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Beyond Balkanization

A proposal for utility regulatory and industry reform.

Fortnightly Magazine - April 2011

The nation’s ongoing search for energy solutions gives rise to the question: how is the electric utility industry doing and could it be doing better? The “deregulation” the industry went through in the late 1990s has turned out to be more about “restructured regulation” than it was about “deregulation.”

Today the industry faces significant challenges, many related to carbon. These include nuclear generation; wind power and renewable energy in general; natural gas; electric transmission; demand-side management; and technological innovation and the smart grid.

A common denominator of these challenges is they all require a lot of money to address. The electric utility business remains a capital-intensive one. And the business proposition for many initiatives is uncertain.

Regulators and legislators have resorted to various approaches, ranging from the development of state authorities to finance carbon mitigation, to the creation of state-operated regional cap-and-trade entities such as the Regional Greenhouse Gas Initiative (RGGI), to the creation of state-run renewable energy credit (REC) markets. These approaches overlap each other and would likely have been overlapped yet again rather than have been supplanted if a national cap-and-trade law were enacted.

Government will have a huge role in energy policy and energy regulation no matter what. However, the specific role that government takes is important. The distinction between government as regulator and government as industry actor is very important. We’ve known for a long time that the industry restructuring that began in the late 1990s was creating the need for new regulatory responses. We weren’t sure what the response was, but the pre-existing regulatory framework seemed unlikely to serve the needs of a restructured industry. We can’t complain too much about slow progress in developing good responses, because the problems and issues are really complicated. But we have made some missteps, in making recent “government as industry actor” assignments, and by now we probably should have made more progress.

My proposals probably won’t make anyone happy. In a nutshell I believe we need to encourage the formation of bigger utility companies, and we need to overhaul our regulatory processes, making them clearer and more robust as a result.

Small Isn’t Beautiful

The electric utility industry is reasonably positioned to meet today’s needs. However, it hasn’t changed or expanded fast enough to meet tomorrow’s needs. Industry growth is hamstrung; the industry isn’t being allowed to grow enough to address the many roles it ought to be addressing.

Some say the industry’s challenge today is to engage in more long-term planning so that solutions to today’s challenges can be identified. Long-term planning does make sense; more foresight is needed.

But some issues go beyond long-term planning; examples are capital formation and program creation and implementation.

Many projects we see as potential contributors to our energy challenges are simply too big for a fragmented industry to carry out effectively. Recent efforts

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