-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AtjrmKh9wKXTQ2p+yTL4YkN/Nd/QzOQEXG3kDtuLQuCohBJEFOlGdF/N/x/I6VYY iV2g6bevLAbQe5J9HTCpGQ== 0000004904-96-000092.txt : 19960921 0000004904-96-000092.hdr.sgml : 19960921 ACCESSION NUMBER: 0000004904-96-000092 CONFORMED SUBMISSION TYPE: POS AMC PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19960919 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN ELECTRIC POWER COMPANY INC CENTRAL INDEX KEY: 0000004904 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 134922640 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: POS AMC SEC ACT: 1935 Act SEC FILE NUMBER: 070-08779 FILM NUMBER: 96632038 BUSINESS ADDRESS: STREET 1: 1 RIVERSIDE PLZ CITY: COLUMBUS STATE: OH ZIP: 43215 BUSINESS PHONE: 6142231000 FORMER COMPANY: FORMER CONFORMED NAME: KINGSPORT UTILITIES INC DATE OF NAME CHANGE: 19660906 POS AMC 1 File No. 70-8779 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _________________________________ POST-EFFECTIVE AMENDMENT NO. 1 TO FORM U-1 __________________________________ APPLICATION OR DECLARATION under the PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 * * * AMERICAN ELECTRIC POWER COMPANY, INC. 1 Riverside Plaza, Columbus, Ohio 43215 AMERICAN ELECTRIC POWER SERVICE CORPORATION 1 Riverside Plaza, Columbus, Ohio 43215 APPALACHIAN POWER COMPANY 40 Franklin Road, Roanoke, Virginia 24022 COLUMBUS SOUTHERN POWER COMPANY 215 North Front Street, Columbus, Ohio 43215 INDIANA MICHIGAN POWER COMPANY One Summit Square, Fort Wayne, Indiana 46801 KENTUCKY POWER COMPANY 1701 Central Avenue, Ashland, Kentucky 41101 KINGSPORT POWER COMPANY 422 Broad Street, Kingsport, Tennessee 37660 OHIO POWER COMPANY 339 Cleveland Avenue, S.W., Canton, Ohio 44702 WHEELING POWER COMPANY 51 - 16th Street, Wheeling, West Virginia 26003 (Name of company or companies filing this statement and addresses of principal executive offices) * * * AMERICAN ELECTRIC POWER COMPANY, INC. 1 Riverside Plaza, Columbus, Ohio 43215 (Name of top registered holding company parent of each applicant or declarant) * * * G. P. Maloney, Executive Vice President AMERICAN ELECTRIC POWER SERVICE CORPORATION 1 Riverside Plaza, Columbus, Ohio 43215 John F. Di Lorenzo, Jr., Associate General Counsel AMERICAN ELECTRIC POWER SERVICE CORPORATION 1 Riverside Plaza, Columbus, Ohio 43215 (Names and addresses of agents for service) American Electric Power Company, Inc. ("American"), a holding company registered under the Public Utility Holding Company Act of 1935 ("1935 Act"), and American Electric Power Service Corporation, Appalachian Power Company, Columbus Southern Power Company, Kentucky Power Company, Kingsport Power Company, Indiana Michigan Power Company, Ohio Power Company and Wheeling Power Company (sometimes collectively referred to herein as "Applicants") hereby amend their Application or Declaration on Form U-1 in File No. 70-8779 as follows: 1. ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION is amended by adding the following at the end thereof: "F. Release of Jurisdiction Over Retail Sales (1) Introduction. Pursuant to an order (the 'Order') issued by the Commission in this proceeding on September 13, 1996 (Release No. 35-26572), the Applicants were authorized to acquire New Subsidiaries to engage in the businesses of brokering and marketing Energy Commodities, including natural and manufactured gas, electric power, emission allowances, coal, oil, refined petroleum, refined petroleum products and natural gas liquids. The New Subsidiaries' brokering business consists of arranging the sale and purchase, transportation, transmission and storage of Energy Commodities for a commission, while their marketing business consists of entering into contracts to sell, purchase, exchange, pool, transport, transmit, distribute, store and otherwise deal in Energy Commodities. The New Subsidiaries may from time to time have an inventory of Energy Commodities but will not own or operate facilities used for the production, generation, processing, storage, transmission, transportation or distribution thereof. No New Subsidiary will be a 'public utility company' under Section 2(a)(5) of the 1935 Act. The New Subsidiaries' businesses include brokering and marketing electric power and natural gas to wholesale customers. The New Subsidiaries also intend to broker and market electric power and natural gas to retail customers. In the Order, the Commission reserved jurisdiction over the brokering and marketing of electric power and natural gas at retail pending completion of the file with respect to the permissibility of such sales in various states. Applicants now request the Commission to release jurisdiction over the brokering and marketing of electric power and natural gas at retail to the extent permitted or authorized by state laws and state commission orders. As discussed herein, given that retail gas competition is already permitted for many customers and that the pattern of retail electric programs is already being established, it serves no public purpose for the Commission to prevent the New Subsidiaries from readily participating in these programs. Immediate entry into any such programs is essential in order to compete with other potential participants. To require Commission approval of retail gas and power marketing in each state would seem wasteful of time and expense for both the Commission and the New Subsidiaries, would place the New Subsidiaries at a significant competitive disadvantage very difficult to overcome, and would deprive the programs and consumers of the benefits of rapid broad supplier participation. (i) Commission Time and Expense. Retail sales of natural gas by other than the local distribution company ('LDC') are currently permitted in every state. As such, the New Subsidiaries can begin selling natural gas to industrial and commercial customers immediately and to residential customers as programs are implemented. Further, it is anticipated that many states will eventually implement retail electric programs. Unless the Commission releases jurisdiction over the brokering and marketing of electric power and natural gas under these programs, the New Subsidiaries, as well as similar subsidiaries of the other registered utilities, will be required to file a new amendment requesting authority to participate in such programs as they are implemented in each state. Thus, the New Subsidiaries alone could file more than forty amendments, each of which would require the New Subsidiaries and the Commission to spend time and incur expenses preparing, reviewing and approving such amendments. (ii) Benefits to Competitive Markets. As is the case in the Massachusetts and New Hampshire programs, future electric and gas programs are likely to be offered to a limited number of customers. Unless the New Subsidiaries can begin marketing to these customers as soon as the programs permit, suppliers not subject to the 1935 Act will already have aggressively marketed their services to the eligible customers and possibly entered into service agreements with them. The delay between filing an amendment after a retail program is announced and obtaining Commission approval of that amendment will inhibit the New Subsidiaries' entry into new markets and limit the New Subsidiaries' ability to compete for the limited pool of available customers. From a marketing perspective, early access to potential customers is of critical importance in a competitive retail environment. In addition, the very success of the pilot programs depends upon the entry of as many participants as possible into the retail power market. (iii) Benefits to Applicants' Customers. Given that the states served by the American Electric Power System already permit retail sales of natural gas by other than the LDC and that many of these states will eventually implement retail electric programs, Applicants' customers would see an immediate benefit from the New Subsidiaries' entry into the retail natural gas and electric markets. Applicants' customers will have an additional competitive option when deciding from whom to purchase their power or natural gas. Presumably, the presence of additional competitors in these markets will put downward pressure on the price charged for natural gas and power, thus lowering the customers' total energy costs. In addition, the New Subsidiaries can offer Applicants' customers both natural gas and power, permitting the customers to consolidate their energy needs with one company and to reduce transaction costs. (2) Retail Sales of Natural Gas Historically, natural gas was bundled with transportation and sold by the LDC to retail customers at regulated rates. Over the last two decades, however, the Federal Energy Regulatory Commission ('FERC') and the state commissions have adopted policies or procedures favoring competition in the sale of natural gas.(1) These policies have encouraged additional sellers of natural gas to enter the market. In today's competitive energy environment, most industrial and many commercial customers purchase their natural gas from the supplier of their choice. In addition, states such as New York have opened and unbundled their markets to the residential level. Interstate pipelines and LDCs merely transport the natural gas to these customers. In order to permit this competitive market in natural gas, the sale of natural gas by interstate pipelines was separated from the transportation of natural gas at the federal level.