is the need ror a physica3. con;.ection between the producer and end-use customer at-t:he time of production.

The e are no inventories; you can't produce pcwe now for delive~ late Hydro-elect=ic p~~~ storage pro-jects and some exotic technolog'es may partially char.-e ebs for produce s,

out this is not a

actor in Ploxica at the present.

2'oreover, tnere are no alternative modes of transport'ng power and a customer cannot se ect a t 'ck, or barge.

The elect=ric power p oduced now is lost forever i=

not delivered to an end-use customer now.

~

~

'- 'Therefore, the unique intimate 'nterrelat" onsn' between='roduction and transportat on makes the transmission

1.

2.3.

se'rvices market a accessary element -n the bulk power ma ket arid appropriate tb analyze as an integral. part o="

that market.

5.

6.

7.

8.9.,

10.

11.

12.

13.

15; 16.

17.

18.

19.

20.

21 22.

2'3.

24.

25; 26.

27.-

28.

29.

30.

31.

32; 33.

34.

35.

36.

37.

. 38.

39.

40.

41.

42.

43.

44.

Q5.

46.

47.

48.

Q9.

50;

~ ~

~

~ ~

~ ~

59 1.

2-

'3.

5.

6.

7.

8.

9.

'0.

11.

12.

13.

14; 15.

16.

17.

18.

19.

20,.

21.'2.

23.

Z4; 25.

26.

27.

. 28.-,

29.

30.

31.

32.

33.

34.

35.

36.

37.

.38.

39.

40.

41.

42.

43.

44.

45.

46.

47.

48..

49..

SO.

Q.

Which of the bulk power sub-ma=kets do you consider relevant to evaluating FPGL's acquisition of Vero Beach?

A.

They all are relevant, although some are more important ti.an others.

Q.

Why is t=ansmission se~ ces a

elevant ma k, t?

I A., Transmission serv ces is a relevant ma-ket because control of transmission by

a. la-'ge utility can block a geographically isolated indeoendent utility f Gm access to oti e-bulk power markets avd lower cost power.

Xf FP&L controls transmissior.

and refuses generally to allow wheeling, then Vero Beach would have very limited alternative sources of oulk oowe rendu'ements,

exchange, or se~ce's as would'."t. Pierce and-ether similz-ly situated utili-es; Q.

Why.

s the exchange market relevant?

A.

At t:he present time'ne Ft. Pierce municioal utility can coordi..ate and exchange oulk oower w'tn Vero Sezch and FP&L. if.Ve o Beach is acauired,

however, t:he loss of one of two competitor supoliers to Kt. P'e ce could increase its costs, oarticula=ly i= FPGL's reluc-tant to act as a normal Ei~ m a comoet=tive environm nt, and szllw"-ly and eagerly se'l oulk power exc~gn~e services and t ansmission at compensatory

-'at s.

Q.

What is the geograph'c ex=en"= of both tne actuzl and the potential ~~~.smission services markets' A.

As T. have stated ez lier, ma kets must be viewed from the demand s'de and the supply side.

Tne act~1 transmission sedu ces market is

@he ooe atiag.a ea of Florida Powe- ~d L'ght Company.

On the suoply.side of this market is FP&L's transm'ssion see~ ces 'whicn are provided as a part of its bulk oowe-sales to its captive distribution c nters and to other utilit.'es.

Tn addition, there zre.some t-ansmission lines connecting, for exam-e, Ft. Pierce znd Vero Beach, which are not o~4ed by FP~4i..

These tyoes of 'te connection be

~een the isolated utilit es withiri.FPGL s ooerati-..g

area, a=e minor.

Since FPGL does not wheel tnird oa ty oowe='ithe in or out of its ope at'ng area, the supoly s de oZ ti'.e ac"ua tr~asm-ss cn se~

ces a=ket s a~~ost totaily cc..st=a ned to FPGL's ooe

-.".'a~ "rea.

L~ ti. s geograph'c a=ca "" :

clearly domi~ai:=-s and hzs market power in the transm'ss'o

1.

2.

~3 4.

5.

6.7..

8.

9.

10.

11'.

12.

13.

. 14.

15-.

16.

17.

'18.

19.

20.

21.

22.

23.

24..

25.

26.

27.

28.

29.

30.

31.

32.

33.

34.

,35.

36.

37.

38.

39.

40.

41.

42.

43.

45.

46'.

47.

48.

49.

50.

services market.

Tn FPGL's operat ng a-ea, oz the total 4,843 m~ les of high voltage t=ansm'ss'on lines of 67 Zv and aoove in, 1976, FPGL o~wad 81 percent.

This is shown in exhibit (GT-5).

F Gi's share has actually decreased witn the addit'ou of a SOO i'v line installed earlier this year.

The potential transm ssion services market includes not only FPGL's op'crating area but also all oz Florida and beyond into. neighboring states.

The ',geographic extent of this market-would include areas as far away as it is economic for somewhat distant utilities to buy, sell or exchange oow w th the uti 'ties in the.PGL oper ti..

area, including :PGL.

tnera is no clear method

=o determining tho geographic extent of this market.

. t 's clea

, how'aver.,

tha" on the supply..side tha ut'1't as isolated w"'thin tha FPGL service area would contirue to

'epend or.

F'P.L'to wheel power

<io them in the ootan" al market.

The demand s

de oz th's potential market in eludes all oz the utilities

~ tha

.>>PGL ooe ating area who would wisn to race've whee ac power o= who wo"'d wish to have thaeir powe sent out over FPGL transm ssion lines to other uti"it'es within FPGL's ooaratin~ area, within. 1orida. and oerhaps beyond.

It will become inc eas..gly claw-as I descr be the geog apM;c extant of the 2ct'Mol ma=ket in tne other bulk oowar sub-~~

a s,'hat

-" PG' efusa to wheel the do~ant

~actor in data~sing tne geographic ex"art of the various actual sub-markets.

Thus, if F.GL ware

-to wheel on reasonable comoetitive ha=i.s, 'the cot'yetitive impact of the loss'oz Vero Beach through acquisiti on.

would. be greatly lasserad although it would by no means be eliminated.

Q.

%hat, is the geograonic extent of the actual bulk power equ'-ements mark,et?

A.

The actual recui em r.ts market is FPGL's operat-ing area.

Cn the supply side, FPGL does not sell ru" 1

~ requirements po -er outside oz ts service terr tory because of tar'torial, agreements w"'th 'aa=ghbo=ing

=-utilities. Utilit-es w'hin FPGi.'s operat'"..g a=ca'annot sell outside th's "rea either for the sa e reason. or because

=PGL will not wheel for t.".am.

On the demand side, all o= the cps "orna s '"hat FPGL supplies are o" f

cou-se z FPG 's operating a"ea.

ZD the actual ma ket on the supply s ce, ti e primary suppl'er oz full requirements power is Florida Povar anc

'e 1.

2.

"3.

5.

6.

7.

8.

9.

10.

. 11.

12.

13.

14.

15.

16.

17.

18.'9.

20.

21.

22.'23; 24.

25.

26.

27..

28 29.

30'.

31.

32.

33.

34.

35.

36.

37.

'38.

39.

40.

41.

42.

'3.

le.

46; 47.

48.

49, 50.,

". 61 "

Light; FP&L supplies, full requirements to all 259 o="

its ovix distribution centers and to Lee County E ec"='c Coooerative.

Hithin FPGL's operating area f

two 0 utilities also provide full require onts bulk powe= to other distribution utilitias and to the.ir own distr'bution centers.

These two suppliers are Jacksonville.e Elec"=='"

Authority, wh"'h supplies full require ants to the City oz Jacksonville

Seach, Green Cove Springs, anc to its own distribution network and Kay Nest Hu~xic'pa wh'ch generates all o" its own needs.

Thus, PP&L's dominance in the buLk powe-raqu~-aments market gives it significant market power.

Could competition go on between "ull recu'ments bilk power suppliers?

A.

Yes, but not in the normal sense.

Zn fact, compet tion does go on-as an outgrowth of the competition to serve rata. 1 loads.

Speci.zically, if a municipal system is se-vin~ retail loads, r~&L is competing to

.obtain that."ranchise and therefore at the same limo."'s competin~ to supp" y bulk powe= racui ements to what '-ould become a captive r PGL d' "r'ution cente Conversely, an rPG distr"'oution center may be in a municipal'~y which dec'des to create a munic'pal distribut'on ut ity.

The co pet tion in this ma kot s betwee..

PPe~

and the mun c" ~sal

. orm 0

~ uti lhty.

A particula PL'lac" pa utility. does not compete with rPK to se<<ve in i.othe municipality.

Thus, t'. e e is not compet'tion in t'iormzl sense of two ezis'ting utilities t=.y'g to se

-a one customer.

Nevertheless, there '

competition.

XZ r~K allowed th'rd party whe lag or if othe=

transm ssion'lines were built, then soma ut"lity other than FP&L could supply the oulk powa requi=emants to this new distribution utility.

Since we're d scussing,

here the actual '=ull requ.rements market', it i'. no't likely that anyone othe than rP&L could serve a

mt aicipal.

7PGL nevertheless faces the competition

="rom t:he possi-bility that the mun cipal will obtain its own generation either by ouilding its own slant or by gaining access to a plant built by rPGL, r1orida Power Corporation o-some othe large u"il'ty.

Q.

Don't each o= tnase Cull requirements suppl e=s have 100 percent o= the.= markets?

1.

"3.

5.

6.

7.

8.

9.

10.

11.

1'2.

13.

14.

15.

16.

17.

18.

19.

20.

21.'2.

23.

24..

25.

26.

27.

28.

29.

30.

31 ~

'2.

33.

34.

'I A.

Yes, they -do have 100 percent oz each oz the local geogr aphic markets tha t they serve.

There never-theless is actual competition going on continuously to see whether FPGL will continue to serve the fu 1 requirements to its zranchise municipalit'es or whether a municipality will create a municipal ut" 1'ty and i stall its ra generation.

Even though FPhL attempts to block a municipa 'ty z=om getting po5 r wheeleci to it frov.

outside of PP&L,'s operating area, the possioil'ty zo a

annicipality to create a utility to d'stribute and to generate its. own power does exist.

Q.

%hat is the geographic ex" ent of the'oten'- al bulk power requirements market?

A. If rP&L wou~ d wheel power, then.the potential fu11 'requi emen ts ma=ke t >>oui d be opened'p

~a th' market; the suppliers would inc'=ude any generat".g utility in Ploxida, and pe haps even 'oeyond, with e:cc ss generation relative to its own needs.

For example, iz a utility in Georgia had excess capac'ty 't might oe willing to sell 'full requ'"ements to a utility in."lor'ca.

There are moor ant ques.tio~s to answer, however,.>>hether the intert'es'are suff. cient to c~ such loacis, whet"er it would be econcm' to t=ansm't that d'tance, and whethe regulatory constraints wou d 'olock inte state sales ofthis type.

More ealistical y, the potential suppliers oz zull requ'-ements to Vero 3each woulci pro'oably oe on>.y those util'ies in Peninsu'a

.lor'cia.

This potential ma ket would have many more competitors than FPGL attempting to supply full reciu -e'ents to the various distribution util'ies unless, however, ter=itoria restrictions are impose'd and en=orced.

35.

36.

37.

38.

39

~

"40.

42.

43.

45.

46; 47.

48.

49.

30.

On the dema.d s" de,. the potential pu=chasers of full requ'rements bulk powe would be any non-generating utility w" thin econcm" c reach oz a potential supplier.

Non-gene ating d'strioution utilities include the capt've distribut-on centers of the ve tically integrated ut'lit"es and

~he distribution'etwor<s oz t..e cu rently sel=-

generating independent util='t'es if, "hat uti. ty ciec dec to drop out of the generating level oz the indus~

1 Q. 'o you conside the actual bulk power require-ments market that you have identified re evant to th's proceeding?

A.-

Yes.

Ve"o Beach

-ants to become a fu e

. =-e-ments c='-pt-'ve customer oz rPGL, anci i~ the acqu's'"ion 's approved it will oecome one.

The reason'his market '

'l l.

2.

"3.

5.

6.

7.

8.

9.

10.

12.

13.

15.

16.

17.

18.

19.

20.

21.

22..

23.

24.

25.-

26.

27.

28.

29.

30.

31.

32.

33.

34.

35.

36.

37.

38.

'9.

40.

42.

43.

45.

46..

47, 48.

49.'0.

relevant stems f om,FPGL's refusal to wheel power.

Vero Beach has no viable choil e emong suppl' of bu k power.

Since FPGL'as dominated the eauirements market oy ts control of transmission and refusals to deal fully'he bulk gower mzrket, Vero Beach has not been permitted by FM the normal competitive alternatives to acau.'si-tion by FPccL.

The long term dom'aznce and,market powe of FPGL has brought Vero Beach to tnis point.

-'Zt appears that FP&L's market power has born Q.

Are you suggesting that utilities other than FP&L shoe~id be allowed'to serve full requirements to a distrioution uti ty isolated'within FPGL's se vice territory?

A.

Yes and pa ticularly sine FPGL does not Wily recognize a publ'c utility's obligation to se ve all customers whet he czgtive resale distr~ buticn cente s,

direct high voltzge "nd st="'z custo s,. or direct b'g.

voltage resale d's"=ibution ut lit'es.

Even if FP~L did not discrim sate among the types o-customers t se ves, a customer should have the c.oice of who supplies h -.

Q.

Rhat is the geographic extent of the actua'ulk power exchange mz=ket?

A.

As T. mentioned ea lie

, the bulk power exc -;.g market. is musual in tnat the util'ties wh'ch p" ci-ate

'n '

are.both suopl'e s and ouyers.

'The exchange ~=ket e

~

~

is restricted by de=i. itic'o generating ut

=t=:es w tn o

~

o

'capacity in excess of the'r neecs wn cn.can excr~nge or barte bulk powe seduces with similarly situat c ut'ies.

For Vero Beech, the act.=~al bulk power exchange market is with Ft. Pierc znd rlorica Power 8 Light, wherein these three utilities buy and sell bulk powe among each other, FP&L donated this buLk power exchange market with 987. of the generating capacity in 976.

Vero Beach we e acquired by FPGL, the company s

corn='-.-.ce would increase and Fort Pie ce's actual suppliers of bu k power wou'd be limited only to FPGL.

Q.

Ts the geograph'c extent of the actual oulk pcwe=

exchange ma=ket for F GL 1imited only to Vero BeacH and Ft. Pierce?

~

A.

Ho.

FPKL exchanges power with Jacksonv lie Electric Aitho:ity, Lzke North, Orlando Utilites,

" o=.'cz Power Cor~orat "on and Ta="pa "lectr"'c, '. edcit='on to Veto Beacn and. t. Pie ce., 'lecithin t.".'s b~oader geography='c market consisting of eight ut'1ies, FPG red 54! of the 1.

2.

"3.

5.

6.7.

8.

9.

10 11.

12.

13.

14.

15.'

16.

17.

18.

19.

20.

21.:.

'2.

23.

24.

25.

26.

27.

28.

29.

'0.

31-.

32.'3.

34.

35.

36.

37..

38.

39.

40.

41.

42.

43.

, 44.

45.

46; 47.

48.

'9.

