White knuckle ride10 September 1998
After 15 years of concerted effort, the White River hydro power project in the US is still at a standstill. An investor-owned utility is just one of the obstacles for the project developers who yearn to be a power utility in their own right. Suzanne Moxon reports
At a first glance the proposed White River hydro power project in Arkansas, US holds great potential — particularly in a country where construction of new plant has declined rapidly over the past few years. The 11.3MW project, which will use three existing lock and dam units, has already achieved what many projects seem to be fighting hard for in today’s environmentally aware climate. With no ecologically contentious issues to hinder the project’s development; with the completion of fish studies and pre-construction baseline studies; and with a FERC licence in the project developer’s hands, it would seem as if construction is on the verge of commencing on the White River in Independence County.
However, upon closer analysis, complex legislative, regulatory and competitive problems are unearthed. Indeed, the developers of the White River project and US utility Entergy are becoming sparring partners in the debate over deregulation and ensuing competition.
White River origins
The origins of the White River project can be traced back to the three locks and timber-crib, low-head dams which were used for navigation but were decommissioned by the US Army Corps of Engineers in the 1950s. The Corps, which was reluctant to maintain structures that had been built at the turn of the century, sold them on. Lock and dam (L&D) 1 is owned by the City of Batesville in Independence County, and L&D 2 and 3 are owned by a local liberal arts college called Lyon College.
The first attempts to utilise the dams for power were made by local citizens on behalf of the city of Batesville. In 1980 they received a preliminary permit from FERC. Three years later the County joined forces with its city and discussed the possibility of developing power at all three dam sites. Reluctant to commit any more funds, Batesville relinquished control of L&D1 to the County, who then proceeded to develop all three dams as a single power project (the County is the licence holder for L&D 2 and 3).
‘Over the years we have known that the best use of the White River will be to produce power for local consumption,’ Rita Potts, co-ordinator of the project for Independence County, said. Original licences to construct power plants at the three sites were issued in 1985 and 1986 but since then two six-year Congress extensions have been awarded, with only two years remaining on the last one.
To date, the generating capacity of the White River project is still zero. But what has been the cause of such a lengthy delay? ‘When the County entered the project,’ Potts explained, ‘we were told that there would be two major problems — obtaining FERC licences and selling the power.’ FERC proved to be an easy obstacle to overcome but the sale of hydro power is proving to be more complex.
‘We have to have the means to finance construction,’ Potts added, ‘and this will be obtained through municipal bonds. However, in order to secure repayments, as in any power deal, we need to have a power sale agreement. Unfortunately, we have not been successful in marketing the proposed power. During the late 1980s and early 1990s there was a glut of power in the region which is still having an impact.’
Although the White River project is regularly responding to requests by utilities who are seeking power, the County says it is competing with embedded interests. White River, a new hydro facility which will incur high costs during the first years of operation, is competing with facilities which are already in operation.
‘We have been short-listed on at least two occasions. One out-of-state utility proposed an option whereby the County would hold the project up for two years and give them the right of first refusal, while the County would agree not to market the project to anyone else,’ Potts explained. ‘However, since the FERC licence requires construction to commence within a given period, we could not make this type of agreement.’
Electricity aggregation board
There have been some encouraging signs for the project though. More requests for proposals are coming from utilities seeking ‘green power’, such as hydro, but this is not enough. Reluctant to place all their eggs in one basket, and tiring of a lack of encouragement over recent years, the project developers have been seeking another course of action. They hope to form an electricity aggregation board which will act as a utility.
‘We have to become an independent power producer to market our own electricity,’ Potts said. ‘We have been attempting this since 1985. Research has shown that if we had our own utility to market our power locally a 30-40% reduction could be made in current electricity bills.
‘We have proposed setting up a utility in order that we can use the hydro power locally as well as purchase lower cost power on the market — the hydro plant will not furnish full requirements for local use — in order to bring power prices down. We would prefer to have our own utility,’ Potts added, ‘but, barring all other options, we will sell the power to someone else.’
The process of becoming an independent power producer in a regulated electricity market in Arkansas — it is estimated deregulation will not occur in the state until 2000-4 — is a time-consuming task involving complex legislation.