(2) Consistent with the public policy favoring competition in the natural gas market, state commissions have been aggressively deregulating sales to end users in order to encourage new marketers of natural gas at the retail level. As a result, a robust, competitive marketplace has evolved where retail customers can purchase gas directly from gas producers, non-regulated utility affiliates, and independent marketers. These purchases can be consummated in the production region, anywhere along the pipeline transmission system, or at the city gate of the LDC. The retail natural gas market has undergone profound changes in the last twenty years. Whereas rates were once fixed from the production field to the burner tip, today there is competition at the wellhead and for the retail customer. FERC and the state regulatory commissions have consistently held that competition in the retail natural gas market is in the public interest and have encouraged pipelines and LDCs to unbundle their transportation and distribution services. As a result, the vast majority of natural gas purchased by industrial customers is transported, but not sold, by the LDC, and an increasing number of commercial customers are purchasing their own gas for delivery by the LDC. All forty-nine continental states, Canada and Mexico have adopted public policies favoring competition in the retail natural gas market to some degree. Retail sales of natural gas by other than the LDC, unlike retail power sales, are currently permitted in every state. Thus, the New Subsidiaries can begin selling natural gas to industrial and commercial customers immediately. And, as evidenced by the New York Public Service Commission's order deregulating sales of gas to residential customers, the New Subsidiaries eventually will be permitted to sell gas to residential customers in all states, and could in the state of New York today. Authorizing the New Subsidiaries to sell natural gas at retail will increase competition in the natural gas market, and therefore benefit all natural gas customers. Based upon the foregoing discussion and the advanced state of competition in the retail natural gas market, the New Subsidiaries hereby request authority to broker and market natural gas at retail to the extent permitted or authorized by state laws and state commission orders. (3) Retail Sales of Electric Power Competitive pressures are rapidly increasing in the electric utility business. These pressures arise from a number of trends, including surplus generating capacity, regional rate disparities, increased generating efficiencies, and regulatory programs to foster competition. Increased competition has been most evident to date in the bulk power market, in which nonutility generators have significantly increased their market share. In states across the country, there has been an increasing number of proposals which would permit a retail customer to choose its electricity supplier and would require the utility currently supplying such customer to deliver over its transmission and distribution systems the electricity purchased from the chosen supplier. Legislative and public utility commission initiatives are moving rapidly, and the New Subsidiaries may be in a position to pursue opportunities in various states' retail markets. States such as Illinois, Massachusetts and New Hampshire have implemented pilot programs under which utilities provide customers with access to alternative suppliers of electric power.(3) In addition, many other states have instituted proceedings to examine competition at the retail level.(4) It is expected that the electric utility industry will continue to evolve and that more states will permit retail electricity transactions by power marketers. Authorizing the New Subsidiaries to sell electricity at retail will increase competition in the electric power market, and therefore benefit all electric power customers. Based upon the foregoing and the emerging competitive electric power market, the New Subsidiaries hereby request that the Commission release jurisdiction over retail sales of electricity to the extent retail sales are permitted or authorized by state law and state commission orders. NOTES (1) For a discussion of retail gas sales generally and for a survey of the seven states in which AEP electric utilities sell electric power plus California and New York, see Exhibit 1-A, 'Memorandum Regarding Competition in Retail Sales of Natural Gas.' (2) For a discussion of the deregulation of interstate sales of natural gas by FERC, please see the 'Supplemental Memorandum Regarding Regulation of Interstate Sales of Natural Gas', attached as a supplement to Exhibit 1-A. (3) For a discussion of the Massachusetts and New Hampshire pilot programs, please see Release No. 35-26519 (May 23, 1996) (Eastern Utilities Associates) and Release Number 35-26527 (May 31, 1996) (Unitil Corporation). Pursuant to these Releases, the Commission authorized public utility affiliates to participate in the Massachusetts and New Hampshire pilot programs. The Commission found that the 'programs in both states permit a finding that the proposed activities are necessary or appropriate in the public interest or for the protection of investors or consumers and not detrimental to the proper functioning of the integrated system.' (4) For a discussion of such initiatives in Illinois, Michigan, Ohio, New York and Pennsylvania, please see Exhibit 1- B, 'Memorandum Regarding Competition in Retail Power Sales'. In addition, many other states, including but not limited to Arizona, California, Maine, Rhode Island, Texas, Virginia, Washington and Wisconsin, have begun proceedings to study competition in the retail power market. 2. By filing the following exhibits: Exhibit 1-A Memorandum Regarding Competition in Retail Sales of Natural Gas Exhibit 1-B Memorandum Regarding Competition in Retail Power Sales" SIGNATURE Pursuant to the requirements of the Public Utility Holding Company Act of 1935, the undersigned companies have duly caused this statement to be signed on their behalf by the undersigned thereunto duly authorized. AMERICAN ELECTRIC POWER SERVICE CORPORATION By /s/ G. P. Maloney Executive Vice President AMERICAN ELECTRIC POWER COMPANY, INC. APPALACHIAN POWER COMPANY COLUMBUS SOUTHERN POWER COMPANY KENTUCKY POWER COMPANY KINGSPORT POWER COMPANY INDIANA MICHIGAN POWER COMPANY OHIO POWER COMPANY WHEELING POWER COMPANY By /s/ G. P. Maloney Vice President Dated: September 18, 1996 Exhibit 1-A MEMORANDUM REGARDING COMPETITION IN RETAIL SALES OF NATURAL GAS June 18, 1996 I. Introduction. This Memorandum ("Memorandum") is in connection with File No. 70-8779 ("Application"), in which American Electric Power Company, Inc. ("AEP"), through direct and indirect subsidiaries, proposes to engage in the businesses of brokering and marketing Energy Commodities, including natural gas, to retail and wholesale customers. In the Application, AEP requested that jurisdiction be reserved over the brokering and marketing of natural gas at retail pending completion of the file with respect to the permissibility of such sales. This Memorandum shows that sales of natural gas at retail by brokers and marketers are generally permitted to industrial and commercial customers and are beginning to be permitted to residential customers. This Memorandum reviews retail gas sales generally and then surveys the seven states in which AEP electric utilities sell electric power plus California and New York. II. Retail Sales of Natural Gas. The retail sale of natural gas has changed dramatically since the 1970s. Historically, natural gas was bundled with transportation and sold by the local distribution company ("LDC") to retail customers at regulated rates. Over the last two decades, however, the Federal Energy Regulatory Commission and the state commissions have adopted policies or procedures favoring competition in the sale of natural gas. These policies have encouraged additional sellers of natural gas to enter the market. In today's competitive energy environment, most industrial and many commercial customers purchase their natural gas from the supplier of their choice. In addition, states such as New York have opened and unbundled their markets to the residential level. Interstate pipelines and LDC's merely transport the natural gas to these customers. In order to permit this competitive market in natural gas, the sale of natural gas by interstate pipelines was separated from the transportation of natural gas at the federal level(1). At the state level, LDC's have been encouraged to provide transportation separately from sales of natural gas. As a result, a robust, competitive marketplace has evolved where retail customers can purchase gas directly from gas producers, non-regulated utility affiliates, and independent marketers. These purchases can be consummated in the production region, anywhere along the pipeline transmission system, or at the city gate of the LDC. Deregulation of sales of natural gas and unbundling of transportation services has led to increasing competition for sales to industrial and commercial customers, and is incipient in the residential sector. In 1986, natural gas delivered, but not sold, by LDC's to industrial customers nationwide accounted for 40% of total deliveries to industrial customers.(2) Nationwide, by 1995, an average of 78% of all gas delivered to industrial customers was not sold by the LDC, and in some states this percentage was 98%.(3) That is, on a nationwide basis LDC sales to industrial customers represented only 22% of total gas delivered by the LDC to industrial customers during 1995. Likewise, in 1987, 7% of total deliveries to commercial customers nationwide were deliveries for the account of others.(4) By 1995, however, 26% of total deliveries to commercial customers nationwide were delivered, but not sold, by LDC's.(5) That is, nationwide sales to commercial customers decreased from 93% of total gas transported to these customers in 1987 to 74% in 1995. These nationwide averages are illustrated as shown in Figure 1, while the relative national distribution of non-utility gas purchases are shown for industrial and commercial customers in Figure 2. Figure 1 TRANSPORTATION GAS SHARE OF TOTAL DELIVERIES TO SECTOR 1986 - 1995 Year Commercial Industrial % % 1986 NA 40 1987 7 53 1988 9 57 1989 11 63 1990 13 65 1991 15 67 1992 17 70 1993 16 71 1994 21 75 1995 26 78 Figure 2 PERCENTAGE OF TOTAL DELIVERIES REPRESENTED BY ONSYSTEM SALES BY STATE
1995 State Commercial Industrial Alabama . . . . . . . . . . . 75.0 16.7 Alaska . . . . . . . . . . . 80.2 93.3 Arizona . . . . . . . . . . . 88.3 26.9 Arkansas . . . . . . . . . . 96.0 13.6 California . . . . . . . . . 51.8 13.0 Colorado . . . . . . . . . . NA NA Connecticut . . . . . . . . . 82.7 82.9 Delaware . . . . . . . . . . 100.0 68.1 District of Columbia . . . . 76.7 - Florida . . . . . . . . . . . 97.5 11.0 Georgia . . . . . . . . . . . 92.2 31.4 Hawaii . . . . . . . . . . . 100.0 - Idaho . . . . . . . . . . . . NA NA Illinois . . . . . . . . . . 49.4 9.6 Indiana . . . . . . . . . . . 86.0 14.7 Iowa . . . . . . . . . . . . 83.2 8.4 Kansas . . . . . . . . . . . 62.1 13.1 Kentucky . . . . . . . . . . 87.6 23.1 Louisiana . . . . . . . . . . 98.0 NA Maine . . . . . . . . . . . . 100.0 100.0 Maryland . . . . . . . . . . NA NA Massachusetts . . . . . . . . 85.0 30.9 Michigan . . . . . . . . . . 63.6 6.7 Minnesota . . . . . . . . . . 84.0 33.1 Mississippi . . . . . . . . . NA NA Missouri . . . . . . . . . . 81.0 20.2 Montana . . . . . . . . . . . 91.6 3.1 Nebraska . . . . . . . . . . NA 18.6 Nevada . . . . . . . . . . . 77.2 1.9 New Hampshire . . . . . . . . 99.2 64.8 New Jersey . . . . . . . . . 85.9 52.8 New Mexico . . . . . . . . . 54.5 2.3 New York . . . . . . . . . . NA 12.9 North Carolina . . . . . . . 90.9 39.8 North Dakota . . . . . . . . NA NA Ohio . . . . . . . . . . . . 75.5 5.2 Oklahoma . . . . . . . . . . 87.1 15.8 Oregon . . . . . . . . . . . NA NA Pennsylvania . . . . . . . . NA 15.0 Rhode Island . . . . . . . . 100.0 11.7 South Carolina . . . . . . . 95.4 80.3 South Dakota . . . . . . . . 86.6 27.2 Tennessee . . . . . . . . . . 86.5 34.7 Texas . . . . . . . . . . . . 67.7 24.1 Utah . . . . . . . . . . . . 81.7 11.4 Vermont . . . . . . . . . . . NA NA Virginia . . . . . . . . . . 81.1 11.9 Washington . . . . . . . . . NA NA West Virginia . . . . . . . . 50.8 12.6 Wisconsin . . . . . . . . . . 93.5 48.4 Wyoming . . . . . . . . . . . NA NA TOTAL 74.0 22.2