'0.

installed capacity in 1976.

Of these 'eight utilities, Orlando Utilities, Vero Beach, Pt. Pierce, Lake North, FPH and Jacksonville Electr'c Authority do not exchange bulk. pover outside the group of eight utilities.

T~pa Electric exchanges powe~ with the City of Lakelanci (wh. ch in turn ezcharges with rior da Power Corporation),

and.

Florida Pover Corporation.exchanges with Gulf Power Corporation, Georgia Power, and Gainesv'lie-Alacnua County Utilities Boa d.

~

A.

The supoly s'de of th oulk oowe services Llcludes 'utili ies with oulk pGwe se vices to se suoolie s are t~.e see utilit-es that a"e opera" bulk pove-exchange aa ket.

market het< 0 oo asew Xf the relevant exchange market is viewed so broadly,

=

however, the majo impact on tne c'ompetitive am k t structure fran the oroposed acquisition cf Vero Beach

~

would be disguised.

Vero Beach. and.:>>t.

Pierce are o e-cluded fron ccmpeting eithe=

as selle s or buye s w"'t.

utiliti s other than rPGL anci eacn othe

'n the bulk.

power exchaag za ket because 'of "P&i.'s. refusa'o wheel.

Thus the major ~epact on raar't structure from the acctuisition will be to leave =t. Pierce isolated with no alternative ut'lit"'es than ~r&L w'th whom to exchange power.

Q.

%hat s the goograohic eztent o= the potential oulk power excnange za-ket?.

A. lf the e were no barriers. (other than econc~'c) to the transmission of bulk powe

, the ent=ants into the bulk power exchange raarket would oe any utility vith.

capacity greater than its needs.

These util~ ties cou ci include those located in eastern ard.souther

':. or'da as well as th=oughout the state and tne caste<. United States.

Exclusion f oa t ansziss'on sear'cos, howev r, zkes t ese utilit-es or.'y potential comet to-s

~~ the bulk po~e=:

exchange market.

'Yet another level of ootential entrants into the oulk power exchange market woulci be ezisti g utilities w'tn'.

less gene=at. on tnan they need to be sur=xc ent to =eet t"e'-=

own requirements.

They could 'n the future add 'capac.'~

or could pu chase jointly a la ge unit and. compete for bulk pover sales.

Lesskely

'out st'll potential entrants also include co~unities with the capao' ty o aequi-ing distribution and generation ac. lit'es.

Q.

%hat is the gecgraph"'c 'extent of the actual oulk power serv. ces z-'rket?

1.2; "3.

5.

6.

7, 8.

9; 10.

11.

12.

13.

15.

16.

17.

18.

19.

20.

21.

22'.

23.

24.

25.

26.

27.

28.

29; 30.

31.

.32.

33..

34.

35.

36.

37.

38.

39.

40.

4l.

42.

'43 45.

46.

47.

48.,

49.

50.

51.

Purchasers of bulk power services are defined to be utilities with. insuff c'ent capacity o-generation to meet thei-own loads or reserve 'needs.

The actual gene at-ing purchasers within.FPGL's operatin~

area include Florida Public Uti ities, Hew Sm~a

Beach, Homestead, and Florida Mys Electric,Cooperative, all of whom pur-chase from only one supolier.

Other examples of pu-chase s

which do not generate are Peace Rive Coooerative, wh'ch purchases energy

==om

~ lor'a, Power Coroorat "on, r lor da Power 6 Light and Tamoa Electr"'c; Clay "lect=ic Coope ative, wii'ch. pu-chases f om PGL and Florida Power Corporat on; Okeferoke Electr c Coopeiative, wnich purchases from r FK and Georgia Power; Suwawzee Valley Electric Coooe:".at.ve, wh'ch purchases. from Southeast Power Admi.'strat'on, "PGL,

.and r lorida Power Co~.;

and Glades -Elec: ic, whici: pu chases zrom =PAL and r lorida'ower Corp.

Q.

What is the potential bu'k power services market?

A.

Potentially, Vero Beach could compete "iwtn F GL to sell se~ices to r lo "'a Keys, to 'Homestead, o= co Hew Smyzna, Beach,'r with Jacksonville Electric 4uthority to serve. Flor'da Publ'c Ut-1""ties i=" acc ss to ra miss on services we=

made'vailaole oy FPG Simila=ly, Vero Beach could ente-t>e ma=ket w. th FPccL, Florida Power Corp.,

Tampa lectr'c, Georg a Power and SEPA. to

.compete for balk powe service to Gkezenoke, S~mm~ee

'Valley, Glades Elect ic, Clay Z> echoic

-nd Peace R'ver Electric Coooe=ative, but "or transmission

=aci s cont=.oiled by FPGL.

Thus, FPGL's. acauisition of, Verb Be~eh 'elixir.nat s

one oz FPGL's few comoetitors and increases

'Fr.PGL's ma ket power in the bulk power se~i.ces.ma ket.

0.

Does FrP.r=L, view these 'var-'ous bulk oower sub-'arkets's substitutes fo-each otnei'?

-A.

Yes.

An FPK document, "Strateg'c Planv.'..g D'epartmen't Policy. Planning - Backg=ound Paper St=ateg c.

Issues In Inte -util'ty 3.elations" def

.es franch'ses as zollows:

"Franchises:

Ou= contracts w'h i'unicipal or Cou..ty govern-ents zo= a,=st= out on cz power at reta'"

to cust'arne s within "neir bounda='es

- an. alternat've to mzicipa distr'bi:t.'on oz power bo~

i I at wLO sa e

==o

=Pc o= ma cipal gene a"

.- ane distribu-'on with ag, eed

-.te ch~ge witn Fl'&L."

(:-sahib' (GT-6).

1.2.

"3.

4,5.

6.

7.

8.

9.

10.

11.

12.

13.

14e

.15.'6.

17.

18.

19.

20.

21.

22; 23.

24.

25.

26.

27.

28.

29.

30.

31.

32.'3.

34e 35.

36.

37; 38.

.39.

40.

41.

42.

A3.

'44.

45.

46 47, 48.49.'0.'ECO

'OUC LAK GVL TAL Tampa Electric Company Orlando Utilities Cocziission City of Lakelan Gainevesville/Alzchuz County City of Tzllzhassee

Moreover, the System Pla sing Department urthe states on page 3 unde Findings and'Conclus'ons e=a=d-ing the inte-char.ge ma=ket thzt:

Thus, FPGL ac'nowledges that the 'bulk power'qu'-e-

ments, ezchznge, and services markets zre" 'inte changeable from the vie~~go'-.t of a distr'outor

""or purposes of ootaining oulk power.

Q.

Does FP&i. recognize competition in the bulc power services market?

A..

Yes they do, but they call 'it the firm inter-change market.

in an FP&L document ent tied "Market Assessment, F ~ int rchange, Peninsula= Flor'ida Systems, 1977-1985",

shown in Ezhib t' (GT-7), FP&L's Sys e

Planning Depa= ent states w the zi=st pa=a~-aph that it:

"has undertake n to zppra'se

"". potential.

market =or firm irte chancre power Florida during th pe=iod 1977 to 1985,"

Two.of the t n syste s cor.sid red as potent z

ouyers are the City of Ve o Beach znd the

~ ort Pie ce Ut' ties Authority.

in this FPGL document unde the head

.g o=

Findings a-d Conclusions,.t..e System Planning Department states on 'the thi d, page timt:

"Under present construct on schedu'es znd load fo eczsts,

've systems appear to be capable of offering s gnif cant compet.t.or to us durin~ the 1980-85 period:

a)

T".CO (21-35 W()

b)

OUC (174-225 M71) c)

LAK (57-253 Kr) d)

GVL (135 237

~M e)

TAL (15'6-248 ii7ri)

The in'tial page of this document t-anslates these acr'ongles:

1 I

~ e-2.

"3.

5.

6.

7.

8.

9.

10.

12.

13.

14.

15.

.16.

17.

18.

19..

20.

21.

22.

23'4.

25.

26..

27.

28..

29.

30.

31.

32..

33.

34.

35.'6.

37 38.

.39.

'.40.

41.

42.

43.

45.

46.

47.

48.

49.

50.'Because the need exists and we have done this type of business w th them in the past, the Cities o- "t. Pierce and V'ero Beach offers good markets for smal;1 con trac ts.

To summarize, FPGL recognizes the interchange

'market and the competition

~m t.

Vnat is not stated is.that the competitors 1'sted can only compet for certain loads to ~xich they have transmission access and that FP&L, by not allom.ng third party wheeling or.

its t ansmission system,. effectively excludes these competito s from offering to serve, for e=.a~le, Varo Beacn and Pore Pie ca There is one add tional point.

A revi w o this document'ighli=i:ts the overlap between tne oulk powe services and exchange markets.

Recall that the distinction is in "Ke ralationsh p oetween pea< load and sel -generating capacity.

On tha 'demand side, a

utility ia the exchanoe market has adaauata asarvas

.FP&L doc~ent shows that a single utility can go back and forth between these two markets every faw yea=s.

As a util'ty's load mows it may have negative reserves

.and purchase powe Then it may build a new unit'arger than

" t needs and sell powe fo a

= w yea=s while its loads mow.

Thus, the d'stinct.'on t.".at i draw ear'ar fo-analytical ccrven ance oatwe

.. t. o bulk power service ma=ket and the exchange market

- s shown, to be artif. c.al.

Utilities buy a..i sell tha.

.elements of bulk power regardless of their degree of self-su ficiency, Hotice FPG 's te~inc'gy.

PPai

=oes to great pains to avoid an interchange ag=eem nt with any util'y with inadeauata sa f-generat'on to meet its own requirements, but then

."PGL offers

= m intarchan"-e" power to utilitias w'th insufficient reserves.

distinction between these. markets oovious y 's ~clear to rPGL as well.

4.

Conduct of FPEL in the Relevant Markets 1.

2.

"3.

'5.

'6.

7.

8.

9.

10.

.11-12.

13 0 14.

15.

16; 17.

18.

19.

20.

'1.

22.

23.

24:

'25.

26; 27.

28.

29.

.30.

31.

32.

33.

34.

35.

36.

37.

38,.

39.

40.

41.

42.

43.

,44.

45.

46.

47.

48.

49, 50.

Q.

%hat does the term conduct mean in econom:c analysis?

A.

Condu t refers to how a firm behaves in its business transactions.'he norm is the expected behavior of a firn in a perzectly competitive market.

iiarket gower can be observed to the extent that a firm's conduct differs f om its expected behavior undex per'feet competition.

Why have you analyzed FPGL's conduct in the xelevant product and geographic markets?

A.

As I. have stated, my analys s oz the structure oz the markets relevant to the proposed acauisition was to determine whetnez FP&~ has ma ket power.

The analys='s o=

structure stron'ly supports the content on that PP&~

h'as market power, but if, in addtion, FP& 's conduct is ant-competitive, then th's conieniion is demonstrated.

competitive"conduct would expose FPGL'-s ~xket power.

Zf ~&L is si own to possess ma-k t power ther no chancre in the structure oz tne.x~custry in the relevant markets should be allowed to ncrease FPGL's market power regardless of how small t¹ increase

- unless the e a=e substant" al offsetiin~ benef. ts. If H'&L is sho>>,

howeve=,

to be exe cisinz iis market powe-then evan the cemonsira-tion oz ozzsetzing oenez ts wanes as a rationale o

permittino the acquisiiion io increase

".6 s

ma koi powe=.

i

~

J~

CL

~

e 0

To repeat, I have emphasiz'ed that t.".e possession oz ma set powe does not imply tha-this powe-necessarily eithe=

has been, is, or will be exe cised.

I have also a "-ued that ircreasing sucn'ower even a small amo~.t lessens compet"'t.'on; a loss in competit'on'an

.soon impose ~ig¹r.

cos"s through ine ficiency.

But when market powe'r is being exe c'sed, the ~Me='ent in ff c enc-'es

'aad h.'g'. e=

cosis f=om market power are be'ng imposed.

Strerg.-"h n'..g a firm's ma ket power in such a situation ~y accele'rate the loss of the remaking competitors ard c=eate a

virtual monopoly'.

Pith regard to your exam"'nat'on oz the company's conduct what we e you= sources'z info~tion?

A.

The pr'~. sou-ce was the discovery mate ial

'sent by rPGL, bu" I also have used the hea=ir.g ecord in Phases 1 and 2 o".th's proceed" ng and other relevant sou=

s.

~

~

Are company doc~ends such as the ones on wn ch you relied the k"'ncs of materials that experts in you=

field would reasonably ely on ir. reaching the'r conc us'ons.

~

A..

Yes.

j.

2.

'3.

5.

6.7.

8.

9.

10.

Q.

Some of the anti-compet"'tive practices that you m'ay cite may not be practiced by rP&L currently.

Vould this consideration change your conclus ons?

A. Ho.'he vidence demonst ates "hat rPGL has monopoly powe in the p=oduction aza sa a

o e ectricity in the market areas it serves.

Even though some o" these anti-competitive practices may no" now be p=acticed does not mdicata tha" PP&< 's monopoly power had di~ished.

To approve PP&i's acauisit on oz the Uero 3each utility would increase FP6 's market povar.

The same or new azti-competitive pract.ces can be exercised as ion~ as this monopoly pover con"nues.'/

11.

12.'3.

14.

15.

16.

17.

Q.

You st=ted earl'er that the. ezercise oz ma Bet poeer to block, otners z=,om access to iransmissior. services wo~~~ d be a bottl'eneck monopoly, anc anti-competitive.

What is Z.K's general policy 'toward the use.of its transmission syst m for wheel"-..~?

18.

19.

20.

21..

22.

23.

A.'P&~ ha's a general pol'cy oz xefusing to wheel 24..

power fo-othe util'ies.

25..

25.

Q.

Xs there ary evidence that demonst=at s th:s 27.

general policy o" re"us'ng to deal in transmission serv ces.

28.

29.

A.. Yes.

- PP6L's pol cv of re& s'.g to deal in trans-30.

mission sem ce.s is demonst=ated oy th'e lack of a filed 31 general tariff for wheel~~g and by

-PT '

statement of

. 32.

policy.

'Zn 1975, in a lette~ to the New cmy~a Pc 33.. Util'ty Commission marked

"-zh~ o.'

(GT-8)

=PAL stated 34.

in the, "ov-th pa a=aph'hat:

35-36.

'rP&L is not prep a ed to hold its elf 37.

out as a cot on carr oz elect 'c" ty 38.

and tne afore does not intend to

.le 39..

gene ally app1'able tariz= fox

. 40.

transmission s e~ces 41.42..

The lack of a filed gene al w'neeling ta=i:" "ad 43.

FP<U.'s policy state~ant show:PGL's marke" powe.:P&:

apparently bel'aves it does 'not have to transact

business, 45.

to deal,'ike a no zl compet" tor, ma openly ozzer t=-'..s-46.

'ssion ser.'ces under a general =ate.

A no~~1 compe"'""=

47 is a comoetito w thout ma ket power whose conduct '

the 48.

-norm e".=actec of a

="

in a coipet't ve whet.

A no=~

49.

ompat "o

woulc o==er to transit anyone s power, a"

a 50.

compensatory ge eral rata, up to the capacity oz the' transmission system.

