Noting controversy surrounding multi-year incentive agreements in utility rate cases, the New York Public Service Commission (PSC) has approved guidelines for filing multiyear rate proposals and...
How State Regulators Should Handle Retail Wheeling
By Kenneth W. Costello, Robert E. Burns, and Youssef HegazyThe electric power industry is next in line for dramatic change. Competition has edged into individual markets, particularly the bulk-power market. This move toward competition has provoked debate in several states over the merits of retail wheeling. Specifically, should retail customers have the right to purchase their power requirements from sources other than the local utility? Many states have addressed the issue in different forums, at different levels of intensity. No state has yet enacted broad legislation, either requiring or granting authority to a state public utility commission (PUC) to order retail wheeling. But that day will come.
What's at Stake?
Proponents of retail wheeling argue that current inefficiencies in the electric power industry can only be eliminated or significantly diminished by competition at the retail level. This camp includes industrial consumers, nonutility power producers, and market-liberal economists. Of course, industrial customers and nonutility generators see retail wheeling as a means of advancing their economic interests, regardless of the cost to the public interest or aggregated economic welfare.
The opposition naturally includes most electric utilities, who consider retail wheeling a zero- or negative-sum game in which some industrial customers benefit at the expense of utility shareholders. This view is shared by the financial community, which foresees only adverse impacts from retail wheeling on utility creditworthiness. Also opposed are small-consumer groups and conservationists/environmentalists. They fear that the financial pressures will
have negative consequences for consumers and the environment.
Debate at the state level is rooted in this larger public debate, but also reflects the growing movement to correct perceived inequities in the electric industry structure through increased competition. First, retail electric rates vary widely, in part because utilities carry different levels of capital expenditures. Second, current electric prices remain high relative to the cost of new generation, even after deducting transmission and distribution costs. (And the highest prices correlate strongly with the largest differentials between price and marginal cost.) Third, recent attention paid to economic development and new jobs has led state lawmakers, regulators, and industrial groups to speak out on the importance of competitive electricity prices. Fourth, industrial customers argue that utility-funded demand-side management (DSM) programs have led to higher electricity prices while nonindustrial customers have reaped most of the benefits.
The Task of State PUCs
The Energy Policy Act of 1992 (EPAct) encourages states to look at retail wheeling. While EPAct sections 721-726 prohibit the Federal Energy Regulatory Commission (FERC) from ordering retail wheeling, many experts can find no reason why EPAct or federal law in general bar state action. Wheeling proponents argue that the Act's so-called "savings clause" bars the FERC from preempting any state law regulating retail wheeling. They believe the question is left for state legislatures or PUCs to decide.
Nevertheless, some legal analysts argue that EPAct does not extend retail wheeling authority to state legislatures or PUCs, nor remove any existing federal authority over transmission activities in interstate commerce. They interpret the "savings clause" as preserving the states' pre-EPAct wheeling authority. But these analysts concede that the federal