Under the Arkansas Public Service Commission regulations, Independence County and Batesville fall within investor-owned utility, Entergy Arkansas’, regulated service territory. In essence, this means that Entergy has the exclusive right to provide electric service within this area.
As one industry source commented, what White River is proposing is to become a public power entity, essentially disengaging a set of customers from under Entergy’s franchise. The company could view this as resulting in a loss of business, as well as a loss of opportunity to receive returns on investments made to serve customers. Entergy, however, says it is unperturbed by the situation.
‘We are a regulated utility,’ Steve Strickland, director of regulatory affairs at Entergy Arkansas, says. ‘And, quite simply, our service territory is not for sale.’
Independence County, developers of the White River project, took the decision to establish an aggregation/utility board after a working task force concluded that Batesville and the County should form a utility. Such action would reduce local power prices and enable independent negotiations with investor-owned utilities such as Entergy. The board, which will be composed of local people, will act as a co-operative with the authority to buy electricity and distribute it in the region.
This theory, however, appears to be in direct conflict with Entergy’s interpretations. ‘I don’t believe that the development of the project and the establishment of a municipal utility will bring down power prices,’ Strickland commented. ‘The fact that the developers have not found purchasers for the power on a wholesale market shows this.’ However, Potts explained, what makes the project feasible is the formation of an aggregation board which means that the power produced by the White River project will compete with retail, and not wholesale, priced electricity.
The latest development to take place at White River was in June. A meeting was held at the local Quorum Court where an ordnance was read detailing the plan to establish a utility board. It is claimed that Entergy was opposed to the idea. One individual at the meeting apparently said that the establishment of a utility board may be as ‘divisive to the community as the Little Rock desegregation crisis’ (a civil rights issue about racial equality at schools). Another is reported to have warned that the County would be ‘sued and sued’ if the utility board was established. ‘We expected litigation but not so much court action that we can’t overcome it,’ Potts said. Consequently, the proposal was not seconded.
Such opposition is not really surprising, industry sources claim, and utilities are reported as being ‘especially sensitive’ to this issue. All Entergy can see with the establishment of an aggregation board is that its customers may start paying the board every month for power, and not itself. As Potts admitted: ‘Entergy objects to this because it does not want to lose customers.’
Not surprisingly, Entergy was pleased by the Quorum Court’s decision. Strickland said it was concluded that the formation of a utility board was an inappropriate course of action for the County to take. ‘There is not sufficient funding and given the benefits of the proposal versus the cost,’ he said, ‘Quorum Court decided it just was not an appropriate proposal.’
Indeed Strickland believes that as Arkansas is moving towards deregulation the formation of a municipal utility board is not a good course of action. ‘Deregulation will provide individual customers with the opportunity to select power suppliers and so offers the potential to reduce rates through competition,’ he explained. ‘At this time it does not make sense to form a municipal utility that locks in one or more suppliers and prevents the choice of supply and therefore the benefits of competition.’
Utility analyst Scott Ridley, in a report for the American Local Power Project, believes that consumers will have to aggregate in a deregulated power market in order to gain benefits. ‘For competitive power suppliers, community based aggregation under franchises of municipal power systems offers a stable, institutional party who may contract for longer periods for larger, geographically concentrated blocks of power supply.’
‘Private utilities have historically opposed attempts to form municipal systems and to utilise local franchise powers. The common charge is that it will create market barriers and re-regulate or stifle competition,’ Ridley explains. ‘The reality is that it will allow more consumers to participate and gain the benefits of competition...Private utilities who hope to continue to hold a mon-opoly position through their ‘standard offer’ do not appreciate consumers having this choice and leverage.’
Ridley’s comments on municipal utilities are referring to a deregulated electricity market and, as Potts went on to explain, Arkansas law makes it almost prohibitive for new municipal utilities to form at the present time. Deregulation, however, may ease the process.
The County has approached the State Legislative Committee and the State Public Services Commission about the opportunity of forming an aggregation board before or as deregulation occurs. Aggregation could take place today, it is claimed, as it would only require an agreement between the present provider (Entergy Arkansas) and the aggregation board, with Public Service Commission approval. October may be the threshold for any decision.