FP&L does not mention any problems with transm'ssion capacity.

The only remain ng rationale for rP&L's refusal.to wheel :s that by ezerting i"s market power it can either maintain o-gain z competi ive advantage.

1.

2.

"3.

5.

6.7.

8.

9.

10.

11.

12.

13.

Moreover, FP&L' neighboring-inves tor-owned utility, 71orida Power Corporation nas a filed general wheeling tariff,md Otte Tail Power Company has file'd a,general wheeling tariff ir. response to tne Dist=ict Court s order to correct for Otter Tail's bottleneck, monopoly activities.

The economic impact of:.P&L's re&xsal to w¹ 1 power is similar to Otter Tail's.

14 15.

16.

17.

18.

19.

20.

21.

22.

23.

'4.

25.

26.

27.

28.

29.

30.

31.

32.

33.

34.

35.

36.

37.

38.

39.

40.

41.

42.

43.

'44.

45.

46.

47.

48.

49.

50.

Q.

What is the concept of a common car=ier?

~ /

A.

This concept has be n explained c" early 'oy Professor James i. Reeks in h>s a-ticle in the Co1umbia Law Review that E quoted from previously..

He states tnat:

The co~on carr" er conc ep is certair.ly not new.

Unde the cion law, transportation and distribut"on systems enjoying monopoly or oligopo y powe have been classified as co~on carriers.

As such, they are qu'red to ca~ the goods o""- all comers so long as capac"'ty exists.

When on views the transmission

&unct on as simply'hat of th long-distance carri er in the elect ic powe>> industry equivalent to railroads or truck in other ind.st= es, it s not difficult to conclude tnat the s~~e rules should apply."

(page 18)

Q.

1s a border-to-border

contract, that is, a sale of power between service areas, a type of wheeling?

Ho.

Horder-to-border cont acts dif="er fundamentally.

f-om wheeling.

A border-to-oorder contract is a sale in which one ut"'lity aequi"es powe

~

om an adjacent utility.

The selling ut lity may ob ta' 's powe-

=rom some other utility, but the oorde= sale is no" wheeling.

Wneeling is the transfer o= power between.geographically separated util'.es, o-sepa ated pa=ts of a s'ng e ut'.lity, emp oyirg the transm'ssion system of a third vt"lity bet een them.

Q.

Es the>>e additional ew'dence tnat rP&L efuses to.'heel?

71 42.

,43.

45:

46.

47.

48.

49.

50.

1.2.

'3.

5.

6.7.

8.

9.

10.

11.

.12.

13.

14.

15; 16.

17.

18.

19.

20.

21.

22.

23.

24.

25; 26.

27.

28.

29.

30.

31.

32.

33..

34.

35.

36.

37.

38.

39.

.. 40.

41.

A.,

Yes.

In 1971, FP&L responded to a reauest for wheel:ng made by the Jacksonville =lectric Authority.

P&L's response to Jacksonvill

's request, shown 'n a latter marked exhibit (GT-9), in tha first parzgxaph was'Mth referen ca to your 1at tar of January 27; and ou-telephone con-versat on of.eoruzry 22 we have carefully considered your request to use ou-t ansmiss'on systems for deali..g with a thi d party Ve are si=ongly opposed to this as expressed to you in Dec moer, when you f"=st br'ought up the

matter, znd aga' expressed to you and'ow Vinnzrd in Jacksonv.

3.1e by the wr" ter and A. L. %right on Janua~'0."

C'gain this is a clear exercise "of market powe=,

a re" sa'o deal.

But thy second paragraph is even more blatant; H'&L wanted to sell the power to Jacksonvi>>e znd thus used its transm'ssion bottleneck to block

a. compet to='s sale. 'his paragraph reads:

'Vie czn readily w~derstznd you concern about powa s.-~ly'or the summa of 1971.'he sinai.ation ->11 be tight

~ peninsular -florida, but we stand ready to ¹lp you as. we have always done. in the past.

Vie feel that you should make a reauest to us to obtain powe-fo-you om zny'ou ce available to us.'h's is the way we have always suppl'ed you.'"

Xf FP&L refuses to wheel power to Jacksonv"lla then it is obvious wny FP&L can say'This

's the way wa have always suppl'ed,.you."

Anothe azzwla not only demons"=ates, a~zin ~&I.'s policy -of re=using to wheal, but-also "P&L's oeneral ras.stance to sup@lying etzil compatiio=s with inter-medizte bul< powe= sa~ c s such 'as xi~ powe

=j..-'bit (GT-10) is a 1973

-P&.internal e orand~.

This

~e=" orz~c~

d"'scusses alternative rP" tactics to wiggle out frou unde tha. C'ty o=

. o-esieac s assa "'or. t.z" s nca ="&L hzd bee"., supplyi"..

"" C'ty w'th cont nuo~s e ergoncy

power,

=P&L could not refuse to sell the City i~ power.

72 1.

2.

"3.

5.

6.

7.

8.

9.

IO.

11.

12.

13.

14.

15.

16.

17.

18.

19.

20.

21.

22.

23.

24..

25.

26.

27.

28.

29.

30.

31.-

32.

33.

35.

36.

37.

38.

39.

40.

41.

42.

43.

45..

46.

47.

48..

49.

50.

The concluding 'paragraph of this memo stztes:

"It is our belief that if we re&use'o sell the City of Homestead Firm Power they will immediately reauest us to whe'el

"." om other Hunicipalities.

3.f we encourage them to increase the

=

'generat.on fin an amount suf=ic't toJ whe e we can purchase power from them we may offset the demand for wneeling as well as avoid a 3.ong-te~ Fi~ Powe commitment. "

Mould FP&L wheel third party. powe or energy Vero Beach made such a request?

A.

Vero Beach d='d request such a se vice from "PGL on 'Hay 3.1, 3.975, accor"'~~g to paragraph three in, a FP&L nano'o file showm 'n Exh"'oit (G~-11).

Vero Peach reouested tha" FPGL 'wi a 1'on-= ~ oowe

~ ox the Orlando Utilities Commiss on (OUC) to Ve-o Beach.

The memo indicates that =P&L pointed out to '.h. Little that pp~y had not 1 ed z rate for such a del've y, a-.d in tt e second place, "P&L would be able to sell non-fi~ energy durin~ many hours o" the dzy zt the same or at a lesser rate than t.".zt auoted Vero Beach by OUC.

Some two and one-hzl= months later on A~.3.y 28,

1976, tho -inte~s.al

.=PAL document shown in Exhioit (GT-12) ent.'ied,

":. GL'

Response

to

'Ra usal to

'vPc~ee fo-Ve o Beati "'as.wan"-en.

This document descr'bes in the second paragraph the oral response rende ed to Y

. Little by."P&i.:

"Xt was ex@1~ed tow~ 'ZPGL is unde t~'e.'

)urisd 'tion of 'the

' ecerzl Power Co~s sion and 'that zny agreement conce~in~

sue~

transaction

~auld have to be fi ed. with the FPC and receive their approval'nd,

.th"'.s could be a time consum'ng process; '.'ore-over, in orde to arrive at, the basis for cost'.g such se~ ce, stud's would have to be conducted to as su e that

. reasonaole, charges would prevail.

,Aga'z, these studies would be t~

e consum~~g.

Th's stalling tactic "'s as ef ec" ve zs an out="'ght refusal to wneel.

rP&L imposed excess=ve t-ai:szcticns costs on Vero Bezch

~ tne -orm o= ""-e c lays.

n s

decision in 0"-=-= Tzi

, t..e D.st=ic" Court "eq 'rea t..e Otte-Tail Powe"'o-o~.y to irsticute a Re'-al wce 1'.".E rate as a aa " a e ~dy to " duce what the cou t -ound

73 0

1.

2.

"3.

4,5.

6.

7.

8.

9.

10.

11.

12.

13.

14.

15.

16.

17.

18.

19.

20 21.-

22.

23.

24.

25.

26.

27; 28.

29.

30.

31.'2.

33.

34.

35.

36.

37.

.'8.

39.

40.

41.

42.

43.

45.

46.

47.

49..

'.50; to be Otte Tail's monopolistic hold on the'.electricity markets in the areas that Otter Tail serves.

Thus, is clear tnat the Cou t thought tha" the lack of a gene al wheeling rate is a significant anti-compet tive pract ca; T. agree.

FPK's failure to promulgate a general wheeling rata pro'nibits parties z

om know.cg be ore hand whathe or not particular agreements would be prudent.

Ls con-trast, iz FPGL Rows the amount of power agreed to a.d its purchase price ir advance oz quoting a wh'eel'ng rata, as tha Vero Beach example demonstrates, than FPGL can manipulate its wneeling.rate zor the particular transaction in order. to d'scourage tha transaction.

Thusly, 'FPEL exercises and maintain.s i"s ma k t powe Alternatively, unde these sa e circumstances, cou" d estimat the economic value to the custom'r of suc.

sezv ca and set its wneeling rata based on th's estimat d

value.

That 's, t¹ absence of a general wheal'ng fac'-

tates undue price discrimination.

T conclude tha~ ~astaad of f lino a cost oz service tariff fo-general wheeling, that customers do not have to negotiate and perhaps litigate for each transac"ion, tha" PAL prefers to oe'in a pos'"

on to exert its -oncpoly powe n eve y transact" on.

As the present example indicates, there-

's no question that FP&L's posts e on wheeling has a ch'llin~ ef -ect or.

coordination, pooling, exchanges, and st-'lar eccro i transact" cns

~

A-e there any wheal'~~ possibil'"ies open to Vero Beach?

A.

Apparently in line w.'th my prev.'ous ans.-e, Ve o Beach does not bel'e tha" any transmission'e v"'c s can. be obta'ibad frc'FPGL.

Zn cross-ezam'~ation, Mx'. Thomas L. Jones oz "-rnst and :-~st was asked about a

statement in his report wh'ch read:

"%Kneeling w.'ll 'add additional costs to incom='~g power.

Ho cu~ ant wheeling options are availaola."

The question to >-.. Jones elicited this conclusion regarding his statement on 'the availao 1'ty oz wheeling to Vero Beach:

'"I think it is accurate as stated, that at,

'that time, based on ou" conversa"ion w.'"h the City /of Ve"o' ach/,

no cur=ant wheeling options we e ava'labia."

(Tr. 517)

Q; Has FPEL attempted to impose i"s wheeling po icy onto othe u i 1'i as a n ti a state oz lo " K that ovpi1 transm'ss'on syste s?

2.3.

5.

6.7.

8.

9.

10.

11.

12.

13.

14.

15.

16.

17.

18.

19.

20.

21.

. 22-23.

24.

25.

26.

'7.

28.

29.

30.

31.

32-.

33.

34.

35.

36.

37.

38.'9 e

40.

. 41.

42.

43.

44.

'5.

46.-

47.

48.

Q9.

.30.

51.

A.

Yes.

Through its participation in ehe glor da Coordinating Group (rCG)., rPH. has attempted to insa>>e its wheeling policy into grouo agraemants.

Tn 1974, FPK's suggested wording of tie 500 Kv (transmission line)'lorida Operating Agreemant stated that wheeling should involve. only systems fully regulated by the rloridz Public Service. Commission

( PSC) as shown in Exhibit (GT-13).

Th"'

word'ng would prevent access to wheels'~

on th's large efricient era-..smission 1'

oy municipzl and cooperative electric systems since ne'har are regulat d, by 'ehe FPSC.

Q. 'ra there any recant develoomenes w'eh egard to PPK pol'cy on whaelin~ that would altar your gene zl conclusion thae. H'&L is adverse to this service? )/

A.

Ho.

Even w."th tha advene of nuclez generation capabilie'y in tha state of rl'orida, and thus 1zrge generation capabi'ity contained ~ one installzt on, FP&L has resisted filing a general transmission rata tariff wieh the redera>>

Powa>> Comm-'ssicn.

PPGL has a~cad to wheel oo.-e>>

==c~

Florida Power Corporation s Crystal Rive>>

-;,3 nuclozr unit to New Sm~a Beach who has acc ss to this imit.

iowave this a~a.ge ent is only on a point eo ooint basis.:PX s

posieior. with ega d to wheeling as expressed to ti:a ror Pierce in 1976 is sho'w in -"xhi'o't (GT-1>>>>) in "'..e next to the. last oarag ao'n:

'ZP&" has no objece'on in p inc'p

.. to working s~ th eh@ C'ty of ~ore Pia c

eo accommodate speci transmission,a~an~e-menes where feasib

">> e.

However, such transm. ssion service involves the.use oz capacity as well as ope at'-.g conside-aeiohs on three systems.

There=.ore, it s cuseo a=y in the industry fo-ansm'ssion serac

'rrangemenes eo be ehe subject o= reasonaole adva ced planning among the, parties involved."

FPEcL continues eo make excuses for not wheal'ag,

'ummary, the facts are:

(1) chat "PGL has nh generzl whael-in~ cari" on ='le w th eha rPC (2) than only second party point to point wheeling serv'ca

-'s being provided

=

by rPGL and then to 'only ore u"il'"y in ""P6J.'s sa~~ca tex itory; (3) that rP&L' pol'y '

aga'nse a general whe 1'ng cari:f; and (4) that Hr. Jones testified (transcript p.

517) that Vero Beach'informed his co pany that. no wheelin~ opt'on exn seed.

>> conclu" e,==om ".hase

~

~

and othe

=aces t"~" =P&L has anc s exe=c=s...g mark e

power in ehe'rzr sm'ss'on services

~~rkae-w th a rasu anti-compet tive ef=ect.

75 1.2.

"3.

S.

6.7.

8.

9.

10.

11.

12.

13.

14.

15.

16; 17.

18.

19.

20.

21.

22.

23.

25.

26.

27.

28..

29.

30.

31.

32.

33.

34.

35.

36.

37.

38.

39.

40.

41.

42.

43.

45.

'46.

47.

. 48.

49.

50.

. Q.

Has FPZcL filed a transmission* rate with the Federal Power Commission zor the wheeling oz C ystal River g3 nuclear power to iIew Smyrna Beach?

A.

Yes.

Did the Comm.ssion vi w t:his transm'ssion rate as a new service?

A.

Ho; FPGL attampte.d to file t:he rate under Section 206 of the Federal Power Act as an in.tial Vnder an initial f li ~ a at:e is not subject to refund.

1'=

tha Commission lowers the rata aztar adjudication, 'the excess amounts paid uncar an

~ tial fi zg a

e s>ot suoject to refund.

The Comm'ssion,

howave, viewaci th's trans-miss'on service as s~ly a supplemental fili..g unde=

Section 205 of the Fade al Powe Act.. Th"'s sactio.. allows for refunds of any poxt'on of a rat'a found to be unjust and unreasonable.

The Commission in its Order of Ap=i 12, 1977 in this docket,

=277-175, which ac epted the rate zo filing under Section 205 but suspended toe proposed

=ate change, stated in part that:.

"The City, at present, provides some its own elect=ic powe

~aneration,capac'y

. and receives its remainin= capacity.

raquiramen" s C=om."PGL.

FPGL t."us pro-vides the'C'ty w th fiw partia rac~c='-a-ments se vice.

Zn p oviding th's serv'c FPuL necassa=ily provides the Ci~y with tha transmission services nacessa~

to carry.=PAL's gene ating'apacit7 to.the, City.".

