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Will the Juice Be Turned Loose?
UI's Dick Grossi ponders an uncertain future in an industry coursing toward competition
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Business New Haven
10/7/1996
By: BNH
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Richard J. Grossi, 61, is chairman and chief executive officer of the New Haven-based United Illuminating Co., which he joined in 1957 as an engineering assistant. Facing the specter of at least partial deregulation of the electric utility industry, UI recently proposed a five-year rate cap in return for the ability to use profits to pay down its massive investments in nuclear power plants. In addition to sitting on numerous community boards, Grossi also chairs the North American Electric Reliability Council and the Seabrook Joint Owners Committee.
Describe UI's reorganization, and why is it taking place?
We are presently finishing up with an early retirement program. One piece had to do with a voluntary early retirement for people who are at a certain age. The other piece is a program where a person can opt out and there is a [severance] package. The purpose is based in the whole issue of competition, in trying to prepare the company for this future, whatever it might be. If we go back to 1990, we had close to 1,600 employees. With this latest reduction we'll be around 1,070.
How is that accomplished without impacting service?
We have gone through a lot of re-examination and we have out-sourced, for example, computer operations. A good part of our meter reading has been out-sourced. We're looking at the extent we can do things more efficiently, and some of that might involve out-sourcing.
UI has been involved in many economic-development programs. Can these be sustained?
These programs may be sustained; it is difficult for us to tell at this time. We see clearly, even in some of the wild models being presented to the industry, that there is a role for economic development because it is still in our best interests to attract customers to the area. The issue is to the extent it is economical to do so. If there are programs legislators or regulators may determine to be socially beneficial in this new competitive environment, some new mechanism will have to be utilized to accomplish that. Either they'll be some form of taxation or it could be the burdens will be equitably distributed among all of the players.
What is UI's proposal on free competition and its rate freeze?
If you go back a couple of years, the DPUC had proceedings on 'retail wheeling' [selling power to individual customers] and on re-structuring. Wholesale wheeling is here with the 1992 energy act; the transmission lines have to be open. I can charge you a toll, but the toll I charge can be no more than what I charge myself, and I can not deny access. That presently only applies to wholesale sales. The 1992 energy act was very explicit: [The act] in no way suggests that retail wheeling should move forward or is part of this act - that's going to be left to the states. There is pressure to open up to retail wheeling. Not all states agree on this. New Hampshire is moving ahead with an experiment; Rhode Island is moving ahead with all-out competition in 1998. Massachusetts is certainly thinking about it and Connecticut is looking at it. There are other states that say it's not appropriate.
So the DPUC had concluded that retail wheeling is not in the best interest of the public. They also strongly recommended to the utilities to prepare themselves for what may become a more competitive environment. The filing that we made is in response to that. We're doing that with the reductions, as far as re-engineering the organization, we are literally turning the company upside down. The [UI] filing recommends that we freeze rates [a response from the DPUC is expected as BNH goes to press] for five years. We are asking in return to take whatever earnings we make which normally might have been returned to customers and to use them to more rapidly amortize the investments in Seabrook. [The DPUC] also said you should do whatever is possible to mitigate any strandable costs. We don't know what those costs will be. That's going to be tested against the marketplace. If the market supports those costs, then they're not really stranded. So we're saying give us a few years and we'll do the best we can do to write off those costs more rapidly.
What are stranded costs?
Think of this as an industry that has been put together over about 100 years. UI has one of the most reliable systems in the U.S., which we are very proud of. What we're not proud of is our costs are high. That's the result of many things. One is we moved ahead with a nuclear program in order to reduce our dependency on oil. That was very expensive; [the current investment] is about $800 million. At the end of the five years we feel we can make a very good dent in that. If the market is high enough then it could possibly support the amount that's left on the books at that time.
Stranded costs are largely nuclear investments?
