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Beyond Balkanization

A proposal for utility regulatory and industry reform.

Fortnightly Magazine - April 2011

in a robust and thorough manner, as the public expects. We need to enable regulatory bodies to take on and match the large utility companies the nation needs to meet our energy challenges. We need to invest in regulation to overcome the sense that “big is bad,” and to avoid a situation where regulators are outmuscled by large, well-capitalized companies.

Even more important is our need to develop creative and innovative regulatory approaches to the challenges we face. These challenges go far beyond cost-of-service regulation, which is complicated enough by itself. Even if the utility industry could identify new regulatory approaches on its own, regulatory bodies need the expertise, resources and confidence to see the merit of new approaches and support them.

Reinvesting in regulation also will bolster public confidence from the standpoint of regulatory ethics and professional competence, and will build a culture of excellence in regulatory institutions adequate to deal with tomorrow’s energy challenges.

While we’re at it, we also need to clarify the jurisdiction of utility regulatory bodies. Local state regulators are spending scarce resources on wholesale power and transmission issues that are properly, from a legal and practical perspective, within the realm of the Federal Energy Regulatory Commission (FERC). Wholesale power costs form a substantial part of the typical utility bill, but Congress has already given FERC exclusive and plenary authority with respect to wholesale electric rates. There may be a degree of inertia from state regulators who were accustomed to a larger role with respect to power supply and wholesale power transactions when the industry exhibited a greater degree of vertical integration. But vertical integration is more the exception than the rule today.

Similarly, local state regulators spend too many resources filling their role as the siting body for interstate transmission lines; when a proposed electric transmission line is to cross through three states, three states need to permit that line. By contrast, when a gas pipeline is proposed to pass through the same three states, FERC permits the line.

I don’t know the reason for the electric-natural gas distinction. Certainly there is a substantial national (federal) interest in electric transmission. It’s also true that an overhead electric transmission line is more visible to the public than is a ground-level gas pipeline. However, there’s substantial local interest in gas pipeline siting and construction, yet the federal government does an adequate job siting gas pipelines—and it should have the same authority over interstate power transmission systems.

Getting Ahead

Our nation faces significant energy issues, and we’re giving in to the temptation to address them on an issue-by-issue basis. We aren’t getting ahead of our challenges.

We need renewable resources, we need nuclear power, we need demand-side resources and energy efficiency. We need both plug-in electric vehicle deployment and natural gas vehicle deployment. And under the currently constituted industry structure, we’re looking too much to government to address these development issues.

We must build an industry and regulatory framework that fosters an adequately sized and capitalized industry, overseen by adequately resourced and staffed regulators with a clear mission, to