Can any in e

ence be made f om ~EL's attempted filing of this rata under Section 206?

A. I conclude that: this ziling demonst ates'~ 's continued efforts to make it very costly to. other utilit'es to gain t usmission services-and to cont"nue tha unce tainty on the cost of such services.

F

<K's'olicy continues to be a re usal to wheel, alba' increas'ngly more subtle.

1.

2.

"3.

Mat is the ezzect o

FP6c 's transm'ssion policy on compet tion in the bulz power market?

A.

By not wheeling power in a gene=al fashion rPGL blocks access to alternative'sou=ces oz supply o-co-op 6.

and municipal syste s.

Ea so doing, such systems can' 7.

shop for less e.cpensive sou-ces oz supply o-sell excess 8.'enerating capac ty except to rPGL.

this is sign'ficant 9., in that h"'storica13.y municipals nave possessed c'obtain 10.

types oz generating capac'y, comparable to the peaking

. 11.

ectuipment of the la ger systems, wnile at."he same ti e

~ 12.

being mzble'o compete with the large efficient base 13'.

load gene ating un'ts oz larger syste s.

Vithout access 14.

to wneel'ng, smzlle systems are unabl to m.'ni ice their

'5.

costs by ootimally comb'ning the peak and intermediate load output f om their gene ating ~its with base load.

17.

po~er pu chased zrom othe s..'8.

19.

Are you generally zz '".'a= w th the nature o.

.20.

FP&Z.'s proposal to Ve o Beach?

21.

22..

A.

Yes.

e 23; 24.

25.-

26.

27.

28.

'9.

30.

31.

32.

33.

34.

35.

36.

37-.

38.

39.

40.

41.

42.

. 43.

44.

45.

46; 47.

48.

49.

~

50.

~

%hat a

e 'ts significant tems?

A.

Under the proposal, rP&~ would p ov.cie all power and ene gy at retz'1 to the customers o= Vero Beacn i-.de a '30 year exclusive

= zr.chise.

P&

also wou

d. pu=chase Vero Bezcn's utility facilities znci. p"ant, upgracie 'nter-connections, hi e Ve o Beach ut'lity em loyees,

'lease f"om Ve o Beacn ce tain proper"'y on wnich the ut'ty plant is loczted,.pay Ve o Beach a perce.'"age of. aL's gross revenues zrom Ve=o Beach custome s; ard cz'rry ou" certain other terms.

. Does rPGL have franch'se ar angements with any other municipalities?

A.. Yes, they have about 165 such franciiises.

~

Q.

How'o thei-te~s vary?

A.

Hy understandi."g is that'hey zre in most respects ident cal.

. Q.

Do you, attach any economic significance to the fact tPzt these -165 ag eements are ide..ticzl in tnei-terms?

4 1.

2.

'3.

'5.

6.

7.

8.9.

10.

'll.

12.

13.

14.

15; 16.

17.

18.

19.

20.

21..

22.'3.

24.

25; 26, 27.

28.

29.,

30.

31.

32.

33.

34.

35.

36.

37.-

38.

.39.

4d.

41.

42.

43.

'44, 45.

46.

47.

48.

49.

50~

A.. Yes.,

Unless the exact form and terms oz these franchises a'e dictated by the regu1atory authority, state law, or similar legal requirement, the extraction o

identical tews from a large and diverse set of custome s

indicates possess-on of ~ket power.

Q Vny is this important?

A.

Yes, I would if both the large system an'd the small utilities could benef'

" om sucn coord'~ation.

The large system coulci not be ex ected to benefit as mt'ch because it aireaciy would 'have obtained way of the benef ts of pooling from internal pool'..g and from the economies of scale relateci to its overall s'ze.

Ho.cover, the system already may be oooli

~ w" th othe systems.

in 'coni=ast, the small ut.'lity would gain much more.

The dist ibuticn of the benefits bet -een ihe two, howeve~,

mould deoend on the'omparat ve bar"a win~ oowe.,Pres~bly, the system and

'a u"il'ty.woulci coo dinat

- orly z each saw scme 'oenef'"

to themselves of doing so..Siace each would ga'z, the total cos" of the comoined coord'..ated sys-em'would be lower than the combined cost oz each Defore the coorc".nat'on.

Acauisiticn of a small ut" 1'y by a large system is, of cou=se, swply one fow oz coord'nation.

Assum'ag t.",at both the la ge system and the s-z

~

util'ty could benefit by ach eving lower costs, then-A.

An exclusive franch'se to serve a ma ket at retail effects the vertical foreclosu-e of this market for any actual or.potential=competitor.

'<oreover, FPK's uniform franch:se zorm ~s for 30 years wn. ch, in my

opinion, s both ~ecessary and excess='ve.

VTith a 'la=ge neer oz z-ancn'ses with staggered expir"tion d"tes, and with a g owLlg c Gnsumo tion oz elect, ic sty over al'1

~ 5 these zrancn'se

areas, the e

s little o-no r.'sk of PAL be'ng caught wiih excess generating capac.'ty if a munic pz '".

deci'ded not to renew a f anch'se.

rere "ore, the imoorwnce of these uniform long term francnises is that ihey exh'o't PPGL's market oower to foreclose potential compet t've suppliers of 'oulk power and to severely "estr" ct a..y cooortwwities for mmicioal'ties to obtain lower'cost elect icity.

Q.

Suppose a, large v tically and ho zontally integrated el ctr" c system ref sed to ergage in coo=~~=at-ing activities w th ti e small ut. 1 ~ t. es

-~ "h whcm it

~ s ir. actual o= potent a

capet. tion

.. wholesa e o-e-a=

markets, or both; Viould you consider s"ch re,"'usal. to be anti-comoet tive?

~

g ~

I

~ ~

~ 1.

2..

"3.

5

~

6, 7-8.

9.

10.

11.

12.

13 '

14.

'3.

16.

17; 18.

'19.

20..

21.-

22; 23.

24.

25.

26..

27.

28.

29.

30.

31.

32.

33.

34.

35-36.

.37 ~

'.38.

39.

40.

41.

42.

43.

43.

46.

47.

48.'9.

'30.

,refusal to coordinate on equitable ierms is to engage m practices which of course impose high r costs than necessary.

This is true even if the 1-rge system's relat've savings are small.

importantly, such re usal by the large system would prevent the small util'y =rom atta.'z-ing an economical combination of prod"ctive resources.

principle, such a re usal to coordinate s identical ~

effect to a price squeeze.

Alternatively, an. effect identical to a price squeeze can be imposed by denying a

competito-access to lower cost intermed "te products ard thereby forcing tne comaetitor to use a non-optimal

. combination of p=oductive factors and tnereby artificzlly.

raise his costs.

Both of these anti-competitive strategies have t e same impact.

The small utility cahoot make sufficient revenues to cover costs and, may oe forced to sell out to the 1ar~e system.

Re us~~~ to enter i~to-a f"11 ran~e of regional power pooling and exchange t ansact'ons may also have the effect of m~ib~ t"'~g the achievement of t:he fu economies ava'labl e The sma'1 ut lity may have to forego opportunities to expand as much as the ma=ket der"nd allows, or to delay ezra-sion fo a pro orgcd - rio.

This is particularly likely in the case of the smal e-utility wnich wishes to obtain nuclear gen a"'"..g capaci~i..

%hat is the mea..'

of the te~ "deali"..g"

-.. the electric utility industry?

A.

Dealing is simply t=arsact'ng business with oth utilities.

A reft'sal to deal means tnat a

= = t="'es noi to.ente business transactions that in a compet't've ma ke" would be considered no~1.

A refusal to wheel is - refusal to deal in transmission services.

One otne type.of anti-competitive bus.ness trans-action should be mentioned alai.. in addition to the out-

~ght refusal to deal.

This s

a tying contract wherein a firm that competes at retail with his c s<iome

=ore s

the custom as a conc-iion of sale, to ag e rot to compete with the seller in ce tain product or geog aphic

markets, or to accept other conditions.;

%hat has been ~GL's general policy towarc the selling of z"'m bulk powe to municipal ut-lit'es in 'ts operating z=ez?

A.

Dt~-'~g the 1930's and 1960's;

PGL blatantly refused to sell fi~ bulk pcwer to ~icipals; rP&

refused to deal.

During ih'e pe iod from roughly 1967

'h

- 79.-

~ 1.2.

"3.

5.

6.7.8.

9.

10.

11.

12.

13.

14.

15.

16.

17.

18.

19.

20.

21.

22.

23.

24.

25.

26.

27.

28.

29.

30.

31.

32.

33.

35.

36.

37.

38.

39.

'40.'l.

42.

43.

44.

45; 46.

47.

48.

49.

50.

1972'o the p esent,

howevex, FPGL has become more subtle in. such refusals.

FPGL now reluctantly sells partial requirements firm bulk pover to two zunicipals that hive some generating capacity of t:he'r own.

These two are Homestead and Hew Smyrna. Beach and Z'illdiscuss how tney we e able. to obta,'n th's sexvice later.

First, however, it would be use&~~

to examine rP&L's conduct regard'ag t:he sale of firm bulk power, wnolesa2.e powe to munic pals. in the pe od befo-e 1967.

Q.

~ Hhy have you chosen 1967 as the part" cular date' A.

ln 1967, a significant event occu ed that chang d

the regulatory environment in which:PGL ope ated in ti e.

bulk power market..

The event vas that the Fede~z'1 Power Commission declared ~&L to be ju.sdictional.

The Commission in its Op n'on Ho.

517.

ssued,H~=ch 20, 967 (37 'F C 544),found that."P&L owns and operatps facilities

<ox the transmission of elect ic energy -n inte state

'commerce and the efore is subjec to t.;e Commission'.s regula.tions.

This Co'mmissinn o'o n'on was affirmed -y t"e Supreme Coux't in'972.

Tne Commission's opinion acopted; the initial Dec'sion of the 'iearin~ r.zaminer.

FPKL's earlier pe"'od-conduct is cescribed in the Tnitial Dec" sion an analysis of the problem 'of the Coze.'ssion's jurisdic-tion over interconnections o" pub 1" c util' 's:

"...A facet. of this problem [of interconnectionj is illustrated b-tne "" tuation regarding the Xnterveno-y of Cl wiston.

Clewiston is three m'es f om Florida's Ranch-Fort Eye s

t=a-. smission li..e.

Clewiston owns and operat:es its own distribution p~-nt.

Tt presen"

'y p'ux'chases Cleviston' reguiremen s

"~om Glades electric Cooperative, inc. Glades purchases its power from "lor'a 'three miles ~om Clevis ton.

Cleviston'seeks -to'urchase directly =om."lo >da.

Direct se~ce to Cleviston by Flor da would save the City S" 00,.000 per yea Tn 1952 Clewiston and U.S.

Sugar sought jo'~tly to ootzin powe "or the st mon"'.."1orida stated its w"'1ling..ess. io sell powe= to U.S.

Sugar, but was not: willing to.pe~ t the power to be re-sol.d to Clew stan.

Zn 1954 Clewiston requested=ect semce froa Flo~ da at wholesale.

7h' was re=used on the g owcs tnat t.".'s

- as contra=g to company po icy, that i" would not sell to' L. c-pal a" wnoxesa e

except in the case o= fu=..isn'ng a.. e-e=gency s pp y.

As an alte at've, Florida proposec to lease t

't 1.

2.

30 5.

6.

7.

8.

9.

10.

11, 12.

13.

14.

15.

16.

17.

18

'9.

'20.

21.

~

22.'3.'4.

25.

26.

27.

28.

29.

30.

31.

32.

33.

34.

35.

36.

37..-

38.

39.

40.

41.

42.

'43.'

45..

46.

47.

48.

49.

'0.

Clawiston's distribution system and sell di"ectly at retail within the City.

This counter-proposal

. was rejected by tha City Comm=:ss on.

ln 1957 Clewiston aga-'n requested that Florida sell directly to.it.

Florida stated in essence that Clewiston's raauest was rejected, ou~ that it would be will'ng to buy out the system and 'sell at rata 1 within the City.

The City tu..ed down this counter-of e

,.and, as a result, was. unable to pur-

'hase power from Florida.

At this conzerence, Florida restated the same company policy as was stated in the 1954 negotiations.

Zn '1962 C1ewiston again raauastad a di ect power supply'from Flo-'cia.

Florida stated, in

essence, that its policy had not changed and. '"

'oulci therefore not sel" to Claw saon at wholesa"a.

En July 1965 Clewist'on reaues~ed a direct whole-sale supp"y f"om Flo=ida at t.'i sa=e at s as "loca was.u>>ng for its sales to Glades, the rural electric cooperative which was resell'ng Florida powe to U.S.

Sugar which inturn was selling to Clewiston.. Florida stated in essenc that the company policy haci not

changed, and that it would not sell to C"awis"on.

Xn a'eptember 1965 con"ere..ce rlorida's. p-asidant stated in essence that the company policy rega=d"ag selling po'-er to acmic pal'ies hac not changed, but.

could change..

Ha would p opose to Flcr'da's Board of Di actors that

" the C'ty oz Clew'ston would ag ae to have a rezarendum to see i" t..e C'ty woulci sell its distrioution system to rlo ica or s.".ould continue to operate it, and the City..Commission would be bound by th's re"a a..d lorica would sell directly to the City =:" the rezarandum vota we e in'avor.of City owne ship.

Florida also

stated, in essence'hat the ates would not necessarily be as low'as.'the rates to Glades, ard that this wou1d=have to be worked out.

Clew'ston informed Florida that if Florida would suomi" a wz;itten proposal it would be presented to the City Commission for approrpiata action."

Thus, zor ove tan.years, W&L refused to deal w-th Clew.'ston. in supplyin~ bulk power.

At the same time, iP&L continuously attempted the takeove=

oz the town's etai elec'tric business.

Since rP&L was s pplying Glades r".lectric Co-op tha in tuw resold to Clew ston,

- " is clea" tha" FP&L haa sufficient capacity to supply Clew ston d"'=ac" y..

The sale o" power by PP&L to the Glades Co-op fo resale to a municipal was u 'e'xception to =P&L's genial, 1.

2.

3.

5.

6.

7 ~

8.

~ 9.

'0.

11.

12.

13.

14; 15.

16.

17.

18.

19.

20.

21; 22.

23.

24.

25.

26.

27.

, 28.

29.

30.

31.

32.

33.

34.

35.

36.

37.

38.

39.

40.

41.

42.

'3.

44.

45.

46.

47.

'48..

4:9.

50.

policy.

Until 1973, the 'rate schedule under which F~GL sold wholesale po~er (the indust y term usea to describe firm bulk power) eo ~~

co-op elece ic util'ties, pro-hibited the co-ops from reselling this powe to municipalities or unincorporated commities.

This was the so-called "Applicat on" clause.

The currant rzte schedule SR 's still rest ictive; every wholesale bulk power cuseomer muse agree not io supply any customer or rPGL'.

As I stated earl'a, in ehe'960's an exception to t:he application clause in the RZA. cooperative rate schedule was made for Glacas E3.aceric Coooarzeive.

Glzdes was permitted to supply the Citiyof Clewision with t:ha wholesale power that Glaaes had purchased

==am:2&L.

