Deregulation, you say? We still haven't seen any.
Let's begin with a quiz. We'll use the multiple-choice format, developed at the University of Wisconsin during the 1960s to address overcrowding caused by the World War II "baby boom." Choose only one of the following 10 possible answers. Be careful. It's tougher than it looks.
Question: What is meant by the term electric restructuring?
A. To provide all consumers with retail access to multiple "energy" providers.
B. To separate the ownership of power generation from other functions.
C. To "unbundle" electricity into a lot of separate services not easily definable but recognizable when one sees them.
D. To shift regulation to the federal government through a process in which one utility sells all the power plants in its franchise territory to a second utility, which reciprocates by selling all its local plants back to the first utility, or perhaps to some other company instead.
E. To create an international market by transferring ownership and operation of all or part of the U.S. electric power system to foreign investors, or to government-owned, foreign utility systems or conglomerates not wishing to be called conglomerates but lacking a better name.
F. It's the same as "convergence" - except in England, where it also includes the provision of water service through pipes.
G. It's an excuse to create numerous huge and quasi-governmental agencies to run certain portions of electric transmission systems to prevent the owners from deploying their assets in a manner that might yield a greater profit than if a disinterested third party operated the same assets for the "public benefit."
H. Answers A, B and C.
I. Answers A, B, C, E and F, but not D.
J. All of the above, except in Alaska and the District of Columbia.
Without tipping my hand just yet, let me note that I believe that true "restructuring" of the electric power and gas industries, with competition and a substitution of markets for regulation, can bring great benefits for all consumers. Restructuring can serve the public interest if it meets these conditions:
It's achieved in a timely manner, with minimal transaction costs;
The process follows market signals and market discipline;
Markets set the balance between risk and reward;
Successor companies receive incentives to become more efficient;
Regulation is reduced to necessary levels;
A national market can emerge without undue barriers; and
Consumers are not bothered with telemarketing calls at dinner time, while in the bath, or at any other inconvenient moments.
The Promise of Competition
I'm not one to overplay my hand, however. Thus, let me offer two caveats that could limit the amount of any expected consumer benefits.
The first caveat: Can competition reduce prices for delivered energy? The problem here is to make an informed guess as to the course of energy prices under the current regulatory model.
Regulation tied to rates of return and cost of service has been in practice since the turn of the century, and the record suggests a predictable pattern of prices. I have texts going back to World War I 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" for many years if we continue moving state by state and company by company. Consumers may see benefits delayed - or worse yet, lost entirely amidst a patch work of different standards for products and services. National brands cannot develop easily if the market works differently in every state. Regulation has not proven it can provide service at lower cost, higher quality and greater innovation than competitive markets, yet the post-restructured markets include a heavy dose of regulation - both for incumbents and new market entrants.
Some use the word "deregulation" to describe what is occurring in the United States. Yet, there is little true deregulation taking place. No state has permanently abolished its utility commission. The Federal Energy Regulatory Commission still regulates all power plants and power wholesalers.
Professor Paul MacAvoy of Yale University recently described the current practice as "managed competition" - destructive of true competition. He suggests we abolish all regulatory agencies as the only way to insure real competition.
This is not the first time I've heard such a proposal. When I was nominated to the FERC by President Bush in 1990, Vice President Quayle was leading a campaign to abolish that agency. I did not take it personally.
It's a truism: No regulator can deregulate unless legislation does it first. To paraphrase a comment from an episode of the British comedy show, "Yes, Minister": The First Rule of Bureaucracy is "keep all you have." The Second Rule is to "get more." One should not expect regulators to reform themselves.
Or, in the words of a former Wisconsin regulator, uttered many years ago, "When you have them by the rate base, their hearts and minds will follow." Sometime later, in another life at the FERC, this same commissioner added, "If you make it profitable for utilities to do something stupid, they will do all of it they can."
Be warned, however. "What today's FERC gives, tomorrow's FERC can take away." At the state level, that means that "any Order is only an Order until it is changed."
On Capitol Hill, Congress first introduced a measure of competition in the electric power industry back in 1978 when it passed the Public Utility Regulatory Policies Act. Though it confirmed that step more than a decade later with the passage of the Energy Policy Act of 1992, Congress may need to finish the job it started but did not complete.
Branko Terzic recently stepped down as chairman and CEO of Yankee Energy System Inc., headquartered in Meriden, Conn. Earlier, he served as a commissioner on the FERC (1990-93) and the Wisconsin Public Service Commission (1981-86). He sits on the board of directors of Public Utilities Reports Inc., owner and publisher of Public Utilities Fortnightly.
10 False Steps Red herrings from those who oppose restructuring.
What Some Say: Why They're Wrong:
Oppose any federal legislation. Going state-by-state discourages the best service offerings. It
stifles economies of scale and scope.
First require pilot programs in each state. Are the 50 states (and D.C.) so unique as to warrant a separate
trial in each one?
Don't give up subsidies for deserving rate classes. Rates in many states violate even the most widely accepted
cost-of-service principles. Inadvertent subsidies are a disservice
to the public; when intentional, they're simply bad policy.
Wait for the "win-win." Politicians want change with no change. But it can't be done.
Maintain tax revenues. Property taxes are either ad valorem or they are not. Face facts:
Tax shifts may be unavoidable under restructuring.
Save all jobs. Keeping employees on board to do unnecessary jobs doesn't
help them or society. A healthy economy offers the best
route to new jobs.
No plant closures. Running obsolete plants will boost costs, stifle innovation and
discourage new investment in research and development.
Mandatory ISOs to run transmission. Our natural gas pipelines are investor-owned. The system works
well and is increasingly competitive. Why not a "for-profit" or
"competitive" sector for electric transmission?*
Only with a guaranteed rate cut. I say, "Rate cut today, then we talk."
Not without tax funding for "public benefits." Do we really need an entirely new round of targeted programs
to favor demand-side management, environmental pork or
other technologies loaded onto electric and gas rates as
a hidden tax or a price exacted for doing what's right?
* New ultra-high-voltage DC cryogenic lines in pipeline corridors may be able to compete against established, above-ground high-voltage systems. In fact, even the wireless transmission of electric power was proposed by the turn-of-the-century inventor and electrical genius Nikola Tesla before his death during World War II. (I understand that some of Tesla's papers are still classified as "secret" by the U.S. government.)
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