NA: Not Applicable - : Not Applicable In a recent study, 99% of LDC's surveyed (in 111 of the 116 service areas in the United States and Canada) offered unbundled transportation service to some class or classes of customers.(6) Ten years ago, only 45% of LDC's offered transportation service that was unbundled from the natural gas supply.(7) Further, the minimum size of the customer eligible for unbundled transportation service has decreased, expanding the market for natural gas sales.(8) States are continuing to expand the competitive market for natural gas as they unbundle the sale of natural gas to small commercial and residential customers. The intensity of the competition among gas marketers has reached new highs. Since November, 1995 the following major oil and gas companies and gas marketers have formed partnerships to expand their gas marketing capabilities: Shell Oil and Tejas Gas, Conoco and Alliance Gas Services, Chevron and NGC Corporation, and Mobil and PanEnergy Corp. In addition, Utilicorp United, Inc. recently announced plans to purchase Unifield Natural Gas Group, Inc., a major gas marketer to commercial and industrial customers in the Chicago metropolitan area. LDC's have also begun to encourage competition in small commercial and residential sales, as witnessed by the customer choice programs voluntarily proposed by Central Illinois Light Company and Wisconsin Gas Company. Of course, large, established gas marketers such as Enron Corp. and NGC Corporation continue to aggressively promote competition and pursue customers for their gas marketing services. Even prior to the Gas Related Activities Act of 1990, the staff of the Securities and Exchange Commission ("SEC") recognized the increasingly competitive nature of the wholesale and retail natural gas markets. In Release No. 35-24329 (Feb. 27, 1987), the staff by delegated authority authorized CNG Trading Company, a wholly-owned subsidiary of Consolidated Natural Gas Company, to purchase and sell gas supplies obtained from competitively priced sources and thereby compete with independent gas marketing companies for delivery of low-cost, non-regulated gas supplies to LDC's and their industrial and commercial end users. III. Unbundling of Local Distribution Company Services. Consistent with the public policy favoring competition in the natural gas market, state commissions have been aggressively deregulating sales to end users in order to encourage new marketers of natural gas at the retail level. As a result, purchasers of natural gas now have access to multiple sellers and can make purchases under competitive conditions. The following provides a summary of the actions taken by the seven states that the AEP System serves plus California and New York to promote competition in the retail natural gas market. A. Ohio. Ohio was one of the leaders in developing gas transportation "self-help" programs for industrial customers in the 1970s. These programs allowed certain Ohio industrial customers to purchase non-LDC gas during the frequent shortages of the period. Following FERC's issuance of the proposed rulemaking in the Order 436 proceeding in 1985, The Public Utilities Commission of Ohio ("PUCO") instituted a generic proceeding to investigate the availability of transportation services provided by Ohio LDC's to retail end-use customers.(9) As a result of the 85-800 Proceeding, PUCO adopted Gas Transportation Program Guidelines ("Guidelines") governing the unbundling of LDC transportation and distribution services for end-use customers. The purpose of the Guidelines is to facilitate gas transportation within Ohio by providing broad guidance to LDC's while allowing individual transportation tariffs and special contract language to detail specific terms and conditions of service. The Guidelines provide that each gas or natural gas utility subject to the jurisdiction of PUCO that elects to provide transportation of gas developed, owned, obtained or purchased by an end-user must provide such service on a nondiscriminatory basis, subject to the capacity of its system. All transportation tariffs filed by regulated utilities are required to provide for unbundled services such as firm and interruptible and such other selections as PUCO may from time to time approve. For example, The Cincinnati Gas & Electric Company offers transportation services on an interruptible basis to any customer that utilizes a minimum of 10,000 Ccf per month, and firm transportation service to any customer willing to pay a monthly administrative charge and the rate set forth in the tariff.(10) Likewise, Columbia Gas of Ohio, Inc. offers a general transportation service (i) on a firm basis to any commercial or industrial end- use customer that consumes less than 300 Mcf per year; (ii) on a firm basis to any non-residential customer that consumes at least 300 Mcf per year; and (iii) on a firm basis to any non- residential customer that consumes at least 18,000 Mcf per year.(11) The success of the Guidelines in allowing competitive sales of natural gas in Ohio is evidenced by the fact that in 1995 natural gas delivered for the account of others to industrial customers accounted for 95% of total deliveries to industrial customers in Ohio.(12) Also during 1995, natural gas delivered for the account of others to commercial customers accounted for 25% of total deliveries to commercial customers in Ohio.(13) A bill recently was passed by the Ohio Senate and the Ohio House of Representatives that would allow the state's regulated natural gas utilities to compete on even terms with gas marketers by authorizing the utilities to sell gas to customers at market- based prices.(14) As stated by the sponsor of the Bill, "most commercial and industrial customers have the option of buying their natural gas directly from producers, brokers, or marketers, rather than from their local gas utility. These producers, brokers, and marketers are not regulated as public utilities...[and] the utility serves only as a transporter, delivering the gas to the customers' factories or offices....By allowing utilities to compete for commodity sales along with other existing suppliers, the bill should lead to an increase in competition, with better service and lower prices for the state's consumers."(15) The Ohio Legislature has now joined PUCO in stating that promoting competition in the sale of natural gas is sound public policy. The bill presently is awaiting action by the governor. B. Indiana. Although the Indiana Utility Regulatory Commission ("IURC") has not, to date, instituted a broad proceeding regarding deregulation of the natural gas industry, the gas utilities regulated by the IURC have filed, and the IURC has accepted, tariffs that provide for nondiscriminatory transportation of gas developed, owned, obtained or purchased by an end-user, subject to the capacities of their respective systems. Indiana Gas Company, Inc. offers transportation service (i) on an interruptible basis to any commercial or industrial customer that has an annual usage of greater than 50,000 therms and less than 500,000 therms and a maximum daily usage of less than 30,000 therms, and (ii) interruptible or firm transportation service to any commercial or industrial customer that has an annual usage of 500,000 therms or greater or that has a maximum daily usage of 30,000 therms or greater.(16) Citizens Gas & Coke Utility offers transportation service (i) on an interruptible basis to any commercial or industrial customer who uses a minimum of 300,000 therms per year through one or more meters, of which at least 150,000 therms must be supplied by offsystem gas, and (ii) on an interruptible basis to any commercial or industrial customer using at least 150,000 therms per year at one location.(17) And Northern Indiana Public Service Company offers transportation service (i) on a firm basis to any customer whose gas requirements average at least 200 Dth per day and (ii) on a firm basis to any customer whose gas requirements average at least 100 Dth per day.(18) The tariffs filed by the above utilities have permitted competition in retail sales of natural gas in Indiana. In 1995, natural gas delivered by LDC's under these and similar tariffs to industrial customers accounted for 85% of total deliveries to industrial customers in Indiana.(19) Also during 1995, natural gas delivered for the account of others to commercial customers accounted for 14% of total deliveries to commercial customers in Indiana.(20) C. Kentucky. Following FERC's issuance of Order 436, the Kentucky Public Service Commission ("KPSC") instituted a proceeding to investigate the impact of federal energy policies on natural gas to Kentucky consumers and supplies, including the impact on the availability of transportation services provided by Kentucky LDC's to end-use customers.(21) As a result of the Proceeding, the KPSC adopted an Order ("Order") mandating the unbundling of the sale, transportation and related services available to end- use customers. Among the objectives of the Order are to ensure that all customers of LDC's have an opportunity to benefit from increased competition in the natural gas industry, to promote the use of the retail distribution system by customers who arrange for their own natural gas supply, and to evaluate the unbundling of services at the LDC level.(22) Through the Order, the KPSC expressed its belief that competition in the retail natural gas market is in the public interest. The Order provides that each LDC must provide transportation services on a nondiscriminatory basis to any customer on a first come, first served basis, subject to the capacity of the LDC's system. That is, transportation must be made available to any end-user who can arrange for its own supply of natural gas, unless transportation capacity is unavailable. All transportation tariffs filed by LDC's are reviewed on a case-by- case basis and are required to provide for unbundled sales and transportation service, such as firm and interruptible, and such other selections as KPSC may from time to time approve. The success of the Order in promoting competition in Kentucky is evidenced by the fact that in 1995 natural gas delivered for the account of others to industrial customers accounted for 77% of total deliveries to industrial customers in Kentucky.(23) Also during 1995, natural gas delivered for the account of others to commercial customers accounted for 12% of total deliveries to commercial customers in Kentucky.(24) D. Michigan. The Michigan Public Service Commission ("MPSC") has not issued general guidelines governing gas transportation services. Instead, the MPSC has used the contested rate case process to decide transportation issues on a case-by-case basis.(25) Much like the Indiana utilities, the gas utilities regulated by the MPSC have filed, and the MPSC has accepted, tariffs that provide for nondiscriminatory transportation of gas owned or purchased by an end-user, subject to the capacities of their respective systems.(26) Michigan Consolidated Gas Company offers transportation service on both an interruptible and firm basis under various tariffs to any customer, regardless of gas usage, desiring the service and willing to pay.(27) Likewise, Consumers Power Company offers transportation service on both an interruptible and firm basis under various tariffs to any customer, regardless of gas usage, desiring the service and willing to pay.