However,las shown by a rP&L latter eo Glades, Exhibit (GT-23). '.GL', for a oerioa o" approximately two years assessed Glacas wnae PP&L desig..ataa as a special invest"ant cha>>ge o" S925.00 oar moneh for this pr~vilage "to cover eha cose of ceriain peaking power

="or resale."

ZP&L's imposition o" eh's special chz ge cannot be justified by cost since the same produci,

~ wholesale powe

, was being sold to othe M cooperzt'ves j=ing this eime without ehe 8925.00 oer month axe=a cha"ga.

Thus, rP&L's act" on zppears eo have been unaua p='ca discri ination.

FPK did not >>e"use eo sell firn bulk oowe>> 'usi to Clewiston.

Two examples demonse ata th's aci.

First, F.H.'s refusal to sell fi~ power ay be scan in ~P~

s internal correspondence o"

955 in. relation eo e1 a C'."y of Sta ke's desi=a to.pu chase wholasal powe- -"=om =PG Paraoraph two of th's

."PGL me oranaum saoiz zr.'rm a t.

(GT-15), states that CitiyCouncilm~ Olson:.

"...is correct in his unde stana ng, that"'e do not sell wholesale powe eo 'any,co~-

nity or mun'cipality and ce ta'nly'ave

'no ineention of changing ou= pol'cy" on this matter."

Second, in a telagrzm to the communipi.or Vince Ga dan, showa in ixhibit (GT-16),:"P&~. reiterates this pos'ion:

"Va do not supply municipal syste.s wholesale power..."

1/

Exhibits do noe necassz ily appea= in the testimony in sequent='

nc e iczl o-der.

N

<<82-0 1.

2.

"3.

5.

6.7.

8.

9.

10.

11.

12.

13.

14.

15.

is.

18.

19.

20.

21.

22.

23'.

24.

25.

25.

27.

28.

29.

30.

31.

32.

33.

. 34.

35.

36.

37.

38.

39; 40.

41.

42.

43.

45.

'6.

47.

48.

49.

50.

0.

Are there any other except'ons to r.PGL's policy'f refusing to deal vith municipa1s?

A.

Yes.

An exception to FPGL's re& sal to deal policy was made in 1958 when firm wholesale power was sold to New Smyrna Beach, a municipal.

As saowr. in FPG i+ternal correspor.dence,

.xh'bit

. (GT-24),

rPEL ~swished firm power to New S~~a Beach du=a.ng the winters of 1958-1959 and provided the power at the regular rates cha ged.

the co-ops.

However,'. as seen'in this cor espondnce, this service was cond" tioned bee~use:

(1) the New S~a Beach City Co~ssion was to agree verbally not to o der any additional generation during th's period, and

('2) to initiate legislation t:o change the City

, Chart:er.'n such a wa7 as to e..able'the C"'ty to dispose of.its electric propre=ty by sale or lease upon a majority vote of the,="=ee-

. holders pa=t'c'pa".'ng in an elect" on he d.

for that plumose.

The circumstar'ces of th's exception to ~r.BL policy in the case of New Smear:.a Beach ind'cate that the excep"ion wa made'only to" assist FPL in 'ts efrorts to acauire the elect=ic system of New S~~a Beach.:

Q.

During. t:hs period, did, rP&L'ave an opportt~ity to state its policy on dealing with mmicipa s in a fo~

outside o" florida?

A.

Yes; in the same yea= that

~r ~~ was declared jurisdzctional by the Co~ssion,

."P&: made.

a. statem nt fo the record June 27-28, 1967 at the United States Senat:e'ommittee

'Heangs on S.

365 as shawm in r.xhibit (GT-I7).

Zn the last para"raph on the first pate,

~r.GL states that:

"71orida Power and Light Company has not made any categor ca statement of pol'y to the ez" nt that.it would not wi.olesale to m~icipalities... "

The facts contracict rKL.s assertion.

As an example o= its

".good neighbor" pol'cy of se~n~ runiciaals, FPr.L states paragraph two. on the first page of th's

"~~ bit th "

"r1orida Power 6 Light: Compary has on neer

' f occas io..s provided elec tr '

energy 2o=

~ 'ities in d," stressed situations caused oy

'e 1.2.3.

5.

6.

7.

8.

9.

10.

11.

12 13.

14.

15.

16.

17.

18.

19.

20..

'1.

22.

23.

~ 25.

26.

27.

28.

29.

30.

32.

33.

. 34.

35.

36.

37.

38.

39.

40.

41.

42.

A3.

45; 46.

47.

48.-

49.

50.

Q.

Was the e any effect. on SPEAL's policies conceding the sale oz whol sale power on municipal'.ties?

A.

Yes.

FP6i's refusal to sell wholesale power lessened compet'tion d'rectly in the bulk power markec and probably also in the reta'1 market.

L. the bu~'<

power ma bet, ~&X's rezusal to sell wholesale powez to muni'cipals isolated nnnicipal

'elect~i.c syst s.

This isolation was made possible, of course, by.P&L's revisal to wheel power zrom othe electr~ c systems.

FPGL s

refusal to sell wholesale power 'sed hig'osts on these nmici.'pal systems and their custome s because in are eco. omic for se~ng the municipal's small loads.

."PM denied the mun'cipals the cost sav"-..=s z

om econom"'es oz scale-in generat"'on..

Compet" tior. also was probab'y reduc'ed in'he retail power market because

~&~ denied the mmici~a s the cost advantages oz la-ge s'cale production.

Ym'cipalit'es would be discouraged z=om'oxing new municipal syst'ams.

because of the expectation that ~EL would re"'ther wheel nor deal and would leave them isolated with a small:scale inezzicient generating plant.

Q.

Would you please describe>>PGL's pol cies tcwa=d

'municipal utilit'es after the June 27-28, 1967 statement bezore Cong=ess?

A.

Yes.

Cne month a=.ter r~&L's statement ecord before the U.S.

Senate, an O'K intewal shoe> i+ -'.ibit (GT-18) recounts an info al w'th the C'ty of To estea":

ov the me-or an d~

eet" ng "Upon 2."'

t reouest by "he C'ty fo-an a~ange-ment for wholesale semce, we pointedout that we emergenc'es, breakdowns or 'nadeauacies.

A prime example is iVew Smyrna 3each wneze electric energy was supplied for abou" three yea s because oz delays in the installation of the city's steam plant."

PP6i uses.

as its example of'willingress to erve,.ts concerted.

attempt to acquir the Hew Smyrna Se" ch ut'lity, an-efzort foz wr.ich 't was willi g to bend 'ts general pol cy oz refusing to deal with the m.nicipals.

Thus, PPGZ.'s policy statement on dealing wit~ mmic"pa s made.

before the'.S.

Senate Cori~.ttee is directly contradic"ea by..

the FP&~ internal documents that T. have examined.

'3

~ ~ ~, ~

1.

2.3.

5.

6.

7.

8.

9.

10.

11.

12.'3.

14.

15.

16.

17.

18.

19.

20.

21.

22.

23.

24.

25.

26.

27.

28.

29.

30.

. 31.

32.

33.

34.

35.

36.'

37.

38.

39.

40.

41.

42.

43.

45.

46.'7.

48.

49.

50.

don't now serve any m~micipa ities wholesale, we don't vane to serve any, but if they really want wholesale service and this is the only arranoe-ment that czn be negot".ated, if the territorial agreement hzs been settled, thee we would not refuse to sell wholesale, but we would not ezpect to give the City our 3:4, wholesale rat It was also po'nied out that an inte change agreement mzy be'more desiraole to the C'ty than wnolesale contract.

Ve emphasized again that

'purchase oz the'Homestead fac'lities, or lease oi them should be conside=ed also.'t sevexal points, it was x'epeated ihat we must have a territorial ag cement sg..ed,,

sealed and delive ~a, and approved by the Pub 1'. c Se~ c Co~s sion be fo=e going ahead with any of inese. arrangements.

Penile'~<. T~e

= sa'd tb

'City was more nteres".ed in a wholesale cont=act than anyth'ng else, he volunteered tha,i the present couzn'ssion s different

,f om tho'se oz the.pas" and that it was willing to review and conside a-.:yth ng, such as an o "f = to

.purchase, qr lease tha" we may ca e to subm't.'"

At th.'s point F &: says it will sell at wholesale to a municipal, b~t only at a highe

=ate znd condit'o..ed or t'ed to a te itorizl agreem nt.

rrccL instead o" deal'g norma ly, co 1d" tions znd i~ laces. t -e cost 0 iis offer whi' at the same ti=e attempt ng to acaii=e the u"il ty.

Q.

Is th're additional ev"'dence oz tiy'ng ag ee ents?

A.

Yes.

In another me orand~,

FPG desc oes a

florida Public Se~ce Co~ssion inaui~ about the ter=iio agreement between the City o= i-:omestead a..c 7 GL.

This correspondence,

=.chibit (GT-22) dated in 1967 s"ates:

'n answer to question two,'

gave hm some of the history oz the negotiations we nave conducted with

~

the City and Clyde Booth of Meric Connell and Assoc.

I told himwe hzd made no deals 'to sell th

City oz Ho estead powe That ihe C

y of i'.ore-stead had asked us if -~e would sell wholesale power to the',at tne co-op raie.

Ve had told them that we dian' want to sell wholesale power, bit that we d-'c.".'t refuse totem.

I told aim that X

thougn" tne C'ty would be nzv" ng to ~ke z decis on shortly a="e= th's te"-" to izl agree ent is o"ce=ed as to 'wi".'et.'".er t.'".ey a=e go'~

co ouy o"e ge..e aiio..

o=, rennes" us to seI1 them wholeszle sewer o-us cake over the'ystem.

I ex@la"ned about the ere gency

). l.

2.

"3.

5.

6.7.

8.9.

10.

11 w 12.

13.

16.

17.

18; 19.

20.

21.

22.'3; 24.

25.

26.

27..

28.

29.

30.

31.

32.

33.

35.

36.

37.

. =38.

~39.

40.

41.

42.

43.

45.

46.

47.

48.

49.

.ties which give~ them firm powa= if they lose their largest unit, and also that,the City.had agreed to lis een to anci conside=

a proposal for us to buy or lease the'r distribueion system.

Again, a similar policy appears in an FPGL lette to the City Comm'ssion of :ort Pie ce; znibit (GT-20),

dated December 13,

.967, the third paragraph o'z which

'eads

~

"The..second question was about 'an emergency tie with you system to fu~ish whatever power you may neeci in case. of an emergency.

Panci'ng

.the development of a ter itorial agreemane anci further dec's'ons we w'll be in a pos'cion,to make an erne gancy tie with your syse m."

Q.

How would you characterize this indication of FPGL policy' A.

The FP&L policy outiinad in this doc--ent 's the same as the po 'cy befo e 'e; an ae"arnot by "PBL eo c'ontain tne munic pa systems

'oy means of te itor'al -g eemarts.

The pract'ce of two util~ e.'es agree ng upon serv ce eer ito="

in order to o event the wasteful duplica""'on 'of electrical

~ 8

~

~

~

~

facade" t" es ~atn-n an a e" zs noe tne

~ ssue.

xn t,ese

documents:PcL is shown to have employed tne te

= eo=.al agreements as a precondition for a'sc ssin~ what should have

'oeen noel business transace ons for bu'k owe with ocher utilities.

Thus, tnese

-'ntarnal FP&L'documents ind'cat

'.PG~

has attempted to force ty'ng agreements on the cmicipals Q.

Has Vero Beach attempted to obta:n wholesale'i~

bulk power f om FPGL?

A.. 'es.,

but FP&~ subtly refused; Zn this same yea

1967, an FP&~ memorandum simunarized a meeting w ~h representa-

'tives 'of Vero Becah as shown in Exhibit (GT-19).

FPGL takes-a posieion sim'lar to its Homestaaa posie'on.

The FPGL memo states tha "The'uestion of wholesale power was presented

[to Vero Beachl and Z told them I did not think this was a good ic a and.then w tna ew my answe=

and seated : thougne a review of the thi"d pu"pose

'fthe meeting, (discussion o

emarg ncy sam~ca),

m'oht ante= '..to th's ana be a solution. i said we wo"la be glaa to d'scuss th's but "'.at it would aepend, of cou se,. on ene interpretat"'cn o=

what const'eutad emcrgen'cy seer'ce.

Th's 't..e..

3.

86-1.'.

2.

"3.

6.

7.

8.

9.

10.

11.

12.

13.

14.

brougnt on the third question.

Yw. wallace brought up the quest'on of rates and trading of power and also at tha time made a statement that Messrs.

Spencer and Fuqua [of PPGLj had previously 'told tnem they P'PGL) wer not interested, in.wnolesale power.

At this t<~e

.I asked them (those representing tha city),

as a.divers" on, whether they we e interested in selling or leasing tha property to us.'hey said "yes" that they'ould be inter stad in a proposal and asked how long.it would take to make such a proposal. '; told them that i"

'e nad tne information a proposal-could be made in about.30 days.

15.

16.

Q.

Did FPGL ma'. a any offe s to Ve o 'Beach o

bulk powe service o

to acqu're'he Vero Beach systpm?

17.

18.

19.

A.

FPH.'did not oZ=e bulk power service, but d'd 20.

suggest acquisition.

in a PPGL letter of November 28,

1967, 21.. Exhibit (GT-21) to the City Cozmission oz Vero Beac'n, FPGL 22.

responds to questions ra'sed at the Lfovember'4, 1.67 ze ti.=g, 23, just.'mentioned, between the C ty of Ve o Beach and 24, Pa ag=aphs th ae and four of the letter state:

25.

'6.

The second question was about an emergency tie 27.

with your system to ~~ish ~nateve'owez

'you, may 28.

need in case o

an emergency.

Pendin~.tne deyelop-29.

mert of a territorial agreement and further.'ecis-ons 30.

'to which we refer below, we will be in

"- 'aosit ion 31

. to make an erne gency tie with you-syst~~;

Th's will

32. 'ake the prasu es o" ~eciacy o"f ooth the City a..d 33.

our compary and provide time zo- &- her.

s~~ ay.and 34.

discuss on.

35.

Tha third question involves wholesale power to

. 36.

the City and we ara reluctant to go furtner into this 37..

at this t'

'as we believe there ara other'lta..atives 38.

which should'irst be fully studied.

These will'9.

include:

40.

(a) similar arrangements zo inter"'mange oz power 41.

between us such as we now have with the C'ty of Jackson-42.

ville and Orlando Util'.t es Commiss'on.

43.

(b) The out '"..t purchase of you-present system by

.44.

ou-company.

45, (c)

A 30-year lease oz your p esent system by our 46.

company zo-our operation.

47.

48.

.At th"'s poi..t a" th end of 957, :.:6 s subt' polio::

49, of re="us~

g te de="1 with the munic pals had taken shape.

his 50.

policy continues'.o tl s day.

Tne heart oz the ra=usp Ls 1.

2.

"3.

3.

6.7.

8.

9.

10.

11.

13.

13.

16.

17.

18.

19.

20.

21.

22.

23.

24.

25.

26.

27.

28.

29.

30.

31.

. 32.

33.

34.

35.

36.

'7.

38.

39.

40.

= 41.

42.

43.

