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Spokane, Washington  Est. May 19, 1883

Wwp, Sierra Pacific Try To Salvage Merger Critical Hearings May Determine Fate Of Proposed Deal

Ever pull out an extension cord, only to find you’re still six inches short of the socket?

That should give you a pretty good feel for the position Washington Water Power Co. and Sierra Pacific Resources find themselves in on the eve of a critical hearing before an administrative law judge in Washington, D.C.

The Spokane- and Reno-based companies have tried for two years to merge as a new company - Altus Corp. Each would retain its identity as an operating division of the new corporation.

Altus would sell electricity, natural gas and water to roughly 500,000 customers.

Last November, the Federal Energy Regulatory Commission nearly killed the deal before ordering the hearings that begin tomorrow and conclude July 3.

Utility executives have spent the ensuing months working to resolve some of the concerns that caused the FERC commissioners to find the merger was not in the public interest.

Despite significant progress, WWP Vice President Larry Pierce says the companies and FERC staff members haven’t connected on some key issues.

And if Judge Jacob Leventhal sides with the staff, and his ruling is supported by the full commission, the results would violate conditions set by the Washington Utilities and Transportation Commission when it approved the deal in December, he says.

“You go back to Point Zero,” Pierce says.

The utilities promote the deal as a way to cut millions from costs over the next decade. Consumers will benefit from a rate freeze for electricity that runs until 2001.

But Washington commission spokesman Steve King likens the deal to a house of cards. Commissions in six states gave their consent with the understanding their constituents would share the benefits equally, he says.

If FERC upsets that balance, King says, the house could come tumbling down.

FERC has been doing a lot of juggling lately. Utilities all over the country have announced mergers officials say will increase efficiency and reduce electricity rates to consumers.

The activity is a response to legislation and regulatory rulemaking that have exposed traditional monopolies to new competition.

FERC, scrambling to keep up, earlier this year asked for comments on potential changes in its 30-year-old yardstick for determining whether a merger is in the public interest. There were 70 responses, including one from Sierra.

Unfortunately for Sierra and WWP, the old yardstick and their own criteria for assuring that their merger works for both companies do not correspond very well.

Their conditions:

The deal must not harm their customers.

The deal must not harm their shareholders.

Resources like generating plants and transmission lines remain dedicated to their existing users. That will keep WWP’s low-cost hydroelectric plants working to the benefit of its Washington and Idaho customers.

“It’s important that we prevail on these basic principles,” Pierce says.

FERC’s lead staff witness, E. Allen Mosher, says the “no losers” approach is misguided.

Officials are too busy playing defense when they should be playing offense, he said.

“This merger has the potential to foreclose other potential benefits by distracting management’s attention from the competitive restructuring occurring throughout the electric utility industry,” he said in his written testimony.

The problem for FERC and its staff boils down to this - WWP prices for power and transmission are much lower than Sierra’s.

Before the various state commissions, WWP and Sierra successfully resisted the blending of their rates to create so-called single-system pricing.

But federal regulators usually want merging utilities to blend their rates as a condition for approval. For transmission, some exceptions have been allowed for “zonal” rates.

Transmission can add one-third to the cost of a kilowatt-hour. That makes pricing important to a utility like Kootenai Electric Cooperative Inc., spokeswoman Catherine Parochetti says.

The cooperative may soon purchase as much as 30 percent of its power on the open market, and may need WWP and Sierra circuits for delivery, she says.

Kootenai and several other Idaho cooperatives are intervenors in the FERC case.

Before FERC, WWP and Sierra proposed a transmission rate based on the cost of each system, plus that of whatever third party ties the two together. The two are not directly linked.

FERC’s staff would allow Altus to charge transmission users only Sierra’s rate, which is 60 percent higher than WWP’s, when their electricity buyers need to use both systems. The third-party charge would be separate.

The staff also suggested a formula for calculating a single-system rate.

Pierce says neither alternative is acceptable because both deny WWP revenue the company would receive if it were to remain independent.

Single-system pricing also continues to be an issue for sales of electricity to wholesale customers of the utilities.

Pierce says WWP and Sierra have agreed to a four-year wholesale rate freeze. FERC staff has approved that step, but also wants Altus to return to the commission at the end of the period with a proposal that would blend power and transmission costs to wholesale buyers.

“That’s totally unacceptable,” he says. Sooner or later a blended wholesale rate is bound to lead to a blended retail rate, which would drastically increase power costs in Washington and Idaho.

Pierce says the pledge by WWP officials that the merger would do no harm was meant to be permanent, not short-term.

“We’ve done everything we can to make this a good deal for our customers,” he says.

One other sticking point is the price WWP, which has power to spare, would charge energy-short Sierra for electricity.

FERC staff says Sierra should be charged only what it costs WWP to generate the power. Pierce says WWP should be allowed to charge the market rate - the price that could be demanded of any other customer.

WWP makes millions selling that energy to other utilities. Pierce says the utility’s customers and shareholders would lose those benefits if the position of FERC’s staff prevails.

He added that concerns WWPSierra transfers of power would not reflect true market costs should be eased by the futures market for electricity recently established in New York.

Trading there, which determines the price of electricity for delivery at the California-Oregon border, would reflect the true market almost perfectly, he says.

Pierce noted that one of the issues raised by the full commission in November - the amount of savings the merger would create over the next 10 years - has been resolved.

Officials scaled back their estimate from $450 million to $400 million in April.

“They’ve not taken exception to any of our benefits,” Pierce says.

Pierce says compromise is difficult for FERC. Other utilities could try to apply any precedent set in the WWP-Sierra case to an entirely different set of circumstances elsewhere in the country.

“We end up fighting some battles that are national in scope rather than unique to our own situation,” he says.

Resolving issues with the staff would have been helpful because agreements at that level are not considered precedent-setting, he says.

Pierce credited FERC staff members for their efforts to understand the WWP-Sierra case. But the companies can only go so far without undermining the principles that have guided their officials from the start, he says.

“Now is not the time for compromise,” Pierce says.

At the Edison Electric Institute, a utility industry trade group, senior public policy analyst Louis Harris says the merger between two relatively small companies has been surprisingly nettlesome.

Although there are some transmission constraints, he says, there is plenty of power available north and south of the bottlenecks to assure a competitive energy market.

That increasingly intense competition, he adds, should alleviate Mosher’s concern that the merger won’t promote maximum efficiency of resource use.

The institute, in its response to FERC’s request for comments on new merger guidelines, said deals should be permitted as long as no harm is done to any customers, Harris says.

He predicts the commission will relax its grip in the future, but was uncertain how that prospect will affect the WWP-Sierra and other pending mergers.

“It’s keeping a lot of lawyers busy,” he says.

, DataTimes ILLUSTRATION: Graphic: WWP and Sierra Pacific milestones