(28) The tariffs filed by the above utilities have allowed aggressive competition in Michigan. In 1995, natural gas delivered (but not sold) by LDC's to industrial customers accounted for 93% of total deliveries to industrial customers in Michigan.(29) Also during 1995, natural gas delivered for the account of others to commercial customers accounted for 36% of total deliveries to commercial customers in Michigan.(30) Finally, the MPSC recently initiated a formal legislative hearing to determine whether it is appropriate to allow all customers to have access to the competitive natural gas market by expanding the availability of gas transportation services.(31) Under existing utility tariffs, rates, and procedures, unbundled transportation of gas is not an economically viable option for smaller customers. Thus, the MPSC is investigating what steps, if any, should be taken to allow such customers to participate in the competitive natural gas market. E. Tennessee. Although the Tennessee Public Service Commission ("TPSC") has not, to date, instituted a proceeding to mandate unbundling of gas transportation services, the utilities regulated by the TPSC have filed, and the TPSC has accepted, tariffs that provide for nondiscriminatory transportation of gas owned or purchased by a retail customer, subject to the capacities of their respective systems. For example, United Cities Gas Company offers transportation service on either an interruptible or firm basis to any commercial or industrial customer that has an annual usage of greater than 270,000 Ccf.(32) Nashville Gas Company offers transportation service on either an interruptible or firm basis to any customer that has a minimum annual usage of 6,000 dekatherms.(33) And Chattanooga Gas Company offers interruptible transportation service to any customer consistently using an interruptible minimum daily volume of 100 Mcf, and interruptible transportation service with firm gas supply backup to any customer consistently using a minimum of 73,000 Mcf annually at daily rates of at least 200,000 cf or 2,000 therms.(34) The tariffs filed by the above utilities have permitted competition in Tennessee. In 1995, natural gas delivered for the account of others to industrial customers accounted for 65% of total deliveries to industrial customers in Tennessee.(35) Also during 1995, natural gas delivered for the account of others to commercial customers accounted for 14% of total deliveries to commercial customers in Tennessee.(36) F. Virginia. Following FERC's issuance of the proposed rulemaking in the Order 436 proceeding, in 1986 the Virginia State Corporation Commission ("VSCC") instituted a proceeding to investigate the availability of transportation services provided by Virginia LDC's to industrial customers.(37) As a result of this investigation, VSCC adopted the Order, which encouraged the unbundling of LDC transportation and distribution services. The purpose of the Order is to facilitate gas transportation within Virginia by providing broad guidance on unbundling to LDC's while allowing individual transportation tariffs to detail specific terms and conditions of transportation service. Although the Order does not mandate unbundled transportation and distribution services, VSCC promotes competition by reviewing individual company practices in rate cases to assure that each company maximizes utilization of its system. Consistent with the intent of the Order, Virginia's LDC's have filed tariffs providing for unbundled transportation services. For example, Commonwealth Gas Services, Inc. offers interruptible transportation service to any nonresidential customer(38) and large volume transportation service to any customer with a maximum daily volume of 20,000 Mcf per day or greater.(39) Also, Virginia Natural Gas, Inc. offers firm transportation services (i) to any high load customer with annual usage in excess of 12,000 Mcf and (ii) to any customer with annual usage in excess of 2,000 Mcf.(40) The success of the Order in promoting competition in Virginia is evidenced by the fact that in 1995 natural gas delivered for the account of others to industrial customers accounted for 88% of total deliveries to industrial customers in Virginia.(41) Although the Order included only industrial customers, the Virginia gas utilities have voluntarily filed tariffs offering unbundled service to commercial customers. For example, during 1995 natural gas delivered for the account of others to commercial customers accounted for 19% of total deliveries to commercial customers in Virginia.(42) G. West Virginia. Following FERC's issuance of Order 436, the Public Service Commission of West Virginia ("PSCWV") instituted a proceeding to develop rules governing gas transportation services within West Virginia.(43) Pursuant to General Order 228, the PSCWV adopted Rules and Regulations Governing the Transportation of Natural Gas ("Rules"), one purpose of which is to provide a framework within which transporters of natural gas could maximize the benefits of open access to local and interstate gas supplies for West Virginia customers.(44) The Rules govern the unbundling of LDC transportation and distribution services for end-use customers. The Rules provide that each natural gas utility and intrastate pipeline subject to the jurisdiction of the PSCWV must provide nondiscriminatory transportation of customer-owned gas to persons requesting such service over the existing facilities of the utility or pipeline, subject to the capacity of the system. All transportation tariffs filed by utilities and pipelines are required to provide for unbundled services such as firm and interruptible and such other selections as the PSCWV may from time to time approve. The success of the Rules in promoting competition in West Virginia is evidenced by the fact that in 1995 natural gas delivered for the account of others to industrial customers accounted for 87% of total deliveries to industrial customers in West Virginia.(45) Also during 1995, natural gas delivered for the account of others to commercial customers accounted for 49% of total deliveries to commercial customers in West Virginia.(46) H. California. Following FERC's issuance of the proposed rulemaking in the Order 436 proceeding, the California Public Utilities Commission ("CPUC") instituted a proceeding to investigate the availability of long-term transportation service for customer-owned natural gas.(47) Pursuant to the 85-12-102 Proceeding, CPUC adopted an Order requiring California's large gas utilities to unbundle their transportation and distribution services for high-demand end-use customers desiring firm long-term (greater than five years) services. Subsequently, CPUC instituted a proceeding to investigate the availability of short-term transportation service for customer-owned natural gas.(48) Pursuant to the 86-03-057 Proceeding, CPUC adopted an order requiring California's large gas utilities to unbundle all of their transportation and distribution services for high-demand end-use customers. CPUC believed that unbundling such services would increase competition, lead to lower gas costs and reduce, if not eliminate, the risk of sudden gas price swings. Together, these Orders required California's large gas utilities to provide unbundled transportation service for gas owned, obtained or purchased by any high-demand end-user, subject to the capacity of the utility's system. By requiring unbundling, the Orders foster CPUC's express public policy of increasing competition in the retail sale of natural gas. The success of the Orders in bringing competition to retail gas sales in California is evidenced by the fact that in 1995 natural gas delivered for the account of others to industrial customers accounted for 87% of total deliveries to industrial customers in California.(49) Also during 1995, natural gas delivered for the account of others to commercial customers accounted for 48% of total deliveries to commercial customers in California.(50) I. New York. The New York Public Service Commission ("NYPSC") instituted a proceeding to investigate the availability of gas transportation services provided by New York LDC's to end-use customers prior to the FERC's issuance of the proposed rulemaking in the Order 436 proceeding.(51) As a result of Case 28672, NYPSC adopted gas transportation guidelines ("Guidelines") governing the unbundling of LDC transportation and distribution services for end-use customers. The purpose of the Guidelines is to create a more favorable competitive environment for the production and transmission of natural gas by providing general guidelines to LDC's while allowing individual transportation tariffs and special contract language to detail specific conditions of service, including special customer needs. The Guidelines provide that all New York gas distribution utilities (unless exempted by NYPSC) must file tariffs offering gas transportation service for customer-owned gas. Such service must be provided to all qualifying customers(52) on a nondiscriminatory basis, subject to the capacity of the utility's system. All transportation tariffs filed by the utilities are required to provide for unbundled services such as firm and interruptible and such other selections as NYPSC may from time to time approve. The success of the Guidelines in promoting competition in New York is evidenced by the fact that in 1995 natural gas delivered for the account of others to industrial customers accounted for 87% of total deliveries to industrial customers in New York.(53) Also, during 1994 (the last year for which figures are available), natural gas delivered for the account of others to commercial customers accounted for 21% of total deliveries to commercial customers in New York.