43.

46.

47.

48.

49.

50.

'n insisting that FPGL will only deal in interchange

'greements and not in "irm powe The key issue of interchange agreements is Hat the municipal is reau'red to have e~ougn generating capacity to be selz-suzficient, and any "firm interchange power" supplied under t¹ inter-change is 1'm'ted to a three year max mam.

Of cou se, the municivals want firm bulk power that they can count on for longo'r periods in o der to ezzic'ently.plan their genex'ating neecis and or economy. 'o cover, the municivals are reau-ied by FPEeL's terms to maintain more generat

..g p ant than is econom"'c.

By making the municipals install expensive capac~,

FPGL makes them less competit 've.

FPGL also continues its'fforts to acquire or lease th m~icipals 'ystems, and s tails and delays dealing 'n the owl'i power mar'<et whil it attempts to acquire cont oX of th mun c'pals'etail se A.ce.

Q.',

How d.d, Hom stead and. Sew S~a Beacn pe suad

>>PH to sel" them fi~ partial requi=e ents -bulk powe

?

~

A.

Hew-S~a B'each Apparently persuadec

'~GL through litigation and th=eatened 1'igation, but in granting th's service."PK ca=efully po.'nted out that they we e ma¹ng an exception.

Homestead obtained powex'u-ng an erne gencp-zor about. three years ~.der FPQ.'s wi:olesale rate SR uncier which FP&~ sells to ti.e co-ovs. 'hen Homestead claimed that sin'ce it has been receiving.=-i.=~'ower ~ce=

FPG 's wholesale rate SR that i.t haci to be se~ed continuously undex'h" s ziled ta iff.

Z.". contrast

. Vero Bea-h was. not succosszul n cota n.ng " w pa=t a

requi ements power zrom FP&Z.

How PAL h~s applied to aequi e the ent."'=e Ve o Beach system and reta'i se~ce.

~

The case of Homestead is sho~w

~~ the seve" al FPK memorancia and, other documents in r.xwb t (GT-29).

For examvle, in this exhib't m a Octooer 23, I%73 FP&~

memorancium that'hows the City of Homesteaci has beer; receiv

.g eme=gency power continuously for three years, 1970>>1972.

Upon a Homestead reauest for irm power an FPGL memo of.august 20, 1973 shown cn page 14 of the Exhib" t states t..at 'ack i9.tthews

[an FPH. attorneyj echos the Y~rshall Theory, fi.. e.,

FP6L President

~~~rshall PacDona d] "You can't sell what you ain't got."

Homesteaci's request zo'r fiw power supvosedly cannot be gran"ed s='see FP&

is asse=ted not to have it.

=urthe

~o e, th's me-c states that

>>P&J. should have.available its load estimates and es>"='ated esca-es "o back up these remarks.

Hcweve=,

='n an FPBL e=o=an= a so '.. ""'.'.'D t (G'- 9) ca ed August.21,

1973, the following =P&

statesmen"s incicz-'

1.2.

"3.

5.

6.7.

8.'.

10.

12

'3.

14.

15.

16.

17.

18, 19.

. 20.

21.

22

..'3;.

24.

25..

26.

27.

28.'9.

30.

31-32.

33.

34.

35.

36.

37.

38.

39.

40.

42.

43.

'4.

45.

46.

47.

48.

49,.

50..

that FPGL felt trapped into'roviding Homestead with firm power:

Homes'tead

- Met th s date with Ban 7uqua, Jack I~I, d Ll yd I'l'-.. J k tl was, now familiar with tha.company's fi. ing or rata schedule SR with the

.ZC and our lette s

'o wholesale custome s advising our intention for exfectuat ng said rata SR beginning Sap'tem-ber 1; 1973.

He also, was g ven and'v'awed the letter of August 14, 1;973 Crom Rooert Jaolon

'o K'enneth Pl~~

requesting a 10 day extension.

~

'ack P~tthaw's opinion of our position s

now changed from his opin'n stated yes terday.

He mpinta ns w'h rate schedul SR be'ng exxectua ted that Homes tcad, as all cus tome s,r on SR, is indeed recaiv'ng wholesale powe

.and firm base power that we have no a g~m nt in.our contention ti:at Hom stead has oean'ce'v'ng firm base powe at comm tad intervals.

~ he a-

fore, ou z:egotiations should center a ound the following factors:

1. If they request f rm base load power, they e

eceiving base load power th ough existing distribut. on connec"ions anc can conti;.ue to receive some oase load powe plus

- any addi,t'onal fir~ base load power they require.

All of which will be on wholesale rate SR.

2. If they elect to construct a transm'ssion line and connect with our transmiss'on zaci 'y-they may do so.

3.

Iz they desire firn base load powe='ia the transmission connection, we ca>sot refuse.

Rata SR

'illstill be applicable.

In this event, they wou'1 d 'effectively be race'v"'ng the same base load power at the same rata ={S3) but will have gona to the expense of constructing transmission fac"3.iti s.

Ix they request a tr~~ssion intePchanga along with a aquest fo-fi base. load, then Schedule D, wh'ci; states that ti.a rates sha 1 be neogtZated, wi11 apply, in which case we w11 implement rata schedule SR.

The other contract st.adules for interch~~ge powe (Schedules A.,B,C, 6.E).preclude the fact that both parties have po'-e=

. to exchange.

Du-ng nagotiat'ons we should ask for a carta'n amount of power tha" we may want to ouy some ti=a.

V7e should earnestly seek, with their assistance, wi.e e, the mutual benefit

~s der.'ved.

~

~

~

~

~

89'-

O.

1.2.

"3.

4.5.

6.

7-.

8.'.

10.

11.;

'12 ~

13.

14.

~

15.

16.'7.

18.

19.

20.

21.

22.

23 ~

24..

23.

26.

27.

28.

29.

30.

. 31-

'2.

33.

34.

35.

36.

37.

38.

39.

'40.

41.

, 42.

43.

44.

45.

46.

47.

48.

49.

'ven though FP&L felt trapped by its 'own slipup in 1ett'ng Homestead have firm power under the SR rate for three years, FPGL still wanted to ~ose on Homest:ead the requirement to build new capac'y adequate to make Homes~cad self-su ficiene. It obvious y 's uneconomic to both purchase long-term fi~ bulk power and to also nave eo build high cost new capacity for the same load.

The apprehension oz =PcL chat: Homestead mignt rot be forced into building new czpaci y is expressed n a later FPei memorandum on October 5,.1973 which alsc is ia Exhibit (GT-29). It ind'ates alter atives in replying'o a letter zrom the City o= Homestead, (v.'a t..eir con-.

suleants) to FPBL..

Firm Power.

(Schedul D) e zo owing. a eernaeives

'are available to us in answering eiZs question:

a..We do noe have rirm Power to se'L>

and sirce s

Sc cule s roe use wi h othe>>

Municipalities, we would not propose its use..

I.

b.

Allowing ene eo use a

aee similar to SP. as a Fi m Powe Agre ment.

h' is ext emely dangerous as 'e w'll allow the C'ty o= Homestead to operate its electrical system without increasing its gereraeion.

c.

Offe them a Schecule D Rate at less than Rat S3.

if they will prov-d us w'th a signed cone=ac"

""o=

the installe'on o

generation capaol o= c.:a~ing their electrical load ard having adcie'onal sc.~

ce which we could buy ae ehe end o" z three year period.

This ~ould allow us'to nave a Fi~ Agree-ment from the Ciey o" Homeseead ehae they v'll

'contirue the'eneraeion and prove that we a e

only selling Firm Powe for a deflate period of time.

Xn paragraph b is the statement that it would oe

".extremely dan"e=ous" eo allow Homestead eo become a no pa'rtial equire nts fi~ bulk power c seomer ice the

=o-ops.

1 interp e~ ehe "cange " to mean that other existing ~~ici~a

~

=-

~

~

or new mm c pals created

~ -. F:"cL's

.c rrene =eea-1

"=an"n'se mu.icipal'ties, might then be ab e to gee the SR rate t"o and the=eby become -o e competitive -i"n rPGL for eeail

. business.

Q, What do you conclude

==om these documents?

1.2.

34 5.

6.7.

8.

9.

10.

11; 12.

13.

14.

~15.

16.

'17.

18'.

19.

20.

21.

22; 23 o 24.

25; 26.

27.

28.

29.

30.

31.

32.

33.

35.

36.

37;

. 38.

~ 39.

40.

41 42.-

A3.

44.

45.

46.

47.

48.

49.

50.

A.

Fi 'st, T. conclude that FP&L'as maintained a-market power position where it is able to deny access to lowex'ost generption by the munic'pal utilit es by insisting on inte change agree ents and refusing wnere possible to sell firm power.

En a January 25, l964 letter

. from FPGL to the City of Homestead, a so in E-sibit l',GT-29),.

it is stated tha" once the interchange (an interconnect'on at transmission voltage) has been completed, FP&L will

serve Homestead for a period not to exceed 36 'months with firm power at the SR rate.

>~ th's case, FP&L not only attempts to limit the sale to a snort-term but also attempts. to condition th s ag cement so that Homestead must i.cxease its generating capacity.

Thus, the'r-me reason tnat the municipals want access to wholesale powe to obtaxn the econom" es of scale of l"rge generat'ng un's, FP&L attempts to preclude oy its intexchange agree-ment.

Furthexmore, since the sale is to be of limitea du=at'on, FPc L reduces an option to tne intercnange parker.-

This option.'s plow ng gene ating capacity a..d firn purchases such that a lease-cost

""rm oulk, power is achieve d.

Can FP&L gain from these interchange agreements' A.

Yes.

FPBL gets the advantage ox hav"ng a wide cnoice of which util'ty it wants to ezchange wth hou" oy.

hour, but the municipals are by and large isolated

'~=on each othex'nd have zewer alternatives,

Thus,

~r &L ooerates with a range of alternatives, but den'es these alte..atives to its competitors.

1.

2.

~3'.

6.7.

8.

9.

10.

12.

13.

,14.

16.

17.

18.

19.

20.

21-.

22; 23.

24.

25.

26.

27.

28.

. 29.

30.

31-

'2.

33.

34.

35.

36.

37.

38.

. 39.

40.

41 42.

43 44.

46.

47.

48.

'49..

~

- 50.

Q.

hra there-any docu'ments that indicate FP&L's ecant policy toward municipal elect ic systems?

A.

FPGL's pol:cy toward the gener'ating options o" nnwi-cipals is fond in a 1973 FPK Strateg"'c Planning Depart~ant Policy P1arwing <<Sack,ground P.aper shown in Exhibit '

GT-30.

This paper des'cribes FPK's inter-utility ralat ons program and the policy deva'loped at a Feb'~~

24, 1975 Senior Management Plannirg Council meeting.

Inter-utili"yrelzt'ons is, da ired thareir.

as the way in wh"cn FP&Z dea s with its neighboring utility systems ard customers.

TI-o sl'das that accompany th's doc ~ant. ara elevmt to you auestion on pages 9 and 10 of the paper".

"Zn the Qmortant a ea of the interactions between inta=-connectiors, intarcharga,'hole-saling and. joint ventures Slid s 48 ard 49

'umma isa the objectives which we co..sid =

to be desirable

'and the efforts which are recommended to be carried out in furthe ance of these ooj ct ves."

Slide 48 is shown in ~~ioit (GT-30) at pa"-

14.

U..de=

the heading, "Direct Efforts 'to ara listed the following:

o Renewing franch'ses.

- planning

- organi"at. on

- custome sauce o 'nformal coordination arrangemc'nts.

- nonbinding comm"'ant

- insure volpzita~ benef. ts I

o Negotiated interconnection cont=acts. rathe thar..

wholesale tar'ff.

o Apply interchange cont acts utiliz.ag appropr'iata schedules to all non-isolated generati..~ ut litias.

o Confir.e SR rata to non-generating utilties or to isolated portions of generatirg utilities.

o Phase out wholesale tariffs where possible to subst-

'ute negot-atad. contracts.

~

~

~

~

~

~

~

o Te~itoal ag ae "ants coverLng d "ectly addio n=ng facLlit"c,s.

'92-1.2.

3-5.

6.

7.

8.

9.

10.

11.

12.

'3.

14.

2.5.

/16.

17

'8.

19.

20.

21.

22.

26.

27.

28.

29.

30.

.31.

32.

33.

34.

35.

36.

37-38.

39.

..40.

41.

42 43.

45..

o Coordination of all responsible FPH zunctions.

'I Tnese actions, if under"aken, would reduce the bulk aowe supply options oz the municipals.

First, the emphas's or.

negotiated rates oz service instead oz a filed tariff hinde s rational plann ng by Fp&L's customers.

The time

'tation on the provision,oz fi~ servi'c unde'r the.

&Z.

interchange contracts frustrates the

~~

icipa3.s planni g and increases their costs.

Substitut:ing negotiated rates

=o= a general wholes'ale firm power tariff, adds uncertainty to the

'ecision-ma3cing arocess oz; the municipals.

Furthermore, the interchange cont.=aces fore

.each municipal ut'lity to install excess generating capacity and limits access to large scale generating units.

Phasing out who).estele tarifzs wnere possible and substitut.'ng negotiated'nterconnection

'contracts appears

~ to ind'cate rPGZ's desire to serve pa tial requirements customers with eT ergency se~'ce only; 'This further compli-cates mw~iciaal att mpts to achieve least-cost gene ation and would remove the option of municipals to -e~ n as pa t.al requ~wements customers of FPK.

4 Recent interactions between r.P&L and mmicipa~

systems are illustrated by Exhibit 'QT-31).

Th's ex'='oit is the text oz a 1976 letter zrom tEe Fort P

rce Utilit":es

'Authori'ty (FPUA) to FP6i; on page

one, the Fort P erce s-okes-man states that:

"The Fort Pierce Ut'"'ies Au""..'or ty has irs"ructed me'o ex@lore all reasonaole

~~~~~s oz procu=ing-electriciiy zo-our custome s.

These alt ~at='ves to selling the system nclude the aossib 1'y. of buying wholesale aowe-and of 'whee 'ng'owe=

we caZ'-buy powe mom some other pr"vate c'orna"ny

'r municipa~ ity.

VillFlorida Powez and Light sel'irn power to the

'Port.Pierce Utilities Autho ity in such quantities as required by the..ort Pie ce Util

Autho.'y in addition to that power pro'sently sold. or exc..-

ged under existing contracts?

Vr.at would the demazjc awe.

'commodity cha~=es be'?

%hat ter~,

cond tions a-.=d lw tations would Florida Powe and ~ight requ =e in a contract to sell wholesale power'?

~

VillFlo-ida Power and Light ag=ee to wheel power for the rort Pie ce Utiles Authority i" the Authority =ines a private o

public generati. g system

-h'.". can ~.d'l'sell power to the For Pierce Util~ties Autho>>" ty?

0 4$ l The Fort Pierce Utilities Authority zeels it is essertial that th s nfor'~tion be available t:o them in order for them to evalua"e any ozfer which might be made to purchase the Fort Pierce Utilities Authority system.

1.

2.-3.

5.

6.

7.

8.

9.

10.

'1l; 12.

13.

14.

15.

16..

17.

18.

• 19.

20.

21.

22;

. 23-24.

~

25.

26.