We went from 93 percent oil dependency down to 11 or 12 percent. No one is interested in that anymore, even though in a few years we may be 80-percent dependent on imported oil. Today we are looking at competition and people are saying that whatever facilities you have must be competitive. The problem is Seabrook, because it is new and we haven't had ample time to depreciate it. So we have all these embedded costs and the market will not support it. If you threw everything open to competition today we could not support that unit. The alternatives are cheaper, gas and oil is lower. There are some people who say, 'That's not a problem; let the stockholders eat that.' In a normal business that probably would be the answer. During the embargo we could have charged a hell of price for electricity if this were a competitive environment, but we were regulated so we couldn't do that. This is the fifth inning of the ball game and someone wants to change the rules.
In fairness you should at least give us the opportunity to depreciate those costs that appear in today's marketplace that appear stranded. If the marketplace will not support those investments, we're asking that those investments get passed to all customers.
Attorney General Richard Blumenthal has proposed that transmission, distribution and production be separated into different companies.
This is a national model; there are variations to it. We're really in three separate businesses: we make the power; we transmit it over the lines; and then we distribute it to the retail customers. People are suggesting that generation should be spun off as a purely competitive business. And I can't disagree with that. Those utilities that feel they can be competitive in that marketplace may decide to become simply generators of power. Transmission and distribution will continue to be regulated. I don't think you'd be happy to see a lot of wires running around the countryside.
Where does UI's electricity come from?
We have about 200 megawatts in Seabrook. About 40 percent of our energy comes from nuclear - Seabrook, Connecticut Yankee and a small piece of Millstone. Forty percent [is generated from] coal in our Bridgeport Harbor plant. The remainder comes from gas and hydro, and we have the refuse facility in Bridgeport, and we have 400 megawatts in New Haven, which is oil or gas, depending on price. Whether we'll continue to own those plants, we don't know. We're trying to make those facilities as economical as possible so they can compete in an open marketplace.
What about concerns about nuclear safety in a free market?
I don't know what's going to happen with respect to the Nuclear Regulatory Commission [NRC] and its examination of nuclear in a competitive world. They're looking at it from a safety point of view. They're concerned that the entities that own those nuclear plants may become financially stressed and not be able to adequately support what nuclear requires.
What is 'cherry picking' of customers?
We have mix of customers. In a regulatory environment we are not allowed to charge customers what they should be charged. [Regulators] were trying to keep things affordable. Coming in as a competitor you'll look for a customer. When you can show that customer, 'You've been subsidizing this other customer; we can cut your costs.' If you're successful, then there's a danger from the point of view of the customers that are left behind and the entity that has to continue to serve those customers. I have this nightmare that I have one foot in the competitive world and one foot in the regulated world. And it is not an unrealistic nightmare.
Is competition going to lead to mergers?
Yes, particularly the Midwest - it's a hotbed for it. They don't have the burdens of nuclear and they see themselves as benefiting from this competitive world.
What's pushing deregulation faster in other states?
It's a matter of individuals getting behind a concept and pushing forth. In Massachusetts and Rhode Island, the New England Electric System [NEES] is pushing for it. They're better positioned. At this point it's all a matter of where you happen to find yourself. Everyone feels that to the extent you have an advantage today, you'd better move.
Where do you see proposals for free competition going, and what do you think about the attorney general's proposal?
He's free to make those proposals. The disappointment I have is that the details are lacking. On the surface these things may look attractive, but the details are very important. I have nothing against competition. We have to keep our focus on what we want to accomplish. We're trying to give our customers good service at a more attractive price. What's happened is people have tossed up competition. To the extent that you sometimes bring up concerns [about competition] it's almost like saying you're against motherhood. We are for competition; we just want to do it right. Look at the telephone companies: It has been 17 years since Judge Greene [broke up AT&T] and even here in the state we still don't have open access as far as retail. The energy act was enacted in 1992; this is '96, it's four years, and people are talking about [introducing competition in] '98. Let's not mislead the public: We should move and do it in a way that's well thought-out. If it's not done right I know who's going to get blamed. It can be done; there is nothing incompatible between competition and reliability. I'm not saying [competition should be deferred] five years, as in the case of our filing. We may be tossing around dates that are earlier than that. The '98 date is just too aggressive. Slightly later than that is probably do-able - but that still is going to push us.
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