Exelon Chairman, President, and CEO John W. Rowe, on the proposed merger that would create the largest utility in the United States....
Hard-and-fast ring-fencing rules are not the best way to maintain order in the partially deregulated utility sector.
In 1992, my colleagues on the Michigan Public Service Commission (MPSC) and I initiated the first retail wheeling case in the country. Retail wheeling was the old name for competition, back when everyone thought that moving electrons from one place to another was a relatively simple task, one that could not in any way harbor underlying sinister acts or motives. Oh, how 12 years have changed those perceptions.
I left the MPSC within a year to go to Wall Street, joining the utility ratings group at Fitch Ratings. It took another 10 years to formalize retail competition within the state. Clearly, from the MPSC's view, that was a good thing. It allowed California to bear the brunt of the ills that often inflict a first mover on radical innovation. But what followed at Enron put the entire energy sector on edge and led to discussions about means to avoid those pitfalls in the future.
At the state level, policy-makers have started to consider the appropriateness of using ring-fencing to protect a regulated utility's operations from that same company's competitive activities. Ring-fencing is defined as the legal walling off of certain assets or liabilities within a corporation, as in a company forming a new subsidiary to protect (ring-fence) specific assets from creditors. Most of the ring-fencing protections to date have followed utility stress situations or have been implemented within the context of a utility merger or acquisition. While I, as a former state regulator, can see the apparent appeal of some of the ring-fencing proposals that have been bandied about, as a former Wall Street utility analyst, I also possess the cautionary worry that hard-and-fast statutes and rules are not the best means to maintain order within the partially regulated/partially unregulated utility sector.
That is also why I differ with views expressed by my good friend Dr. Fred Grygiel and his colleague John Garvey, economists at the New Jersey Board of Public Utilities, in the August issue of the Fortnightly ().
For instance, I do not think any commission in the country-certainly not the MPSC-could have imagined moving ahead on competition if strict barriers were to be erected between the regulated and unregulated activities of a company, including prohibition of the long-expected consumer benefits that would flow from legitimate cost-sharing and close interaction among all members of management. Issues such as these do not require a "legal ring-fencing" as much as call for the establishment of fair and well-defined affiliate relations guidelines suited to the characteristics of the utility companies within a particular jurisdiction.
During my tenure as a commissioner, no regulators in any state wanted to have their authority usurped by their own state legislature. Indeed, those same regulators would not have wanted to promulgate their own rules that sought to lock in limits on a regulated utility's activities based upon what policy-makers believed the future would hold.
Unfortunately, the California and Enron debacles have put enormous pressure on policy-makers, both appointed and elected,