27.'8.

29.

30.

31.

32.

33.

34.

35.

36;.

37.

'38.

39.

40.

43..

. 42.

43.

44..

45.

46.

47.

/f8.

'9..

50.

The prospective buyer oz Fort Pierce's electric utility is. FPK.

Zn response to this request:,

. PK said du-ing an April 8th meeting with Fo t Pierce, Exhibit (GT-31), p, 2, that FPK d'd not have general transmiss on service tariffs, no did it ant cipate them in the "zture; and'hat there existed the fra-ewo"k zor obtaining additional power through the :PUA-"-PK Znterchan~e contract.

9='nutes oz a March.l, 1976 PPUA-FP&~ meet'ng shownn Exhibit (GT-31) on pages 11 and 12 indicate FP&

was stall'ng ava efzectively refusing t:o deal

~~ t:hPort Pierce.

market sinai

~ tion oz othe utilities so tightly'hat only these limited alternatives e~~ st.

.Xn Decembe of.1976, Fo t P'erce aga'n reauested rates for alte..ative types o" bulk powe serac s

z=om FP&Z.

as shown in i:c¹bit (GT-31)-. pp. 15-16.

The part.a1 requirements sevices equested

were, according to Fort

Pierce, types Chen 'being offe ed by maior t.abilities in the Un'ted States.

These -eauested pa='tial'equ'=o ents seduces we e:

unreserved base,'nter ed'ate and peaking

capacity, and reserve capacity.

Fort Pierce vent on to indicate that while they vere interested "a purchasing'ase capacity and energy zrom.=P~~,

they cur;ently had su~le installed capacity and would be willing to quote.FP&L prices for the sale oZ, intermediate, peaking, o-reserve bulk powe from the Fort Pie ce system.

Ia 'its response, mhioit 'GT-31) p. 17, FP&

referred ro " Pie ce to the ex'sti g agree ent between Fo "

Pierce and ~rM for interchange se~rice as we11 as "P&~ 's firm'sale-zo=-resale schedu~.e, Schedule SR-1..

'The SR =ate does not: untie different types of powe such as bas'e,

"'nte mediate and peaki g.

FPRL refused to m"ie its di~=erent tripes oz bulk po<er.

untying these se=r'ces is not u"usu-Fo~'t Pierce 's asking zo= types of service which althoug';.

unavailable

=~om =PK are types o='ervice offe ed" in oti:er bulk power ma=~'ets in the 'U.S.

Ls add'ion, FPGL's lick of FP&L, by exe c.'sing its market: powe along tne lines of the act. ons outlined in. ts Policy Pl am 'g 3ackg o~d

Paper, has zorced Port Pierc into'hoosing between only two alternatives:.

maintainin~ excess oenerztion or lett~n~ =PK acauire its elect ic system.

Lz a, competitive wrket, PGL would not have ma ket vower and be 'able to co@stra~~. the

94 (2)

Determine (and support if i" becomes necessary) tha prezerable fowl 1 pooling altarrative.

o Other systems form a separative formal pooL; o FP&L act as a second "pool".

o FP&L oecome the "pool".

o Link pool.

a general wheelin~ tariff pracludas Fort Pierce's convass.ng

. other. systems to see if they m'ght be abLe to provide these services.

Q.

Are you familiar wi.th FP&L's policy with regard t:o.

6,, formal power'ooling?

8.

A..

Yes.

FP&L is against a formal power pool in Florida.

9 FP&L's position is outlined in the sama 1973 S'iral eg'c Plan..in=

lp "Department Policy - Plannin~ - Backgrom~~c Paper on intar-utility relations, prav'ously referred to. ud shown. in Ex~bit (GT-30).

Slide.5'45 that accomoanied this paper is in Exhibit (GT-32) at page 1', it presents FP&L "act'o s

and hedges" regard'ng a forwl power pool 'n Florida:

13.

POOLZHG

/

18.

Defend existing informa.l pool as provid'ng most of the known advantages oz formal pooling.

~47

~

o Obtain meaning&>1,calculation oz costs an 22..

benezi"s.

23.'

o Continua ezforts on economy interc'~ange.

24.

Consider (and support if't becomes. necessary) actions wh'ch can be taken th ough ezis"ing Co V ~

~

w m

~

27.

informal pool to zv="ner enca-..ce ts perfo~an".a relative to orbal pool'ng.

29.

30.

o Economy interc..ange among third part'es 31.

delivery sauce..

32.

o Joint projects.

33-0 Reserve shaxin 34.33.'3) 36.

37.

38;

. 39.

.40.41.'.

we.there generally di ferantials in bene its that accrue to la=ge and small util't'es from joining a powa poc'?

~o

43. '.

Yes, in some cases.

A trna power poo= allows o=

C 47.

the operation oz the generating units of a g.oup of ut-'1'"ia's as if all.the gene ating units oelongad to a s'-ngle utili"y.

9V ~

49.

Tf, in a particular ma=kat, a very arge ut. 1'y ezis s

-cn-30'ny much sailer utilities, tha predom."nant uzi ity.~y a a--

MlJ ~

have most of the least-cost generating. units M the a ea ard may not be helped much by a pooling agreement.

This is not-to say that the large system could never be helped in tenus of lowering.'ts costs of generating electricity as se ms to be recognized in the documents.

. 31.

32.

33.

34.

35.

36.

37.

38.

39-.

1.2.

~~3 6.-

7.

Q.

Economy exchanges

.of energy a

e mentioned in your 8.

Exhibit.:

(GT-30) and <~ibit.'GT-32).

Do econo~

9.

exchanges gene ally relate to po~o

~

ng?'0.

11.

A.

Yes, but such exchanges are an inefficient and.only 12.

partial method of'pooling.

An economy exchange is an ex-13.

change of power that takes place between two util"t"'es'when 14; their inc cmental costs of generatinj d f=e and wh n the-15.'.lower cost uti ity is operating below capacity.

The'se 16.

exchanges are entered into perhaps on an horn-to-'pour basis

17. 'nd the savings are split.

tn a power pool w. th cent al 18.

dispatch, however, the equ valent of economy exchanges goes 19.

on conti..ously 'nst ad or having to be a

anged for, eac" 20.

transaction.

Zne gy is.too expensive'and scarce to rely on 21.

imperfect economy exchanges when formal power poolin'g could 22.

insure these potential savings are eal~

d,.

23.

'24.

For least-cos generation to take place ~de the 25.

economy exchange

method, each.utility m st be ablo.to deal.

26.

w'th all-other utilities.

Xf not, then di""fe ential gener-t-27.

in~ costs might emst that two ut. lit es otho

~~ se cou d take 28.

advantage of.during a given hou-.

without -heeling, economy 29 ~

exchange. becomes an even poorer substitute '""or c nFxzl 30 disDat cn.

41.

42.

43.

44.

45.

46.

47.

49.

50..

1.

2.

~3 5.

6.7.

8.

9.

10.

11.

12-13.

14.

15.

16.'7.

18.

19',

20.

'1.

22.

23; 24:

25.

26.

27.

28..

29.

30.

31.

32.

33.'4.

35, 36.

37 ~

38.

'9..

..40.

41.

42.

43.

45.

46; 48.

49.

50.'.

"Earlie in your testimony, you discussed th=

importance'f nuclear access to the small elect ic utilities in Flor da.

You a so discussed the competitive impact of a rerusa1 by FPccL to grant these small electric utilities access to nuclea units.

Are you aware of FP&L's pol'cy and actions ~ th's area?

A.

Yes.

At the present, F".GL does not share wr'"i other u"il'ties any part or FPK's three nuclear ~enerat-ing un ts.

In its proposed St. Lucie g2. nuclear ~it, FPGL extended a partic'pation ofrer during the licensing process to only two municipal syste',

Homestead'and Hew Satyr."=

Beach, Knd to-but one RZ4. Coop, Seminole.

Q.

. Are you familiar w th FPBL s i;.'tial offe-e""

access to the St. Lucia Zi nuc'ear unit'?

r A.

Yes, to the extent the initial of=er by FP&L 's explained in a letter =rom R.Q. iMulnolland or" F9&L to G.

G. Spiegel of Spiegel 6 YcDiamid dated January 9,

1975 shown in Exhibit (GT-28).

Q.

rrom you= vie~woint as an economist, is ~&X's method for detewin~g the amount of capacity to oe offered to those seek'zg access reasonable?

A.

No, FP&L's method

-'s. h'gh'y -as ict"e and

un easonaole ror three reasons

." rst, FP&~ 's met..od would only

=ant access to a-ut-1'ty that

-'s no-- ""rchasin bulk power r=cm FPG".

H':s 'nt oduces the pote..tial =or anti-competitive epact as t excludes util'" es tha" a=e indepencent of FP&L for the='ulk power..

Second, a

utility's sha~e in St. Lac'e II would be, 1'-" ted to that utility's demand on FPGL at the"time oz FPG 's peak load.

Utilities wh"'ch generate as much power as possiole to meet their'osz needs at the time of F K's system peak, thereby helping rPcrL to meet the area's

load, are.

tarn penal'zed because the'r acc ss would be reduced unde

'he FPGL method.

Horeover, oasing access on coinc'c'ent demands 'is not reasonable.

St. Lucie II.is a base load unit and 'can be projected to supply ene gy for a carta-'a.

percentaoe.o" FPh s total annual kNh sa3.es.

Punicipals or others'hould be g=anted acc ss to capacity sazfic.'ent to have an eaual percentage.compared to FP~L oz th'er annual kitch sa es come rrom St. i.ucie i:.

.Q.

Did FPaL plan to give access to its now canceled p oposed South Dade nuclea-plant?

~

~

e r

~

s

~

1.2.

"3.

.5.

6.7.

8.

9.

10.

11.

12.

13.

'4.

15 a'6.

17.

18..

19.

20.

21.

22.'3.

24.

25..

26.

27.

28.

29.

30.

31.

32..

33.

34.

35.

36.

37.

38; 39.

40.

41.

. 42-.

43.

45.

46.

47.

48.

49.

50.

A.

Ho, FPGL maintained that the South Dade 'unit would be exclusively for PP&~ 's use.

This was FP&L's position although the Orlando Ut"lit es Conzaission (OUC) had zoregone the opportu ity to intervene in the 1973 St. Lucie XZ licensing proceeding at the MRC because Orlando rel'ed upon 72&L's representations that it ~ms too late to modi"y St. Lucie il plans and Orlando would be azzorded the opoortunity to particip te in..& 's next nuclea unit..

This is showa in Exhibit (GT-33) at pages 12

.to 18.

Tn March;. T975, Orlando was advised. oz F.GL's @la-s Zor a South Dade nuclear unit, Within ~;~-weeks'rlanco informed PPGL o= "'ts interest in ~'owner'shio share o" the proposed un t.

"P&" dic not respond until a year later when it inzomed Orlando and ochery that tne ~wi would not be jointly owned..

Th's same 'letter also in=owed these-pa-ties

.that PP&T m" gnt be interested in the joint development, at an wwsoeciz ec tutu e time 'and at an unspeci"ied site, o~

some other',. yet unp armed nuclear;

&cil y Q.

%hat, i~~ any conclusions can you d-aw rom:P&T 's policy toward joint nuclear ownersn'p?

A.

Tts resistance to joint o~we smp in nuclea='-units, on any terms, e~~=ectively denies smaller systems 'in

~

o= da a sour'ce o"" low cost gene='ation'nd thereby.restricts t eir ability to ccmpete anc unnecessarily keeps the. cost o=

power to their customers, high.

Historically, what has been

~r. H,'s gene-al ool'cy toward the acquisition o":othe= electric utilities?.

A.

FPK has sian a long standing inte 'esi =-i aca~:

g-competing el ct= c,util ties.

The Commission s.

Op~on 517., issued March 20, 1967 that I auoted

==c ea 1'er concerning xe.usals to ceal snows FP"~ 's desi=e.'to purchase the Clewiston Util'ty.

The 'portion Z auoted oZ the 'iit~ml Decision was adopted by the Comm"ssion in their Ooinicn.

Ia 1958, an election was ¹ld '". Lake North to cete-mine whether the City should sell its electric utility to P&L..

A lette

" oi then Division M~a=-ger Kill to i 's.

zellow e ployees stresses the need

=or vigorous e ection eSzo

<<s and po".ts ou

¹s is very imoor ant to all o us as success in tn s elect.'on will.assis~

us in ou" negotia-tions

="or other systems."

Ex~bit 'GT-34) page 64.

98-1; 2.

~3 4e5.

6.

7.

8.

9.

10.

11.

12.

13.

14..

15.

16.

17.

18.

. 19.

20.

21.

22.

23.

24.

25.

26.

27.

28.

29.

30.

31.

.32.

33.

34 35-36.

37.

38.

39.

40.

42.

43.

44.

. 45.

46.

47.'8.

49.

50.

A.

FP&L has been 'ser'ot:s~.y consider.'ng pu=c""-se Homestead, Ve"o Beac a.-.d Ft. Pie ce ut. 'ties.

7 a

0 Do you know to what "other systems," if any,

. Mr. Hill may have been referring?

A.

X don't know, however, during the 1958-59 period FPGL'ppears to have. exhibited considerable interest in purchase of the 'Vero Beach and Hew Smyrna Beach uti itr es as indicated.in Exhibit:

'GT-'34) pages 64-74;.

Did you find additiona avid'ence rega ding FP&L's interest in 'acquiring othex'lectric utilitKas?

~

A.. Yes;..Fox.ex~pie, in 1965, as shown ~

EZhibit (GT-34) pages

'52 to 63 and75,,

Fp&

ind'cared' izillingness to purci:ase the e 'ect ic uti 'ties o= =t.

Pierc and Hew Smyrna Beach.

O..e FP("=L off'cial aescr'bes

'the prospect

o. acau'-~-.g-the Haw'myrna Beach system as a desi"e tnat "the "PGL system re~ards

"~~ th natural enthusi'asm," Exh'bit

'(GT-34), page 75.

Zn 1966, FP&~ purchased the Zdrewatar system

~~cm New Sm~a

Beach, E.chibic'.'(GT-34), cages 40 anc 4~.

Eomestaad was the sub'jec" o= ro&L's act'act'on A 1967, Exn'b" t (Gi-34), pages 50 and 5, while in 1968, Lake Wortn s u ili"v a"epee-s to.have interested Fv<

Exhibit, (GT'-34}, pages.47 to 49'.

An un:denti""ied P~4. cooperat've,',is the subject o= a 1972 letter in Ex'c'"bit

'G:-34')

osaoe 46.

v. 1973, again tu".suec tha possio

~'"y o equi

-is New 3 yw*

Beach ucil'y Fxhibit (GT-3>>),

page.45.:xtens 've consideraton 'an e==o t rnvolv'ag New~Smywa Beach co..t as thxough 1974s Exhibit.' '(GT"-34) pages 31 to 39 awd into 1975, Exhibi.t (GT-57iY pages 21 to 25.

The possibility ox acauir~m~

t..e Vero Beach util'ty apparently caz:e to the attent'on of FP&I, in 1974, Exhibit (GT-34) page 30.

During. 1976, FPBT. devo,ted consideraole 'attent" on t:o the possibility of acau'-ing the elect "c.ut'i ities Ft. Pierce, iiomestead and Ve o Beaci:,:-xmb't (GT-34) pages 11 to 16.