(54) NYPSC instituted a proceeding in 1993 to examine the issues associated with the restructuring of the emerging competitive natural gas market, the purpose of which was to further deregulate the natural gas market while fostering consumer protection and maximizing competitive benefits(55). The deregulation framework was designed to assure that incumbent LDC's and new entrants could compete, that all customers benefit from increased choices and improved performance resulting from a more competitive industry and the core customers continue to receive quality service at affordable rates. One key element of Case 93-G-0932 is that for the first time under NYPSC rules, residential and small commercial customers are authorized to combine into a group and aggregate their demand such that the group would be treated as a single customer for which a pool of gas could be acquired and delivered to the LDC. By aggregating demand, residential and small commercial customers will be able to take advantage of the lower prices available in the competitive marketplace, much like industrial and large commercial customers have done for years. In fact, Case 93-G- 0932 supersedes the Guidelines and establishes a new framework for unbundled transportation services offered to industrial, commercial and residential customers. In March, 1996 NYPSC implemented the framework set forth in Case 93-G-0932 for unbundling and restructuring LDC services by requiring most New York LDC's to file new tariffs complying with the requirements set forth therein. New York thus became the first state to implement broad-based restructuring of its natural gas market for industrial, commercial and residential customers. IV. Conclusion. The retail natural gas market has undergone profound changes in the last twenty years. Whereas rates were once fixed from the production field to the burner tip, today there is competition at the wellhead and for the retail customer. FERC and the state regulatory commissions have consistently held that competition in the retail natural gas market is in the public interest and have encouraged pipelines and LDC's to unbundle their transportation and distribution services. As a result, the vast majority of natural gas purchased by industrial customers is transported, but not sold, by the LDC, and an increasing number of commercial customers are purchasing their own gas for delivery by the LDC. Although this Memorandum examines the unbundling efforts of nine states, all forty-nine continental states, Canada and Mexico have adopted public policies favoring competition in the retail natural gas market to some degree. Retail sales of natural gas by other than the LDC, unlike retail power sales, are currently permitted in every state. Thus, the proposed AEP marketing subsidiaries could begin selling natural gas to industrial and commercial customers immediately. And, as evidenced by the NYPSC's recent order, the proposed AEP marketing subsidiaries eventually will be permitted to sell gas to residential customers in all states, and could in New York state today. Authorizing the AEP marketing subsidiaries to sell natural gas at retail will increase competition in the natural gas market, and therefore benefit all natural gas customers. NOTES (1) Please see the Supplemental Memorandum included herewith for a discussion of the deregulation of the interstate natural gas market. (2) United States Department of Energy's Energy Information Administration 1994 Annual Energy Review and Natural Gas Monthly (February 1996). "Deliveries for the account of others" are deliveries to customers by transporters that do not own the natural gas but deliver it for others for a fee. (3) Energy Information Administration Natural Gas Monthly (February 1996). (4) See, supra, Note 2. (5) See, supra, Note 3. (6) Foster Report No. 2063 at p.18 (January 18, 1996). (7) See, supra, Note 6. (8) See, supra, Note 6. (9) Case No. 85-800-GA-COI (August 20, 1985) (the "85-800 Proceeding"). PUCO issued its initial Finding and Order on April 15, 1986, and supplemental Entries were made on August 13, 1986, November 24, 1993, October 13, 1994, December 1, 1994, March 29, 1995, September 14, 1995 and November 2, 1995. In the initial Finding and Order, at least one PUCO commissioner believed that "gas distribution companies in Ohio have been voluntary common carriers for a decade." (10) The Cincinnati Gas & Electric Company, Rates IT, FT and ICT. (11) Columbia Gas of Ohio, Inc., Rates SGTS, GTS and LGTS. (12) See, supra, Note 3. Onsystem sales to industrial customers represented only 5% of total sales to industrial customers in Ohio during 1995. (13) See, supra, Note 3. Onsystem sales to commercial customers represented 75% of total sales to commercial customers in Ohio during 1995. (14) Amended Substitute House Bill 476, Ohio 121st General Assembly, 1995-96 Regular Session. (15) Comments of Representative Amstutz, Amended Substitute House Bill 476, Ohio 121st General Assembly, 1995-96 Regular Session. (16) Indiana Gas Company, Inc., Rate Schedules No. 45 and No. 60. (17) Citizens Gas & Coke Utility, Gas Rates No. 6 and No. 7. (18) Northern Indiana Public Service Company, Rates 328 and 338. (19) See, supra, Note 3. Onsystem sales to industrial customers represented only 15% of total sales to industrial customers in Indiana during 1995. (20) See, supra, Note 3. Onsystem sales to commercial customers represented 86% of total sales to commercial customers in Indiana during 1995. (21) Kentucky Public Service Commission Administrative Case No. 297 (May 29, 1987) (the "Proceeding"). (22) Even before the Order was issued, however, several Kentucky LDC's filed tariffs offering rates for gas transportation apart from natural gas sales rates, thus enabling them to compete with other gas marketers. Those filing such tariffs included the five largest Kentucky LDC's: Columbia Gas of Kentucky, Inc., Delta Natural Gas Company, Inc., Louisville Gas and Electric Company, The Union Light, Heat and Power Company and Western Kentucky Gas Company. (23) See, supra, Note 3. Onsystem sales to industrial customers represented only 23% of total sales to industrial customers in Kentucky during 1995. (24) See, supra, Note 3. Onsystem sales to commercial customers represented 88% of total sales to commercial customers in Kentucky during 1995. (25) Michigan Public Service Commission Case No. U-7991 (September 26, 1985 and December 17, 1986). (26) Id. See e.g., Michigan Public Service Commission Case No. U-8635 (December 17, 1985). (27) Michigan Consolidated Gas Company, Rate Schedules No. ST-1, No. ST-2, No. LT-1, No. LT-2, No. TWH-1, No. TWH-2, No. TOS-1, and No. TOS-2. (28) Consumers Power Company Service Rates ST-1, ST-2, LT-1, LT- 2. (29) See, supra, Note 3. Onsystem sales to industrial customers represented only 7% of total sales to industrial customers in Michigan during 1995. (30) See, supra, Note 3. Onsystem sales to commercial customers represented 64% of total sales to commercial customers in Michigan during 1995. (31) Michigan Public Service Commission Case No. U-11017 (January 11, 1996). (32) United Cities Gas Company Schedule 260. (33) Nashville Gas Company Rate Schedules No. 7F and No. 7I. (34) Chattanooga Gas Company Rate Schedules T1 and T2. (35) See, supra, Note 3. Onsystem sales to industrial customers represented only 35% of total sales to industrial customers in Tennessee during 1995. (36) See, supra, Note 3. Onsystem sales to commercial customers represented 86% of total sales to commercial customers in Tennessee during 1995. (37) Virginia State Corporation Commission Case No. PUE860024 (April 4, 1986) and Case No. PUE860024 Opinion and Order (September 9, 1986) (collectively, the "Order"). The basis for the Order was VSCC's belief that "the increase in competition in the natural gas industry has clearly been in the public interest" and that "increased competition and transportation are in the public interest." (38) Commonwealth Gas Services Rate Schedules TS1 and TS2. (39) Commonwealth Gas Services Rate Schedule LVTS. (40) Virginia Natural Gas, Inc. Rate Schedules 6 and 7. (41) See, supra, Note 3. Onsystem sales to industrial customers represented only 12% of total sales to industrial customers in Virginia during 1995. (42) See, supra, Note 3. Onsystem sales to commercial customers represented 81% of total sales to commercial customers in Virginia during 1995. (43) Public Service Commission of West Virginia General Order 228 (March 11, 1987). In fact, in granting the PSCWV the authority to regulate the transportation of natural gas within West Virginia, the West Virginia legislature found that "it is in the best interest of the citizens of West Virginia to encourage the transportation of natural gas in intrastate and interstate pipelines or by local distribution companies in order to provide competition in the natural gas industry and in order to provide natural gas to consumers at the lowest possible price." (44) Public Service Commission of West Virginia Legislative Rules, Title 150, Chapter 24-1, Series 16 (March 11, 1987), as amended to September 1, 1995. (45) See, supra, Note 3. Onsystem sales to industrial customers represented only 13% of total sales to industrial customers in West Virginia during 1995. (46) See, supra, Note 3. Onsystem sales to commercial customers represented 51% of total sales to commercial customers in West Virginia during 1995. (47) California Public Utilities Commission Decision No. 85-12- 102 (October 17, 1985), as supplemented by an Entry on December 20, 1985 ("85-12-102 Proceeding"). (48) California Public Utilities Commission Decision No. 86-03- 057 (March 19, 1986) ("86-03-057 Proceeding"). (49) See, supra, Note 3. Onsystem sales to industrial customers represented only 13% of total sales to industrial customers in California during 1995. (50) See, supra, Note 3. Onsystem sales to commercial customers represented 52% of total sales to commercial customers in California during 1995. (51) New York Public Service Commission Case 28672; Opinion 84-13 (April 24, 1984), as amended by Revisions on May 7, 1985 ("Case 28672"). (52) A customer was required to have a minimum volume of 25,000 Mcf per year, effectively eliminating residential customers from the tariffs. (53) See, supra, Note 3. Onsystem sales to industrial customers represented only 13 of total sales to industrial customers in New York during 1995. (54) See, supra, Note 3. Onsystem sales to commercial customers represented 79% of total sales to commercial customers in New York during 1994. (55) New York Public Service Commission Case No. 93-G-0932 (October 28, 1993), as supplemented by Opinion 94-26 (December 20, 1994), and by Orders issued August 11, 1995 and March 21, 1996 ("Case 93-G-0932"). SUPPLEMENTAL MEMORANDUM REGARDING REGULATION OF INTERSTATE SALES OF NATURAL GAS June 18, 1996 In 1938, Congress enacted the Natural Gas Act ("NGA") to regulate the sale for resale in interstate commerce of natural gas.