168 



resources. In recent yean, with booming construction, these have been directed 

 pntnarily at tbe new construciiua market. 



The primary economic obstacles involve inefflciem pricing of electricity. The 

 electric utility industry is price controlled from generating plant tu insier, with prices 

 based OQ historical 'embedded* cost prtnriplrn Gas production is now completely 

 unregulated. While electric rates are genuaUy well below marginal costs, gas rates are 

 veiy close to margitial cost. 



BPA is proposing to buy power &tim new ga&-&red resources, such as the 

 proposed Tenaska generating project. BPA pie&emly sells power at wholesale at a Oat, 

 melded rate, rather than one which reflects tbe high incremental cost of new resources. 



Public utilities follow that lead, pricing power at rates far below the cost of new 

 resources. The typical retail rate for a public utflliy In the Nortbwcsi is about 4 

 ceots/kwh, about half of the cost of productiOQ, transmission, and distribution for a new 

 electric generating resource. While the public utilities wiH tcH you that they base their 

 rates on the "cost of service," there arc many ways of measuring cost of service, and they 

 generally choose methods based on average, historical costs, rather than on new resource 

 costs. 



Private utilities in the Northwest generally have mere progressive piidng policies, 

 imposed on them by state regulation. ACL of the major investor-owned utilities in the 

 region have inverted retail rates, with end-block rates for usage over 1000 kwh/month 

 around 5-7 cenn/kwh, a level which malces gas conversions very cost-effective. Most of 

 the comrcrsion activity seen to date has been in the service territories of investor-owned 

 electric utilities. 



The political obstacles are relative^ simple. Many electric utilities do not want 

 to give up market share. They do not want to c o ncede cnstotners lo the gas utilities. It 

 seems surprising t*"** constmjer-owned utilitirs would take actions contrary to the 

 interest of consumers, but they do. The reason is partly economic - BPA's flat, melded 

 rate H>»<ign- it is partly political - a sense that the gas utilities are cnmpetitnn; in die 

 TnMrVfft rather than enlleayies m the enerpv services field. 



ENVIRONMENTAL IMPACTS 



My 1990 report to the Association of Northwest Gas Utilities compared the 

 carbon dioride produced by direct application of gas to space and water heating loads to 

 the use of elecinc generation to serve these loads. Depending on whether the ciectnaqr 

 is produced in cogencratian applicaiians of conventional combined-cydc generation, and 

 on whether the alternative generation is gas-fired or coal-fired, the environmental 

 benefits of direct ^plication range from tnodest to dramatic. 



Testimony of Jim Lazar Committee on Small Badness 



June 3, 1993 



Pago 3 



