If you attended any energy conference in the past year, even one on natural gas, I am confident that at least one panel was devoted to the restructuring of the electric industry. Everyone (em Congress, the Federal Energy Regulatory Commission, state legislatures, state public utility commissions, electric utilities, and large industrial users (em appears to be jumping on the restructuring bandwagon.
Statements based on little factual data or evidence (em such as "restructuring will benefit all customers" and "restructuring will lower all customers' bills" (em are accumulating faster than the snow that buried the East Coast last month. It's an accepted truism that a statement made often enough becomes a fact. However, before we create more industry "facts," we need to ask ourselves a number of fundamental questions.
What are we trying to accomplish?
If the answer is lower prices, is restructuring the electric industry the best and least disruptive solution? How many high-cost (i.e., nuclear) electric utilities are there? Has a cost/benefit analysis established the most effective means to lower prices for high-cost electric utilities?
Should all customer classes benefit immediately from restructuring? Almost all of the experimental programs currently being requested by utilities appear to focus on reducing rates for large and medium-sized industrial and a few large commercial customers. Small industrial and commercial customers and residential customers are merely being promised "benefits" some time in the next century. Will all customer classes benefit immediately from restructuring? Do CEO claims that they want theirs to be the "best" electric company translate into lower prices for all customers?
Who should bear the burden of stranded costs?
Are "stranded costs" really a euphemism for "huge debt" incurred in building nuclear generating stations?
Several utilities have suggested that 50 percent of stranded costs should be paid by departing customers that buy electricity from alternative suppliers and wheel it over the high-cost utility's transmission and distribution system. The other 50 percent would be paid by commercial and residential customers that have no choice but to remain on the high-cost utility's system. At first glance 50/50 seems fair. However, today's national usage patterns indicate that industrial customers consume 34.15 percent of electric production, but account for 23.89 percent of utility revenue. Industrial customers' share of consumption is almost 50 percent greater than their share of utility revenue. So, is a 50/50 split truly fair?
Will saddling departing customers with 50 percent of the stranded costs discourage competition and, therefore, defeat the purpose of retail wheeling? Why shouldn't utility shareholders bear part of this cost?
How should stranded costs (if allowed) be collected?
Should low-cost electric utilities be forced to "help" high-cost utilities recover stranded costs?
Should tax dollars (federal or state) be used to "subsidize" electric utilities with high stranded costs?
As incredible as it seems, according to a study in the August 1995 Moody's Investors Service Global Credit Research,
34 utilities have higher stranded costs than equity. Can these utilities survive a competitive market without a stranded-cost recovery crutch?
Is it politically astute to believe that stranded costs can be collected through a national transmission surcharge, thereby benefiting high-priced utilities to the detriment of low-priced utilities? Would a U.S. senator or representative from a low-cost state vote against the best interests of his or her own state?
The Federal Energy Regulatory Commission (FERC) has determined that utilities should recover all reasonable wholesale stranded costs. If the industry (with the exception of the distribution sector) is deregulated and the market rules, will any regulatory body be able to control the actions and reactions of a free market? Or will a free market have to "wait" until the FERC ensures that larger, high-cost utilities have recovered their stranded investments?
Can stranded costs be collected in a competitive environment without the government interference the industry is now disclaiming? Without the FERC's intervention, would there be extra-contractual wholesale stranded-cost recovery?
There has been little discussion about undervalued utility assets such as generating stations that are depreciated and currently booked at less than present market value. What impact should (or will) undervalued assets have on recovery of stranded costs?
If the collection of stranded costs is allowed, how long should the transition period be? Why does it seem to some that a long transition to a competitive market really means "give us time through accelerated depreciation to recover the cost of high-cost generation stations that cannot be recovered in a competitive industry"?
How will deregulation affect rates?
The argument is made that since deregulation of the gas industry the price of natural gas at the well head has been dramatically reduced and the cost of transportation by the pipelines has also decreased. However, local distribution company (LDC) rates have not been lowered. In fact, LDC rates in many cases have increased. Is this a premonition of the future for electric prices?
Residential electric rates in many cases are four or more times higher than industrial rates. Is there empirical evidence that it costs four times more to serve a residential customer than an industrial customer?
So-called "cost of service" studies, whether long or short run, are being questioned by respected economists with increasing frequency. How valid are the assumptions used in these studies? Do the studies have credibility, or are they really based on smoke and mirrors?
Should the transmission grid be opened to retail wheeling at the state level? If it is, can price regulation be enforced? If so, for how long?
Fuel adjustment clauses: To be or not to be? This is indeed a timely question.
Should the generation sector be declared competitive, moved out of rate base, and deregulated? Obviously, some of these generating units have been earning a rate of return and have been depreciated for many years. Is this relevant?
