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Fortnightly Magazine - February 1 1999

that accurately describe our "cost of service" model, still in use in 1998. Thus, one should have at least a rough notion that rates under regulation follow roughly the rates of inflation. Under regulation, a utility buys goods and services in the form of material, labor and capital in the open market. The regulator reviews the prices paid and the amounts purchased and applies good business judgment to the issue of productivity. The result is rates that have roughly followed inflation (either leading or lagging) since the end of World War II.

Today, whatever the experience for an individual company or within a particular service territory, many observers have concluded, both here and abroad, that prices under competition will fall below what we have seen for regulated monopolies.

The second caveat: Will competition spur true innovation - bringing new services and products, with new technology?

Everything can be improved. One quick example is the slow introduction of automatic meter reading at most utilities. Radio technology to read meters has been around for years and only the small gas distribution company I managed, Yankee Gas Services Co., has converted all of its residential meters to radio remote reading and eliminated the manual meter reader.

Of course, it's always dangerous to speculate on new services but I will stick my neck out and predict that someone will offer "interruptible" residential service for both electric and gas service. The service will be "value" priced below firm service and will appeal to customers who have alternatives or are willing to "do without" for the right discount. Customers will make their own choices of "firmness" or "quality of services." One thing that startles utility executives is that many customers are willing to take a lower quality service for a lower price. That's the concept of some "super stores" in retail marketing and is certainly the concept of many of the low excursion air fares, with their many limitations on flexibility of arrival and departure, and advance purchase requirements. The parallels will be found in energy services.

This innovation should extend as well to billing, metering and customer response times.

Many commercial and industrial customers have multiple geographic locations served by many different local utilities. National and regional marketing and sales organizations could create "one-stop shopping" for these large customers. The days of the regulator and the utility getting together to tell the customer what they are going to get in the way of services have passed. The customer will inform the market, by accepting some offers and rejecting others.

With these two caveats satisfied, an outline of a future energy industry emerges through the mists. This industry is marked by (1) vigorous competition in generation and production, (2) a larger, more efficient transmission and distribution sector, but with regulated delivery systems, and (3) several national and regional (and perhaps local) "brands" for marketing carefully designed bundles of consumer energy products.

Regulators as Roadblocks

Beyond the merits of the question, however, one final worry concerns the pace of the process. The U.S. electric power industry will be "restructuring"