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Fortnightly Magazine - February 15 1995

PUCs shift to a consumer protection role. Price caps will replace today's cost-of-service methodology; future regulation will focus on customer needs.

The industry will remain subject to all federal and state environmental laws and standards, as it is today. Competition can imply cost reductions, including those related to environmental concerns, but Wisconsin Electric believes proactive environmental stewardship will provide competitive advantages. Market-based solutions to environmental problems are proving more effective than traditional command-and-control approaches. Overall, placing direct or indirect controls on electric utilities is probably not the most cost-effective way to achieve emission reductions. Policies that cap or limit growth in all those who produce emissions will offer better incentive for finding the lowest-cost solutions.

There is some concern that competition in generation will neglect renewable energy, particularly given the increase in renewable "setasides" in PUC-controlled bidding schemes. We feel that a state can more easily promote renewables under the re-regulated model we envision. The distribution-line access charge could include a renewable subsidy; the Poolco could include a renewable subsidy as an "uplift" or service charge. In addition, opening the retail market to competition will enable "green" Retailcos to go after those consumers willing to pay more for "clean" power.

Wisconsin Electric also believes that energy efficiency will remain an important focus for business, society, and the environment. Utility-sponsored energy-efficiency programs will likely change. In a restructured industry, energy efficiency will become a competitive customer service rather than a substitute for generation. One of the original rationales for utility-sponsored energy-efficiency programs was the belief that market failures and imperfections caused individuals and businesses to invest in less energy efficiency than they would otherwise. But the price signals were inadequate because prices were based on embedded, average costs. With a spot market for electricity, customers will have access to real-time, market-based prices that will encourage them to invest in energy-efficiency improvements. In addition, Retailcos will package the sale of electricity with value-added products, including energy efficiency. The introduction of many market players and market-induced energy efficiency in the future will replace the need for utility-sponsored market intervention.

In the transition to the end-state we envision, there will be a continuing need for regulatory energy-efficiency programs. Because efforts to improve energy efficiency create upward pressure on rates, at a time when utilities are doing all they can to improve their competitive position, we propose a competitively neutral access fee on the distribution lines. Part of this fee could be set aside in a state-administered fund that would be available under a bidding mechanism to supply energy-efficiency services. An access fee on the cost structure of the distribution system would prevent bypass of social programs or other initiatives by any customer. Over time, the need for the fund would diminish as market imperfections fade. This fund also could support low-income programs typically done by the utility.

The transition to a more competitive environment will not be easy, and the outcome will affect everyone in the nation. That's why Wisconsin Electric is actively involved in the process of utility restructuring. The input of all electric utilities