(1) Congress' primary aim was to protect consumers against exploitation by the natural gas companies and to ensure consumers had access to an adequate supply of gas at a reasonable price. Under the NGA, the producers would sell their natural gas to the interstate pipelines at regulated rates. The pipelines would transport their purchased gas and their own production to the city gate for sale to the LDC at regulated rates, which recovered both the pipelines' cost of gas and cost of transmission. In addition, the pipelines would sell gas to end-users in nonjurisdictional sales. Producer sales to LDC's or end-users in the production area, with the pipeline providing only the transportation, were rare. Thus, the post-NGA natural gas industry operated under regulated rates and interstate pipelines sold gas for resale to LDC's at those prices in transactions that combined or bundled into one package the pipelines' supply and transmission costs. Under the NGA, the Federal Power Commission (later, the Federal Energy Regulatory Commission, or "FERC") was authorized to regulate both the upstream and downstream sales for resale of natural gas in interstate commerce, as well as interstate pipeline transportation rates. Although this regulation artificially suppressed prices in the regulated interstate gas market, the intrastate market was not regulated under the NGA, thereby causing a disparity in natural gas prices and hence supplies between the interstate and intrastate markets. This supply imbalance was a major cause of the severe supply shortages in the 1970s. In 1978, Congress responded to these natural gas shortages by enacting the Natural Gas Policy Act of 1978 ("NGPA") to increase the flow of gas into the interstate market. The NGPA created new statutory rates for the wholesale gas market, for so- called "first sales" of natural gas. As part of the new rate structure, the NGPA initiated the process of decontrolling wellhead prices of natural gas. Upon decontrol, the NGPA removed much of the pricing of natural gas supplies from FERC regulatory jurisdiction. The NGPA's aim was to develop a competitive wellhead market where market forces played a more significant role. The NGPA, therefore, radically changed a key aspect of the natural gas industry by eliminating FERC-determined prices for first sales of natural gas. Moreover, the NGPA accelerated a fundamental change in the natural gas industry -- natural gas became a separate and distinct economic commodity, distinct from transportation, storage and load balancing services. Congress and FERC have continued to encourage competition in the sale of natural gas. In 1985, the FERC issued Order No. 436 ("Order 436"), which offered incentives for interstate pipelines to provide open-access, non-discriminatory transportation to downstream gas users. Unbundling pipeline transportation allowed downstream gas users such as LDC's and industrials to buy gas directly from producers or other gas merchants in the product area and to ship that gas via the interstate pipelines.(2) Order 436 and its successor, Order 500, provided the LDC's and industrials with an alternative to buying gas from the pipelines in the distribution area under the pipelines' bundled sales service, and thus facilitated direct sales between gas producers and LDC's and industrials. Order 436 and Order 500 accomplished, in part, FERC's twin goals of increasing competition in the natural gas market and treating the sale of gas and the transportation of gas as separate economic transactions. This reversed the historical function of pipelines which, prior to Order 436, acted primarily as gas merchants. Competition in sale of natural gas proceeded further under the Natural Gas Wellhead Decontrol Act of 1989, pursuant to which the FERC implemented full producer deregulation, effective January 1, 1993. In 1990, Congress enacted the Gas Related Activities Act ("GRAA"), which permitted registered holding companies owning gas utilities to acquire significant production and transportation assets that do not directly serve the needs of their retail distribution systems. By 1992, pipelines competed with other sellers of natural gas for sales to LDC's and end users, such as industrials and gas-fired electric generators. However, although Order 436 eliminated the discriminatory service practices of the pipelines that had plagued the industry for decades, it still left producers and other gas merchants at a competitive disadvantage in selling gas to LDC's: although non-pipeline merchants were restricted to offering only sales service, pipelines could still offer a bundled package of sales, transportation and storage services. Because access to pipeline storage facilities made bundled transportation and sales service more reliable and flexible (by allowing pipelines to offer "firm no-notice" service), LDC's continued to purchase most of their supplies from pipelines. Other sellers moved gas through the pipeline network using mainly interruptible transportation service, a competitive disadvantage when selling to LDC's and many industrial customers. In 1992, the FERC issued Order No. 636 ("Order 636"), which required pipelines to offer a variety of transportation services to their shippers under a system that treats all gas equally, whether sold or merely transported by the pipeline companies.(3) Order 636 required the pipelines to unbundle their sales and transportation services, provide comparable transportation services for all gas supplies, offer access to pipeline storage and allow shippers both temporary or permanent capacity release. In effect, Order 636 transformed pipelines into exclusively transporters of natural gas. FERC also issued Order No. 547 ("Order 547"), which issued blanket certificates of public convenience and necessity allowing certificate holders to make gas sales for resale at negotiated market rates.(4) In tandem with Order 636, Order 547 was intended to "foster a truly competitive market for natural gas sales for resale, giving purchasers of natural gas access to multiple sources of natural gas and the opportunity to make gas purchasing decisions in accord with market conditions."(5) These legislative and regulatory actions demonstrate a clear federal policy promoting competition among sellers and marketers of natural gas. As a result, the interstate sale and purchase of natural gas has developed into an active, competitive commodity market. NOTES (1) For background on the natural gas industry, see The Regulation of Public-Utility Holding Companies, Report of the Division of Investment Management, Securities and Exchange Commission (June 1995), pp. 25-31 (the "Report") and FERC Order 636 (April 8, 1992), 57 Fed. Reg. 13267, pp. 13270-13272. (2) 50 Fed. Reg. 42408 (October 18, 1985). (3) 57 Fed. Reg. 13267 (April 8, 1992). (4) 57 Fed. Reg. 57952 (November 30, 1992). (5) Id., at 57953. Exhibit 1-B MEMORANDUM REGARDING COMPETITION IN RETAIL POWER SALES I. Introduction. This Memorandum ("Memorandum") is in connection with File No. 70-8779 ("Application"), in which American Electric Power Company, Inc. ("AEP"), through direct and indirect subsidiaries, proposes to engage in the business of brokering and marketing Energy Commodities, including electricity, to retail and wholesale customers. In the Application, AEP requested that jurisdiction be reserved over the brokering and marketing of electricity at retail pending completion of the file with respect to the permissibility of such sales. This Memorandum, in conjunction with Post Effective Amendment No. 1 to the Application, demonstrates that numerous states are implementing pilot and other programs whereby sales of electricity at retail by brokers and marketers are not only permitted but encouraged, thus providing customers with a choice as to whom will supply their electricity. This Memorandum provides a summary of such programs in Illinois, Michigan, Ohio, New York and Pennsylvania. II. Illinois. A. Central Illinois Light Company. Recognizing the growing public demand for competitive electric service, in August, 1995 Central Illinois Light Company ("CILCO") filed a petition with the Illinois Commerce Commission ("ICC") requesting an order authorizing CILCO to place into effect two pilot retail wheeling programs whereby CILCO will unbundle transmission and distribution services.(1) CILCO petitioned for the pilot programs in anticipation of the emergence of a competitive market for retail electric service and to acquire information and experience with regard to retail wheeling in Illinois. Finding that the pilot programs are in the public interest and could reasonably be expected to provide useful experience and information concerning suppliers, aggregators and customers of retail wheeling, the ICC approved both pilot programs on March 13, 1996, to be effective upon CILCO's filing of the tariffs described below. One of the programs, Rate 33, is designed to last for a period of two years and will be available to CILCO's customers having demands of ten megawatts ("MW") or greater on CILCO's electric system at any time during the twelve months ending July 31, 1995. CILCO's eight largest customers will be eligible to elect Rate 33. Rate 33 permits these customers to reserve, in the aggregate, up to 50 MW of CILCO's transmission and distribution capacity for the delivery of electricity purchased from other suppliers, including other electric utilities, aggregators and other marketers and brokers. A customer choosing Rate 33 must pay for the contracted transmission and distribution capacity whether such capacity is actually used for delivery of its non-CILCO purchases. Any usage by a participating customer which is not purchased off-system will be supplied by CILCO under its otherwise applicable rates except during certain capacity deficient periods. Under Rate 33, a participating customer is allowed to reduce or totally eliminate its level of participation upon 24 hours' notice. If a customer exercises this option, it may not increase or initiate new capacity reservation for 90 days, subject to the availability of capacity. The second pilot program, Rate 34, is designed to last five years and will be available to all customers located within specific geographic areas called "open access sites". Current plans call for CILCO to designate at least three open access sites. Site 1 will be a municipality that contains at least 400 to 500 residential customers along with some commercial customers. Site 2 will consist of an undeveloped area of at least 20 acres zoned for commercial or light industrial use. Site 3 will be an area with existing commercial businesses whose electric usage ranges from small to relatively large within the commercial class. The total off-system load expected to be served under Rate 34 will not exceed 25 MW. Rate 34 residential customers will be required to purchase all of their capacity off-system due to their small usage and lack of time-of-use demand meters. For all other participants, there will be no minimum or maximum purchase requirement on Rate 34. Like Rate 33 customers, all Rate 34 customers can withdraw from participation on 24 hours' notice, but must wait 90 days to return if they elect to do so, and non-residential Rate 34 customers must purchase their full contracted capacity off-system during capacity deficient periods. Customers participating in either program may utilize aggregators to consolidate their electric requirements. CILCORP, Inc., a subsidiary of CILCO's parent, is planning to act as an aggregator for customers eligible for Rate 33 or Rate 34. In order to implement the pilot programs under Rate 33 and Rate 34, CILCO will unbundle rates for transmission and distribution services. The charges proposed for retail transmission service for Rate 33 and Rate 34 are identical to CILCO's transmission charges for wholesale energy filed with the Federal Energy Regulatory Commission ("FERC") pursuant to FERC's wholesale open access rules. B. Illinois Power Company. In September, 1995, Illinois Power Company ("IPC") filed tariff SC 37 for the purpose of offering a retail wheeling program entitled Direct Energy Access Service ("DEAS").