Entergy is adamant that no action can be taken in the state before deregulation and does not plan to liaise with the proposed aggregation board. ‘Under the present law this whole concept has no meaning,’ Strickland said. ‘However, it does beg the question what will be the role of an aggregation board once deregulation takes place. We do acknowledge that the aggregation of individual customers will form part of a retail market but there has not been any legislation so far. We also believe that any laws will allow for aggregation and we will conduct our business accordingly.’
An expensive purchase
Meanwhile the White River project is ‘championing’ restructuring of legislation, and hoping it will include amending or replacing Act 110 of 1987, which can be described as another contentious issue for would-be public power entities.
At the present time difficulties can occur for aggregations once they have purchased power from a wholesale distribution point. This then has to be delivered to customers’ homes and may require investment in substations and distribution networks to overcome current retail-level regulation and monopoly protection offered by the state to the utility. Act 110 makes it very difficult and very complicated, Potts claims, for a utility owned by a municipality to acquire property from other utilities.
Regardless of this, the White River project has proposed to purchase Entergy’s distribution system in the County. Potts admits that this will be very expensive but the project developers are hopeful deregulation will address such barriers to competition.
‘We feel that as long as Act 110 exists, it will present burdensome and possibly insurmountable obstacles to local governments forming new utilities in order to participate in a competitive market,’ she said. But, as one industry source commented: ‘If a utility doesn’t want to sell its assets — why should it?’
Strickland’s interpretation of Act 110 is that it does currently provide a method for a municipality to purchase a utility’s system. A municipal entity can make an enforced purchase, he says, but the Public Services Commission will monitor the sale and ensure that adequate compensation is paid to the utility. However, Strickland repeated again, Entergy’s systems are not for sale.
‘Furthermore,’ Strickland went on to add, ‘I believe that the development of the White River hydro power project is completely irrelevant to the establishment of a municipal utility. The two issues should be completely separate.’ The fact the County is combining the two ‘is indicative of the fact that the project is not viable and has no willing buyer,’ Strickland claims.
Potts, however, went on to explain how US utility Duke Energy — which has over 1600MW in hydro construction and operation — may help Independence County achieve its municipalisation goal. Upon the establishment of a utility in the County, the company is willing to finance and construct the White River hydro facility; assist in its development, operation and maintenance; and also assist in the operation and maintenance of the distribution system. In return, the two utilities will enter into a power sales agreement.
Indeed, the White River project is still adamant that Entergy will benefit from the proposal to establish a utility board. ‘Entergy will be working toward competition and customer choice,’ Potts says, ‘and could set the stage for bringing competition to Arkansas. There could also be opportunities for it to negotiate power supply contracts with the aggregation board and perhaps this could be part of the deal.’
Once such aggregation becomes a legal entity, Entergy says it may enter into power deals with boards like White River. However, Strickland could not comment about future plans at the present time.
Reflecting on the on-going debate about the White River hydro power project and the proposed utility, Potts said: ‘Entergy is the driving force behind the opposition and they don’t want anyone else in the electricity business but themselves.’
Potts admitted that the project may eventually run out of resources but there is no sense of defeatism yet. ‘The project is not one of success at the minute but of perseverance,’ she said. ‘It’s not over but we’ll continue to campaign at the same level and we will also continue to market the power.’
One question which should be asked is, if White River hydro is still keen to market the power, has it approached Entergy? The answer is that the utility has been asked and its response was no. ‘The project is not up and running and so there is no way we can buy from it now,’ Strickland commented. ‘We have no need for extra capacity at the present time and so do not need to enter into a contract to finance the project’s construction.’
Indeed Strickland added that Entergy does not believe that the White River development is an economical project. ‘Entergy used to own L&D2,’ he explained, ‘and over a period of 15-20 years our studies concluded that it would not be economically viable to implement a hydro power project. Consequently, we donated the unit to Lyon College, the present owner.’
With Entergy stating very firmly that their service territory is not for sale and that they will not deal with aggregations until appropriate legislation is passed, Potts still remains hopeful. ‘We want to be at the forefront of deregulation,’ she said enthusiastically, ‘but at the present time we are taking a step back. We are re-assessing the situation before we start charting our course again.’