The federal government is proposing a radically new way of obtaining traditional monopoly services like natural gas and electricity: asking utilities to compete to provide them.
In a proposed government rule, the General Services Administration -- which buys services for more than 100 federal agencies -- the Department of Defense, and the National Aeronautics and Space Administration, would competitively procure utility services -- electricity, natural gas, water, sewage and steam.
The rate impact on customers "could be substantial" if the proposed rule goes into effect, according to Charles Gray, assistant general counsel to the National Association of Regulatory Utility Commissioners.
The government spends about $4 billion a year on these services, which represent 2 percent of the annual national output by utilities. Excluded from the proposal is telephone service. The GSA has asked for competitive bids for a new federal telephone system.
The federal government, which produces its own steam at more than 100 government sites, also has asked for competitive bids to have an outside operator run three large steam plants in the District and Virginia.
The all-encompassing utility proposal is an outgrowth of the Competition in Contracting Act of 1984, which requires federal agencies to procure all goods and services competitively, GSA officials said.
At stake are hundreds of millions of dollars the government pays to utilities across the nation, including local utilities such as Potomac Electric Power Co., Washington Gas Light Co. and Virginia Power. In 1985, the bill to the GSA from WGL -- excluding the DOD and NASA -- was $6.4 million, the bill from Pepco to the federal government (including DOD and NASA) was $216.3 million, and the bill from Virginia Power to the entire federal government was about $100 million. Those amounts represent nearly 17 percent of Pepco's revenue, less than 1 percent of WGL's revenue, and 3.7 percent of Virginia Power's. WGL could not immediately estimate its total bill to the federal government.
"The bottom line is we don't have a statute that says you can avoid competition in the public utility service area," said Richard Hopf, deputy associate administrator for acquisition policy at the GSA. "There is a statute that says you must seek competition." The goal of the proposal is to get superior service at better prices, he said.
But utility regulators and area utilities say there are major public policy considerations and technical problems in the government proposal.
"It's a threat to the whole structure of basic utility law and practice that has been in existence for 50 or 60 years," said Gray of the association of utility regulators. "Should the federal government be allowed to leave utilities hanging, and other customers who have no alternatives paying for the fixed costs of the system that have formerly been paid for by the federal government?"
In a letter written to Terence C. Golden, administrator of the GSA, House Appropriations Committee Chairman Jamie L. Whitten (D-Miss.) and two other members, Reps. Edward R. Roybal (D-Calif.) and Silvio O. Conte (R-Mass.), said, "the proposal appears to involve clear disregard of federal, state, or other regulatory bodies that govern utility services," and called the potential impacts "serious."
Rep. Edward J. Markey (D-Mass.), chairman of the House subcommittee on energy conservation and power, said, "Our concern is what the impact is on all residential customers of electricity who do not have the ability to shop around."
The proposal, which would ultimately mean having cheaper natural gas or electricity transported over local utility distribution systems from distant companies to federal agencies, is fraught with legal stumbling blocks, regulators said.
There is a "legal gray area" surrounding the issue of forcing utilities to transport cheaper natural gas or electricity.
"We realize there are legal issues; we're not sure they are legal obstacles and we'll be working on it in the next few months," said Hopf of the GSA.
But according to the state regulators' association, only Congress can give the Federal Energy Regulatory Commission the authority to make pipelines transport natural gas from distant producers to customers. New voluntary federal gas transportation rules have resulted in a handful of pipelines transporting gas. About 10 state regulatory commissions have compelled pipelines to transport natural gas to customers.
Electric utilities are beginning to compete to buy cheaper electricity from neighboring companies to help avoid building new power plants. Federal regulators theoretically can compel electric utilities to transport cheaper electricity from a distant utility to a customer, but have never done so, said the association's Gray. Some states have made the transportation of electricity to customers mandatory, "but the question is can they enforce it?" he said.
Area utilities and the Edison Electric Institute, which represents investor-owned electric utilities, also cautions that the concept of having electricity transported is loaded with technical problems and the threat of higher residential rates to pay for the electrical distribution system.
On the natural gas side, WGL said it is considering the idea of transporting natural gas to customers who want the service, but also cautions that residential rates and reliability of service could be affected.
According to the Edison Electric Institute, among the implications are "higher rates for utility ratepayers, potentially less reliable service for utility ratepayers . . . and an uncertain situation in terms of future planning."
Pepco's John Derrick Jr., vice president of customer relations, said the transportation of electricity to dispersed sites, such as to users throughout the District, is far more technically problematic than the transportation of natural gas, although the utility is not afraid of competition.
The electrical distribution system would have to be expanded and lines that could handle greater amounts of electricity would have to be installed, disrupting service at some sites, he said.
"You increase the complexity and ability of Pepco to have the same kind of reliability -- and somebody's got to pay the freight, it will be more expensive," he said. Pepco also would have to charge a customer a "standby" fee to assure future sources of electrical supply if a distant source dried up, he said.
The problem for state regulators would also be "monumental," he said, because they must continue to ensure other customers who have no alternatives get the lowest rates possible.
But some industry experts said transportation rates for natural gas or electricity could be structured to cover some of the fixed costs of utility distribution systems.
The GSA has begun to challenge some utilities in distant states over the issue of transporting electricity. In Colorado, it has intervened on behalf of the Department of Defense and asked state regulators to compel Public Service Co. of Colorado to transport electricity to Lowry Air Force Base. State regulators say they do not have this authority, according to Michael J. Ettner, attorney for the GSA. "We're trying to get answers as to the gray area of the law," he said.
Industrial customers find GSA's idea attractive. "The concept is very intriguing to large industrial customers," said John Anderson, executive director of the Electricity Consumers Resource Council. The Washington association represents 21 large industrial customers, among them Bethlehem Steel Corp., General Motors Corp. and Anheuser-Busch Cos., which have facilities in Maryland or Virginia.
"Electricity and natural gas are products like a toilet seat or a hammer," he said. Utilities still make money on transporting electricity and can sell their own electricity to other utilities, he said. Many industrial customers who could switch to another source of fuel have natural gas utilities transporting natural gas to their facilities.