(2) Tariff SC 37 was filed in response to customer demands for more choice, better service and competitive pricing. IPC stated that tariff SC 37 will provide experience for both IPC and its customers in operating in a competitive retail environment and act as another step in the process of achieving a managed transition toward a more fully competitive retail environment. Finding that tariff SC 37 was just and reasonable, ICC authorized IPC to place the tariff into effect on March 13, 1996. In addition, the ICC directed IPC to perform a study on the feasibility of conducting an experimental or pilot retail direct access program for residential and commercial customers and to file a report thereon by March 13, 1997. Pursuant to tariff SC 37, IPC will waive its first in the field rights to the extent necessary to allow third party energy suppliers to sell power to DEAS customers within the scope of the program. IPC will offer a maximum of 50 MW of DEAS capacity, with no more than 30 MW to be served in any one of the three geographic regions in IPC's service territory. DEAS will be offered until December 31, 1999, so long as at least eight customers and 30 MW of load remain on tariff SC 37. DEAS eligibility requirements provide that a customer must have had a demand of at least 15 MW during the 24 months ended September 1, 1995. The customer must also take service at a delivery voltage of 34.5 kv or above. Under tariff SC 37, an eligible customer may transfer between 2 MW and 10 MW in whole MW's (subject to the 50 MW total and 30 MW per region maximum availability) of its firm load service on an IPC sales service tariff or contract to DEAS. IPC will provide transmission and ancillary services using the rates, terms and conditions of IPC's open access tariff on file with the FERC, as amended to make such tariff applicable to eligible DEAS customers. Under the DEAS program, a customer is responsible for procuring its own capacity and energy supplies from third parties, as well as any transmission over intervening systems necessary to reach the IPC control area interconnection point. DEAS load may not be served on IPC sales service tariffs or contracts, and IPC will have no obligation to serve DEAS load except in accordance with ancillary services purchased by the customer. A DEAS customer may leave the program, or reduce its DEAS demand to not less than 2 MW, one time during the program. The customer would be responsible for any remaining third-party transmission arrangements it had entered into. III. Michigan. A. Experimental Retail Wheeling Tariffs. Pursuant to an application filed by the Association of Businesses Advocating Tariff Equity ("ABATE"), in September, 1992 the Michigan Public Service Commission ("MPSC") commenced a contested case proceeding whereby experimental retail wheeling programs would be considered for Consumers Power Company ("Consumers") and The Detroit Edison Company ("Detroit Edison").(3) In April, 1994, the MPSC issued its Opinion and Interim Order(4) in the Cases requiring Consumers and Detroit Edison to implement experimental retail wheeling programs (as described more fully herein)(5), the purpose of which was to "determine whether a retail wheeling program best serves the public interest in a manner that promotes retail competition"(6). The experimental retail wheeling programs were further refined in an Opinion and Order issued in June, 1995(7), and an Order on Rehearing issued in September, 1995.(8) Pending the outcome of an appeal filed by Detroit Edison (and joined by Consumers) with the Michigan Court of Appeals, both Consumers and Detroit Edison have declined to implement the experimental retail wheeling programs called for in the Cases.(9) As envisioned by the MPSC, prior to the commencement of retail wheeling operations, each utility would file, in conjunction with its next round of proceedings for soliciting new capacity, an experimental tariff incorporating the rates, terms and conditions established in the Cases for an unbundled, firm delivery-only service. The utilities would be required to offer firm retail delivery service with capacity limits of 90 MW for Detroit Edison and 60 MW for Consumers, or approximately 1% of each utility's peak demand. Participating customers would be required to sign contracts with the utility in which the customer would commit to refrain from taking full retail service for an amount of power equal to their allotment of firm delivery during the five-year experiment. Participating customers also would assume the responsibility for making all arrangements necessary to procure power from third- party providers -- either directly or through aggregators such as the AEP marketing subsidiaries -- and to have the power delivered to the local utility's system. The utilities would be responsible only for providing unbundled delivery service to the customer's service location. Eligible customers would be limited to transmission and subtransmission level customers, and each customer would be required to contract for between 2 and 10 MW of retail wheeling capacity. Although ABATE recommended that rates, terms and conditions of power purchases from third-party providers be deregulated, the MPSC believed that its enabling statutes required it to regulate the rates, charges, services, rules and conditions of service attendant to the sale of power to an end-user located in Michigan. Thus, the MPSC held that contracts or other arrangements made by retail wheeling customers to purchase power from third-party providers must be submitted to the MPSC for authorization of the rates, terms and conditions of the sale prior to the inception of service. Under the program, participants would be able to return to full utility service after the program's expiration on the same terms available to any non-participating customer. If a participant in the program decides to return to full utility service prior to the program's expiration, it may take service under any rate for which it qualifies, although such customers' load would be served from incremental generation or power supply resources beyond those required to serve the utility's other retail customers. The incremental power supply costs associated with the most expensive source of fuel or purchased power would be assigned to such returning customer in addition to other charges provided by the tariff. B. Michigan Jobs Commission. The Michigan Jobs Commission ("MJC") recently issued recommendations for electric and gas utility reform in Michigan to encourage economic development.(10) The Recommendations focus primarily on the electric utility industry, address industrial and commercial customers only, and outline a set of principles which the MPSC, the Michigan legislature and other affected parties should consider to improve Michigan's competitiveness in attracting businesses. The MJC also recommended that these interested parties issue a challenge to other states to open their regulatory systems with similar actions to allow for interstate energy competition. The Recommendations have been endorsed by Governor John Engler(11) and the MPSC(12). The Recommendations consist of near term (to be achieved by January 1, 1997), intermediate term (to be achieved by January 1, 1998) and long term (to be achieved by January 1, 2001) goals. Among the near term goals are: 1. Allowing all new industrial and commercial electric load to be negotiated directly from the generator and wheeled over common transmission. The MPSC would unbundle tariffs into functional components, set a minimum level of load that can be negotiated directly and ensure that all retail wheeling agreements are reciprocal. 2. Addressing stranded cost by giving shareholder owned utilities a greater opportunity to prepare for market competition. 3. Exploring ending rate of return regulation and replace it with rate cap regulation for all load that is not wheeled. 4. Allowing immediate "file and use" tariffs for all existing industrial and commercial load not wheeled, but negotiated through bilateral contracts. The intermediate goal calls for creating an independent wholesale power pool whereby all who generate power may sell to the pool; however, to be able to sell to the pool, utilities must also have reciprocal agreements to buy from and market the pool. Long term, the Recommendations call for allowing industrial and commercial rate classes to aggregate demand, purchase retail electricity, negotiate bilateral agreements and buy wholesale power. On April 12, 1996, the MPSC issued an order requiring all electric utilities subject to its jurisdiction to file with the MPSC proposals addressing the MJC's recommendations. The two largest companies, Consumers and Detroit Edison, were ordered to file their applications by May 15, 1996, and the remaining electric utilities were ordered to file their applications by June 14, 1996. Both Consumers and Detroit Edison filed their respective Applications.(13) The companies' Applications propose tariffs whereby new load customers may purchase generation service from any eligible power supplier capable of delivering power to the respective companies' systems, with the company delivering that power to the new load customer. Both Consumers and Detroit Edison requested that the MPSC address all of the near term Recommendations in an integrated, comprehensive package prior to implementing the proposed open-access tariffs. On June 14, 1996, the other electric utilities filed applications with the MPSC. Indiana Michigan Power Company (I&M), a subsidiary of American Electric Power Company, Inc., filed a proposed open access distribution tariff, as did other electric utilities. I&M and the others asked that the MPSC adopt their respective tariffs without hearings. IV. OHIO. Recognizing the "increasingly competitive nature of the electric utility industry,"(14) The Public Utilities Commission of Ohio ("PUCO") recently issued an Entry requesting comments on proposed conjunctive electric service guidelines ("Guidelines"). The Guidelines were issued pursuant to Initiative No. 37 of the Ohio Energy Strategy wherein the PUCO committed to "promote increased competitive options for Ohio businesses."(15) The Guidelines are intended to facilitate a pilot project with an initial term of two years. Interested parties already have filed initial comments on the Guidelines, and further comments will be filed prior to PUCO acting on this matter. For purposes of the Guidelines, conjunctive electric service is defined as the quality and nature of the service provided under the terms and conditions of a utility's applicable electric service tariff, contract or agreement under which different customer service locations are aggregated for cost-of-service, rate design, rate eligibility and billing purposes. The conjunctive electric service contemplated by the Guidelines is distinctly different from traditional conjunctive billing. Under traditional conjunctive billing, different service locations of a customer are aggregated and then billed under an existing tariff. In this manner, the customer is able to reduce the level of kilowatt billing units under the existing tariff by capturing the benefits of load diversity that exist among different service locations. Traditional conjunctive billing thus unfairly discriminates against nonparticipating customers. Under the Guidelines, conjunctive electric service rates will either be designed on a cost-of-service basis or revenue neutral basis for each specific group and as such will not discriminate against nonparticipating customers. The Guidelines would limit conjunctive electric service under tariff, contract or agreement to customer service locations within the certified service area of each electric public utility within the State of Ohio. Further, the rates for conjunctive electric service will be developed specific to each group of customers. The function of aggregating groups of customers could be performed by persons in addition to the electric utility companies. That is, third parties such as the AEP marketing subsidiaries could aggregate groups of customers. V. New York. The New York Public Service Commission ("NYPSC") began an investigation into the restructuring of the electric utility industry in 1993 by considering guidelines for the implementation of flexible pricing and the use of negotiated contracts for customers with competitive options. In August, 1994, the NYPSC instituted an investigation into issues related to the provision of electric service in light of competitive opportunities.