[BETA] Fortnightly

A recent conversation:

"When was the demise of the regulatory bargain? What you say is true, but at some point you had to know the bargain was over."

(em A state utility commissioner

"Beats me, it doesn't seem to be over yet. The electric industry still has a duty to serve all customers, and it must charge below-market rate confiscatory for many of our services because of the regulatory bargain. When these duties go away, I'll let you know the date of the demise."

(em The author

When Intel had to replace thousands of Pentium chips that might misfire once every million calculations, it took the loss (em about several hundred million dollars. When Ford built the Edsel, it also lost money. No one (to my knowledge) has ever sued Ford for a shortage of Edsels, or Intel for not making enough Pentium chips. But then again, no government agency ever forced Ford or Intel to build a certain number of cars or chips (em enough for everybody in the U.S. under all conditions (em only to recant and then announce a new set of rules: "Ooops, sorry, just kidding, something better came along."

We, the electric industry, however, still have a duty to serve. We are still required to build plants, transmission and distribution to serve everyone in our territory. We call this commitment the Regulatory Compact. Because of this compact, the electric industry is now stuck with outdated assets built under government mandates. Power plants built using old technology are now priced above market.

Who should pay for these "stranded" assets? Utilities, customers, shareholders? Despite the lessons learned by Ford and Intel, I believe utilities should be allowed to recover their stranded costs, and for a very practical reason (em a quick transition to a competitive market.

I believe in competition. In fact, I believe that the benefits of competition are so great as to outweigh the cost of stranded assets in the long run. Thus, the electric industry should proceed as quickly as possible with deregulation and full competition in generation. A cooperative plan allowing for certain recovery of stranded costs would best secure a quick transition. Unfortunately, however, some regulators or customers may hope for a short-term advantage. They may push through deregulation plans with no provision for recovery of stranded costs. And without recovery, the road to competition could prove long and difficult.

Preserving Incentives

Anyone who believes that the Regulatory Compact is dead should try to find a recent case where service deteriorated to the point of brownouts without sparking an investigation by the state or local utility commission. Regulators may ponder a free market, but the duty to serve still continues.

Without the Regulatory Compact, no one would invest in 40-year, single-purpose assets. Coal companies don't build 40-year, dedicated coal plants without long-term contracts. In fact, perhaps the best indicator of this is the independent power producer industry. No IPP yet builds merchant plants to any great extent: They require a contract with an ultimate user. Yet, some claim the electric industry had no contract.