Q..

Vnat evidenc,'" -any, is ther'e 'regarding a.y currant interest. FPL may have.~i the acquisition 0= ot. o=

elec tric.uti litics?

99 1.-

2'.

4.5.

6.7.

8.

9.

10.

11.

.12.

13.

14.

15.

16.

17.

18.

19.

20.

21.

22.

23.

24.

25, 26, 27.

28.

29,.

30.

31.

32.

33.

34, 35.

36 ~

37.,

38r

-.39.

40.

41.

42.

43,

%h'ee lin~:

Exhib.'t

'GT-35) - Exh=:bi-(GT-46)

Bulk"Powex Sales:

Exnibit (GT-.,45)

(GT>>52)

Ex?Lbit Tying Cont=acts:

Exhibit (GT-5

~

GT-59)

Pooling and Nuclear Pa t(icipation:

Exhibit.. (GT-61)

Acquisition:

Exh"'bit. 'GT-62) 3 - Exhibit Ex%'ioit.

(GT-60) company memorand~

dated September 10, 1976,, it sho~s that the acquisition oz 'the Vero Beach zranch'se was regarded as important to "the zranch'se election'n Daytona Beach.and, other municipal. ope~ations such as Ft. Pierce, Homestead; etc.'.." Exnibit (GT-34),

page 1.

Q.

Are tha exh" b:ts that you have ident.'f'-ed th only',basis of your analysis and conclusions regarding the condu'ct of ~7&5. and its general interest in tne acquisi'tion,of competing or potentially competing electrLc. Utilitias'?

A.

No.

For example, othe documents that Z have a

examined also provided insight into the conduct of

~r e.

The documents which T. consicer especially =elevait ara included 'a Exi -"oit (GT-35) th ouo. Ex'a'bit.

(GT-62').

The anti-competitive practices oz PP6(L

~t. at these cocuments relate to a=e. as follies:

'I 45.

46.

47.

48.

49.

50.

-100-5.

Conclus ions

. 1.2.

~l'.

6.

7.

8.

9.

10.

11.

12.

13.

14.

15.

16.

17.

18.

19.

20.

21.

22.

23.

24.

25.

26 27.

28.

29.

30.

31.

'2.

33.

34.

35.

36.

37.

38.

39.

40.

41.

42.

43.

44.

45.

46.

47.

48.

49.

S0.

Q.

Have you reached any conclusions with re"pect to the econom'ic desirability of 'the st~~ctural impact

. of the proposed acquisition in'he relevant markets?

A.

Yes, I have reached conclusions with regard both to the x;etail power market and to the ouIM powe ma ket.

Xn'he retail power market the stmcture"of the relevant market would become more concent=ated.

FP&~ 's market oowe would oe increased.

Xe is tme that th percentage change in the concentration that =PAL enjoys in the retail power market would be auite small,'e-e=-

'heless when z single fi~ is as dom'aa.t as P aL is a singl

market, any inc ease in its market power is undesirable.

l.

FPGL has generally refused to sell firn bulk.power to municipals; now rPGL does not out=ight re=use bu~ =at.'.er makes it'extremely. d. fzicult for mun'c pals to ga"'n these types of serv ces; rPGL has refused the request oz Ve=o Beach to ourchase'i~

bulk power.

2.

faci has Beach to power in rPEcL bus 'fused to wheel t.. -d 'party powe and ex>1"citly den-'ed a reav<<s" by the City o=

hiero 4

~

~

obtain wheelin"- wnen t.".e G.ty wanted to b" from =he 0-lando Utilities Commission.

There also would be the loss in the reta"'1 market of a yardstick competitor and oz an alte~ative eta"'1 supplier to F.GL in eastern and southern rlorida.

The imoact in -tne bulk power markat 's more seve e.

The -ost imoortant impact.is the loss to the rort Pierce Utilit'es Commission'of an.alternative utilitywith who to coordinate instead o" on"y 1~v".g =P6..

Both r"ort Pierce and Ve=o Beach a=e in the bu'k oower exc.iange market.

Because rPGL re=uses to whee power fo-thi=d

parties, bo"h rcrt Pierce and Ve o Beach a

e const",aine to exchanging wi.th each othe and :PK.

The acqu's "icn would elimina"e one of Pore P'e c 's on'y two alte~natives.

Tt is this impact'more than any othe" that rakes this prooosed acorn"'sition of Vero Beach economical y,norjvsti=iab:

Q.

Have.you cached any concl s ons with resoect.tc the issue"of anti-co~petitive con"uct that.may have been engaged in oy rP&~".

A.

Yes, my conclusions on the anti-c'cmpetit~ve conduct of FP&L can be summarized as follows:

- 101-e

~ ~

F

(,

2.

5*.

6.

7.

'8.

9.

'0.

11.

'2; 13; 14.

15..

16.

17.'8.

19.

20.

. 21

'2.'3m 24.

25..

26.

27.

28.

29.

30.

31.

32'3-.

34.

35.

36..

37.

38.

'9.

40.

'41 42.

43.

45.

4S.

47.

48.

49.

50.

3.

FP&L, although it says that.'t wi11 wheel power,

'efuses to file a gen'eral wheeling ta iff thereby m king it extremely di>>.'cult, expensive, and time-consumirg for any utility 'desiring wheeling to ootzin service.

This type

'of anti-competitive conduct by FP&L increases the transfer'osts of custome s attempting to obtain transmission services and is as ef>>ective as an. outr.ght':refuzal:to wheel.

4.,

FP&L hzs refused

~a general to ~rant'access to its nuclear power plants.

How.FP&L finally is granting access to its.fourth meit, St. Lucie Ti nuclear plant.

F~~<

howeve, is not-offe=.'

an eauitable share to Hew Sm~=z Beach and Home'stead; the only-systems o =ared zn owne snip sha e

o>> the. several that applied.

4 5.

FP&L hzs insisted an territorial agreements befo=e entering into any k'id of bulk, powe market'ng azngements.

Such'tying zgreemerts or cord'tiors or sales a=e an example-of the.exerc'se of market pave-,

6.

FP&L has insisted. on a tm~ty year franchise agree-ments to those"mun c'polities wnich it ser~es a~ retz.'l.

'The effect of su~ch long term franchises 's to>>oreclose th rata'1 marke" to other poten"'al competi"o s.

7.

FP&L hzs atte pt d Co force the municipals to maintz='n inef iciently la ge a ount o'f g nerzting capzcity by insisting on ate change zgreeme -".s =zther tnan willingly se3.ling~ fi~ wholesale b~Pc power.

= 8.

FP&L has discriminated between the BZA Co-ops znd the mt~icipals with regard to sell'~g ',f ~ v'no" esa~ e ou~'c

power, Although :-P'= is sell' firm wholesale bulk. powe to the co-ops it nzs esisted doing rhe sa e to mmicipzls.

FP&L 3.s in the wholesale bulk. pove-Dus Bess, but ~"sc'=~~..a" between custome s i" is willing to serve.'

inter~-et ~~'s to mean that FPc L sees the po'tontial competition f=om m~ "'pz to be much g e'a.ter than from the HZA Co-ops in the competitio=;

.to serve at retail.

. Xn sugary, T. c'onclude that

.P&L he's engaged in a series of..anti-compet"'tive acts demonstrating that it hzs mzr.".et pover,and is willin'o to exercise it.

I

~

Q Vivat effect, if any, m"ght '=P&L's corduct have upon the decision by z aicipzls to cons de the sale oi the.

electric systems' A.

FP& 's cove~ ct would certain y. ofluence a

mmic. jality to cons 'cer the 'sale of its electr'c sys'em.

4s

- 102-1.

2.

~3 5.

6.

7.

8.

9.

10.

11.

12.

13.

14.

15.

l6.

17.

18.

19 '.

. 20.

. 22.

23.

24; 25-.

26.

27, 28.'9.

30.

31.

32.,

33, 3g.

35.

36..

37.

38.'9.

40.

41.

42.

43.

46.

47.

48.

49.

50 FP&L has made

" t vepff.cult for tha mnic pals to obtain competitively'priced. bulk pover; it refuses to wheel thereby blocking the municipzls'rom access to competitively priced bulk power from ot¹ "systems,'t attempts to condition a sale oz bulk power by insisting on territorial ag eements; it has insisted that the munK-cipal consider being taken over by FPGL; and attempts to racuire that the mtmicipals maintain unnecessary ~unts of generating capacity.

Q; Has FP&Z 's conduct affected tha.'ability oz Vero Beach to operate a competitively viaole system?

r h

A.

Yes it has.

To repeat, FPGL has re usad.a eauast by Vero Beach to obtain wheeling of pover zrom another system an'd has created as ts 'long-term e"fact in its operating arez in'eastern an4 southern Florida'n ant'-

competitive environment in which.Vero Be=eh could not hope to obta.'w competitively pr" c d bulk power. "or eszla or to.be able to market the bulk. power sap 'ces that 't could produce to -ender to others except to "ort Pier'ca and ~L.

.Q.

%hat affect,

"" z..y,.m" ght approval of tha proposec a'cauisition

'nave upon the continued'iability of othe=

municipally-owned utilit.'es within or adjacent to FP<~ 's service ter itory?

A.

As I mentioned earlier, the acquisition wou d have a'uostantial i-pzct on Fort Pierce by 'taking away.zn alternative'tility with vncm.to coordina "a.~~stead.of only, having

'PGL.

Faually impo'rtant I bali'eve.~"s that tha faw remaining iso3.ated util'ties within FP<L's ope at"'=g area will v'aw tha acquisition zs the success oz FP&~ 's exercise of ma ket power and of the inability of t..e regulatory. authorities to create' more 'competit've mz kat structure tmt. would allow their cont'inue4 viability..

Q.

Is this result economically desi able'or jus ifia 1

?

No.

It. is clear tha a are go.'~g'o be 'substanti'al-costs to competit.'on in ooth the rata'1 ma=ket and the bulk power market.

in contrast, it is not clear there 'are going "o be any benefits in economies of scale alt"ough tnera may oe some reduced r~wing co sts...

Q.

Could these. ~ zing costs be reduced by'n a t =nat"v=-

to outrigh" acqu s t on?

A.

Yas, I expect that a mo a open bulk power exch=-"g market'ould result ~~:id'enticzl 'savi. gs.

- 103-2.

~3 4.5.

6.

7.

8.

9.

Q.

Ron't any acquisition in some sense always remove a potential competitor?

'I A.

Yes.

Doesn't it'follow that every'cquis~ tion should be rej ected?

A.

Ho.

10.

Q.

Under what conditions would a acquisition or merge=

be economically justi "ied?

'The benezits from a merger may be la ge~ than the costs if two small competitors gai enough strength t¹ough the merger to compete with a larger rival.

m some cases the economies.

oz scale could be substant. al enough to counterbalance the costs result'ng zrom'he loss in compet""-

tion.

Zn addition, iz a company 's za 1 ng "o easons other than the pressu e oz market oowe f=om another

=" =,

then its acquisition'may oe economica ly justified.

12.

13.

14.

15.

16.

17.

ls 19.

20.

21.

22.

23.

24.

Q.

You. have sug-ested. how'PK a-.d othe elec~

systems might operate under competitive conditions.

ven ix'he coo di.at. on and access options you c scussed we e

made available to municipal e'ect c systems, a"en't these utilities so small tha" they-might not succeed in any event'?

25.

26.

27.

28'9.

30.

Tt" is certa'sly possiole that the municipal e1ec 31.

"systems might not succeed even in.a coma tit,ve ma=Bet.

. 32.,

Certainly they neverthe'ess should be given the opoo=t=.ity 33.

to try, and b'e allowed t'e opportz ity. to su'cceed o=

.="a'4.

on the'r own e "'ts.-

Clearly "PGL believe tha-these' 35.

systems could compete ez ect'vely with it for.ret:a~1'sales.

36. lt is possib'e

-the municipals m ght also De able to co'et 37.

with PP&~ for certain types of other bul'~ powe-sales.-

38.

39.

Q.

Hav'e.you reached any overall conc.lusions with.

40.

respect to the economic desirab'ity of approving:the 41.

. proposed acquisition?

42.

43.

A.. Yes.

The prooosed 'acquis t"'on does not apoea 44.

econom'cally justi"iable because the economic costs the 43.

reduction in competition, could outweigh tne savings 46.

ene gy costs.

L~ any case, the same bene=its can be'7.

obtained without acquisition and the costs, thereby sub-48.

stantially reduced or eliminated. "

49.

+0

<< 104-1.2.

"3.

5.

6.

.7-8.

9.

10.

11.

12.

13.

14.

15.

16.

17.

18.

19.

20.

21.

22.

23.

24.

25.

26.

27.

28.

29.

30.

~ 31.

32.

3'3-

'4.

35.

36.

37.

38.

39.

40.

43..

'42.

43.

44.

45.

46.

47.

48.

49.

50.

Q.

Tf the acquisition does occur, what types oz conditions would reduce the economic costs oz'tk's acquisition?

A. First, if FPGL filed a general ta-ifz zar tne wheeling of second and thir'd party powe this would open up alternatives to the isolated util't.es.

'Second, if FP&

.ozfezed'openly without conditions the sale of wholesa e power, base load power,.etc. in the exchange-services ma=ket. th's would give some of the advantages oz economies of. sca e:to the smal utilities.

Third, i=

PP&L o fered to do "cent al economic dispatch fo a3.1 of

. the. utilities'

. its ope atin~ ar a they could obta'~

for.th's pa=t 'of :lorid-the economic benefits from pow r pooling.

rourth, iz =P&L dropped its tying "equire'nts and con'ditional cont=acts His would leave rP&L with

~ market power out-any reduction in the exe c'se of greet.

power could zoster greater competit~ox and ez iciency.

fifth;. the length of 'the franch se perio'c'. coul.d be sho tened to educ the t" of-vori:ical forec osu o of tnis retail mark t.

Sixth, rPK could. g=.ant access to nuc'a plants cn an. equ"'ab'e.bas.'.

.Q.

%hat sMlarities do you nnd between the situat.'on desc ibed in the Otter Tail case and the situation of the publicly-owned systems in rior"'da?owe=

and L'ght's serv'ce a

ea?

A.

T. find the sn tuation to.-be -~imilar, although rP&L is much more subtle n its exe cise of 's oottleneck monopo" y in transmiss'on.

rP&L does not say, flatly; that it will not wnee3.'powe inst ad, FP&L re uses to put in a general wheelin~ rate as reau"'red by the in the Qtte Tail emedi"al decision.

FPoL tequi"es "Mat each intencec use o= 'ts transm'ssion system be negro't a't'ed separately.

whenever a utility requests

wheeling, "P&

'engages in footdragging.and other excuses that in ef "ect constitute

a. refusa3.

to deal.-

Q.

Does this conclude= you testimony?

. A.

Yes.

s-

~, "'

AFFIDAVIT c,'F COLK2L4, fixZiant have@ been f st duly sworn,'n oath deposes and That he has read the foregoin~ testimony and if asked tne

-. ~estions herein his answers in response would be as shown;.

I

. Mat the facts contained her in are tmze to the best o

his Knowledge and belief.

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