(16) On May 20, 1996, the NYPSC issued its Opinion and Order Regarding Competitive Opportunities for Electric Service(17), wherein the NYPSC set forth its vision of the future regulatory regime and the goals expected to be achieved thereby, and described the strategies that should be implemented to achieve those goals. Recognizing that retail competition has the potential to benefit all customers by providing greater choice among electricity providers, the NYPSC intends to move toward a competitive power market in two major phases. The first phase is to take place from the date of the Opinion and end on October 1, 1996. During this time, each of the seven major electric utilities in New York must file a rate/restructuring plan with the NYPSC and FERC. This filing will distinguish and classify transmission and distribution facilities and delineate those facilities over which FERC may have authority versus those that are local in character and subject to NYPSC jurisdiction. In addition, the utilities are to make two joint filings, one addressing transmission pricing and the other addressing the formation of an independent system operator. The second phase will take place as the utility filings are dealt with in the instant proceeding or otherwise reviewed. The entire process is geared to the establishment of a competitive wholesale power market early in 1997 and the introduction of retail access early in 1998. One of NYPSC's stated goals during this short wholesale phase is to develop effective competition among energy service companies, such as the AEP marketing subsidiaries and other power marketers and brokers. VI. Pennsylvania. In April, 1994, the Pennsylvania Public Utility Commission ("PPUC") instituted an Investigation to examine the structure, performance and role of competition in Pennsylvania's electric utility industry.(18) The Investigation culminated on July 3, 1996, when PPUC issued its Report and Recommendation(19), wherein the PPUC recommended that Pennsylvania begin a transition that will end the regulation of electric generation as a monopoly. Although the Report recommends a transition period of five years, if the prerequisites to instituting full retail competition are reasonably satisfied within a shorter time frame, the transition period could be as short as three years. The Report provides for the restructuring of Pennsylvania's electric service industry pursuant to a two stage implementation process. The first stage, the transition period, was to begin immediately and will be used, among other things, to restructure the industry, provide needed legislation, establish an effective and reliable wholesale bulk power market and introduce retail pilot programs. After completion of the transition period, a phase-in period will be provided to incrementally move to full retail competition. PPUC expects to begin competitive retail access pilot programs for all customer classes beginning in April, 1997, and to begin the incremental introduction of competitive retail access for all customers during 2001, with all customers having retail access opportunities by January, 2005, at the latest. According to the PPUC, an increased variety of pricing options and customer choice, including choice among suppliers of electricity, should be the hallmarks of the developing competitive retail power market. As such, the PPUC believes that customers should have several options for generation services, including receipt of electricity from the local distribution utility (either directly or in the LDU's capacity as an aggregator), from a particular generator through a direct contract, or through aggregators (such as marketers and brokers) licensed by the PPUC. Thus, as currently proposed, the Pennsylvania pilot programs would permit the AEP marketing subsidiaries to market and broker power to retail customers. VII. Conclusion. Due to programs such as those cited in this Memorandum, as well as those in states such as Massachusetts and New Hampshire, competition in the retail power market is developing rapidly. The state commissions have consistently held that competition in the retail power market is in the public interest. The Securities and Exchange Commission also has held that competition in the retail power market is in the public interest: The Commission has recognized the need to apply the standards of sections 9(a)(1) and 10, and, by reference, section 11(b), in light of the "changing realities of the utility industry." In that regard, the Commission has noted, among other things, the national policy to promote efficient and competitive energy markets. The Commission has acknowledged that participation of registered system companies in energy marketing and brokering activities may promote greater competition and thus further the public interest in a sound electric and gas utility industry. These concerns extend to competition in retail as well as wholesale markets.(20) The state commissions have stressed that increasing customer choice is one key to developing a competitive retail power market. As such, the pilot programs invariably provide customers with several options for generation services, including purchases from aggregators and other marketers and brokers licensed by the state commission. The various state commissions have acknowledged that the success of the pilot programs depends upon the entry of new suppliers into the retail power market. Thus, as currently proposed, the pilot programs would permit the AEP marketing subsidiaries to market and broker power to retail customers. Although competition in the retail power market is not as developed as in the natural gas market(21), the pilot programs either implemented or under consideration by numerous states should quickly lead to competitive sales of electricity in the retail power market. In fact, the AEP marketing subsidiaries could begin selling power immediately in Illinois, Massachusetts and New Hampshire. Eventually, the AEP marketing subsidiaries may be permitted to sell power to customers in all states. As noted above, authorizing the AEP marketing subsidiaries to sell electricity at retail will increase competition in the retail power market, and therefore benefit all power customers. NOTES 1. Illinois Commerce Commission, Order issued on Petition No. 95-0435 (March 13, 1996). 2. Illinois Commerce Commission, Order issued on Petition No. 95-0494 (March 13, 1996). 3. Michigan Public Service Commission, Order issued in Case No. U-10143 and Case No. U-10176 (September 11, 1992) (as modified by subsequent Orders, the "Cases"). 4. Michigan Public Service Commission, Opinion and Interim Order issued in Case No. U-10143 and Case No. U-10176 (April 14, 1994). 5. As used by the MPSC, "retail wheeling" refers to a local utility's delivery of power to an end-user located in its service territory. As used by the MPSC, retail wheeling differs from full retail electric service in that power is not provided by the utility out of its own system resources, but instead the end- user (or retail wheeling customer) assumes the responsibility for arranging for the purchase of power and its transmission to the local utility's system. Michigan Public Service Commission, Opinion and Interim Order issued in Case No. U-10143 and Case No. U-10176 (April 14, 1994). 6. Michigan Public Service Commission, Opinion and Interim Order issued in Case No. U-10143 and Case No. U-10176 (April 14, 1994). 7. Michigan Public Service Commission, Opinion and Order after Remand issued in Case No. U-10143 and Case No. U-10176 (June 19, 1995). 8. Michigan Public Service Commission, Order on Rehearing issued in Case No. U-10143 and Case No. U-10176 (September 7, 1995). 9. Michigan Court of Appeals Docket Nos. 187387, 187388, 189480 and 189481. 10. Michigan Jobs Commission, "A Framework for Electric and Gas Utility Reform" (December 20, 1995) (the "Recommendations"). 11. Letter from Governor John Engler to the Honorable John G. Strand, Chairman of the Michigan Public Service Commission (January 8, 1996). 12. Michigan Public Service Commission, Scheduling Order in Case No. U-11076 (April 12, 1996). The MPSC directed Consumers and Detroit Edison to file applications that would allow new industrial and commercial electric load to be negotiated directly from the generator and wheeled over common transmission. Consumers and Detroit Edison were required to, and did, file such applications. 13. Consumers Power Company, "In the Matter of the Application of Consumers Power Company for Approval of an Open Access-New Load Delivery Service Tariff and Related Relief", filed in Case No. U-110076 (May 15, 1996) and The Detroit Edison Company, "Application of The Detroit Edison Company for Approval of Principles for Direct Customer Access and an Interim Economic Growth Electric Service Rider for New Electrical Load Installations in Michigan", filed in Case No. U-11076 (May 15, 1996). 14 The Public Utilities Commission of Ohio, Case No. 96-406-EL- COI at 1 (May 8, 1996)(the "Order"). 15. Id. 16. New York Public Service Commission, Case No. 94-E-0952, "In the Matter of Competitive Opportunities Regarding Electric Service," (August 9, 1994). 17. New York Public Service Commission, Opinion No. 96-12 (May 20, 1996) (the "Opinion"). 18. Pennsylvania Public Utilities Commission Docket No. I- 00940032, "Investigation into Retail Competition" (April 14, 1994) (the "Investigation"). 19. Pennsylvania Public Utilities Commission, Report and Recommendation to the Governor and General Assembly on Electric Competition (July 3, 1996) (the "Report"). 20. Securities and Exchange Commission Release No. 35-26519 (May 23, 1996) (citations omitted) (Eastern Utilities Associates, File No. 70-8769) and Release No. 35-26520 (May 23, 1996) (citations omitted) (New England Electric System, File No. 70-8803). 21. See Exhibit I-A to Post Effective Amendment No. 1, File No. 70-8779, "Memorandum Regarding Competition in Retail Sales of Natural Gas." -----END PRIVACY-ENHANCED MESSAGE-----