What will become of social welfare?
If the industry is deregulated and all customer classes are allowed to choose their electric supplier for generation and transmission service, how will "last resort customers" be handled? Obviously, the amount of uncollectible bills caused by these customers differs from utility to utility. Should all customer classes of a utility be required to subsidize customers that cannot or will not pay their bills? Should we pool all of a state's utilities uncollectible expenses and allocate the shortfall among all utilities based on revenues? Or, should we pool all of a state's utilities' uncollectible expenses and reimburse the amount to each utility from the state's general revenue fund? The argument could be made that these social welfare costs should be funded directly by the government, not indirectly by the private sector.
If only large industrial and commercial customers are allowed to leave a utility's generating system, should those customers be forced to contribute a "fair" share to cover uncollectible bills? Or should they escape paying a share of these social welfare costs?
What will customers pay for?
Should ratepayer funded demand-side management programs continue? Or should the cost of these programs be paid by those who voluntarily participate?
Should nuclear decommissioning costs (em in excess of funds set aside in trust accounts (em be recovered? If so, should they be recovered from customers that leave the system? If yes, how?
What do customers really want? We all know that they want lower prices, but are customers willing to sacrifice quality for lower prices? Will reliability be sacrificed? Should customers from all customer classes be permitted to choose the level, quality, and reliability of service they want? Over the years I have seen the outraged reaction of interruptible customers when interrupted (em even though they had received the benefit of lower-priced interruptible rates.
How much is regulation to blame?
Are the problems in the electricity industry today the result of regulation or bad decisions made years ago by some utilities?
Many utility executives argue that the construction of new generating facilities required regulatory approval and that in some cases utilities were ordered to build these generation facilities. Are these executives attempting to shift the blame for failed projects by hiding behind the so-called "regulatory compact?" Some regulators are quick to respond that the utility always has the legal burden to prove any request it brings to a regulatory commission. Regulators must make decisions based on the record created during a legal proceeding; regulators cannot go outside the record to make a decision. Therefore, the utility had to prove, on the record, its need for new generation, and the regulators made their decision based on the record and expertise of the utility management.
Should utilities that have made wise economic decisions over a period of years in preparation for competition be penalized for the mistakes made by utilities that have not?
Where do we go from here?
It is surprising that these questions have not received more attention in the past few years. Ten years ago, under the leadership of then chairman Phil O'Connor, the commissioners and staff of the Illinois Commerce Commission advocated a transition from a regulated electric industry to a market-responsive industry. Our staff wrote a widely distributed monograph titled "10 Point Program of Action." In May 1985, based on that monograph, I gave a speech at the Mid-America Regulatory Commissioners Conference outlining the following 10-step program for the electric industry:
s Implement incentive rates to encourage utilities to market additional energy to industrial customers in the short run.
s Adopt centralized dispatching of electricity in order to integrate and use all available electric resources more efficiently.
s Develop power brokerage and auction markets to facilitate the competitive allocation of power requirements among producers.
s Align regulatory responsibility between the FERC and state commissions to promote more consistent and equitable regulatory policies.
s Develop interstate compacts among regulators in different regions to make the best use of an integrated generation market.
s Require nondiscriminatory wheeling of power between individual customers and producers to eliminate unjustifiable differences in price. (We will then have a national energy market.)
s Unbundle electric rates (em for example, itemize fuel costs, transmission costs, and environmental control costs.
s Relax regulatory controls over generation
investments that are subject to effective competition, thereby promoting a diversity of generating investments.
s Permit specialized agreements with individual customers that reflect individual circumstances to increase both short- and long-term energy sales
s Develop spot and future markets to increase the options for expansion of capacity and market information.
Many of the issues I discussed then are still relevant today and need to be addressed. Now, finally, we must begin discussion of all the issues surrounding the restructuring of perhaps the single most important industry serving our nation. And we must make some decisions. t
Ruth K. Kretschmer has served on the Illinois Commerce Commission since 1983. Commissioner Kretschmer serves as chairman of the Commission's Gas Policy Committee and is a member of the Electric and Transportation Committees. She is also chairman of NARUC's Committee on Gas. In June 1995 Commissioner Kretschmer was elected president of the Mid-America Regulatory Commissioners. She has served on the board of directors of the Center for Regulatory Studies at Illinois State University since 1985. In January 1989 she was appointed to the Advisory Council of the Gas Research Institute and currently is chair. Commissioner Kretschmer holds a degree from DePaul University in business administration and economics.
Articles found on this page are available to Internet subscribers only. For more information about obtaining a username and password, please call our Customer Service Department at 1-800-368-5001.