Utilities, outside industries dispute power-cost figuring

While cogeneration offers to slow the rise in electricity costs, its promise is bumping along a road of tough utility bargaining. At issue is how much utilities should pay for industry-generated juice.

In Houston, the two forces are struggling to reach what may be a precedent-setting agreement for other states facing the prospect of cogeneration.

The resolution of the dispute may indicate whether or not industry and the utilities can cooperate and coexist peacefully if both are in the business of generating electricity.

Cogeneration, the simultaneous production of electrical power and useful thermal energy, has caught the interest and attention of all industries using large amounts of steam in production processes. With rising fuel costs of the past decade, installing gas turbines to generate electricity from steam makes economic sense. And with the passage in 1978 of the Public Utilities Regulatory Policy Act, mandating that utilities buy cogenerated electricity at full avoided cost, the time would seem right for industry to enter the business of generating electricity.

But cogeneration is no exception to the rule that change seldom comes simply or without resistance. The utilities nationwide balked at this intrusion on their domain and successfully appealed the act, an appeal recently reversed by the United States Supreme Court.

Now the battle has shifted to the state level, and Houston is likely to see the fiercest campaign. The issue revolves around what constitutes ''avoided cost ,'' or the cost the utility avoids by buying power from a cogenerator. California, Arkansas, New York, North Carolina, and Florida all have significant cogeneration potential, according to state regulators, but none equals Houston. The Gulf Coast's petrochemical facilities and oil refineries could provide 3,500 megawatts (3.5 million kilowatts) to Houston Lighting & Power Company (HL&P), or 25 percent of the utility's generating capacity.

The utility is planning to add 3,444 megawatts of power in the next decade at an estimated cost of more than $5 billion for two lignite coal plants and a nuclear facility. Yet, theoretically, cogeneration could save the utility from having to build new plants to meet increasing demand. Also, with construction costs figured into the formula used to pay avoided cost, the issue of how much the light company will pay for cogenerated electricity translates into megabucks for megawatts.

By way of contrast, the state of California has a potential of about 3,000 mw. in cogenerated energy, according to California public utility commissioner John Quinley. Although rates vary, the state commission has worked out a methodology based on full avoided cost, with no discount, Quinley said.

''The discount factor bothers me because a cogeneration project near the marginal level of profitability won't get built if discounts are allowed,'' he said.

His statement matches the argument of the Texas Energy Industrial Consumers (TIEC), a lobbying group composed largely of chemical companies, including Dow Chemical, Diamond Shamrock, Cleanese, Rohm & Haas, Monsanto, Union Carbide, and Amoco Chemical, among others. HL&P's current contract with Dow and Diamond Shamrock is for $1.3 billion a year for about 1,000 mw. of electricity, according to Houston city attorney Marsha Gardner. A saving of 10 percent would cut $130 million from ratepayers' bills, according to HL&P officials.

The issue of cost breaks down into two elements. The first is energy cost, or the cost the utility would have to pay in fuel, operational, and maintenance costs if it supplied the cogenerated electricity. Dow, Diamond Shamrock, and HL&P have devised a computer model to compute energy cost on an hourly basis, according to William Rollwage, manager of energy systems at Dow and chairman of the TIEC executive committee.

The other element, capacity cost or investment cost, is far more complex. Fixed costs, such as interest on loans, insurance, and taxes, fall under this category. So do plants under construction - and this is the biggest bone of contention. An interim agreement with HL&P and its cogenerators calls for a $3 per kilowatt per month capacity cost, a figure that cogenerators feel is low. Future costs for capacity that will not be operative for years, such as HL&P's lignite plants or nuclear power plant, are open to interpretation.

Ultimately, interpretation will fall on the Texas Public Utility Commission. A task force has been appointed to study the entire avoided-cost computation.

All parties, including the utilities, agree that cogeneration is a feasible alternative for energy supply. Many companies, however, are waiting to see what rates are firmly established before committing themselves to cogeneration projects. Rates are currently negotiable nationwide, so the outcome of the price paid to cogenerators in Houston may well affect the price paid in other states.

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