Since the federal Court of Appeals decision in the Calvert Cliffs case over 25 years ago, no power plant may be built without a thorough socioeconomic impact statement. Yet, schemes to alter the entire supply system of a state - or even the nation - are currently proposed with only cursory attention to socioeconomic consequences. Despite heated rhetoric, little discussion focuses on how the people in a given service area will be affected by deregulation and its handmaidens - retail wheeling and stranded investment.Nowhere is this lack of attention more apparent than in the two most recognized depictions of restructuring - the Notice of Proposed Rulemaking (Mega-NOPR) on stranded investment and open-access transmission, from the Federal Energy Regulatory Commission (FERC), and the final restructuring order issued about five months ago by the California Public Utilities Commission (CPUC).
Despite its magnum opus character, the FERC document offers no meaningful assessment of the potential impact of this grand scheme on real people. Indeed, it was like pulling teeth to get the FERC even to recognize that air-quality consequences should be assessed in a systematic fashion. Similarly, the CPUC Order, despite a seemingly endless name-dropping of groups representing minorities and the environment, includes no coherent statement on socioeconomic impacts whatsoever.
Electricity is the life blood for both rural and urban components of industrial society. Economic productivity, public safety, health, and social cohesion all depend upon reliable electricity. In fact, far from having failed, utility regulation has proved a marked success. A regulated electric utility industry has stood at the heart of over two generations of unprecedented socioeconomic progress in this country. Moreover, reliability should mark the sine qua non of any proposed policy to restructure the electric utility industry:
"[M]arkets will not take care of reliability. . . . [W]e are dealing with the laws of physics. Whatever economists may wish, the government may legislate, or FERC may mandate, Kirchhoffs' laws are not going to change. . . . An electric power system is not a gas pipeline, telephone system, airline, or trucking company."1
Electric utility system planners, working closely with regulatory agencies, have built the reliable system we currently enjoy on the assumption of cooperation, not competition. What are the long-term consequences of a different set of assumptions for both generation and transmission? Who will do system planning in an unbundled environment? Who will be obligated to serve whom?
Cost-shifting lends an elitist cast to retail wheeling proposals. If some customers pay less under a retail wheeling regime, other customers - probably those with less political power - may pay more.2
This elitism runs rampant in the CPUC order, where the phase-in gives installed meters to customers with 500-kilowatt (Kw) demand before restructuring even begins (1998), but delays meters until 2002 for customers with demands under 100 Kw. Such a phase-in is fine with the largest users, who will all have open access by 1998. But the more jaded observer will note that this "women and children last" approach ensures that large users get a big piece of a pie that may not be further divided. Simply put, it may well prove impossible to reach the latter phases of the Order. As the British found:
"Providing access for a few hundred or a few thousand large customers is easy . . . extending access to tens of thousands of medium-sized customers is complex. The result was a data shambles."3
If California holds true to form, small users there may come to learn first-hand the dictum of the slave of Ancaeus: "There's many a slip twixt the cup and the lip."
A number of subsets of the population may be especially vulnerable to changes associated with retail wheeling:
Small Businesses. The general consensus assumes that large industrial users will benefit most immediately and directly from retail wheeling. In fact, the phase-in structure of such proposals as the CPUC Order will institutionalize these benefits at the expense of smaller businesses. Many proponents of retail wheeling argue that large firms "need" lower electricity costs to "be competitive."
Yet, if job creation serves as a real goal of retail wheeling, this focus on large firms at the expense of smaller businesses provides a sad irony. Economic development scholars have thoroughly documented the importance of the small business sector in job development.4 Large firms generate the headlines, but small businesses create the jobs. To the extent it interferes with this process, retail wheeling will indeed impose adverse socioeconomic impacts.
At-Risk Customers. The elderly may lie at risk in a retail wheeling environment because they may lack the expertise or flexibility needed to take advantage of the supposed benefits of "customer choice." Lisa Crutchfield, vice chair of the Pennsylvania Public Utility Commission, is one who has raised concerns about the impact of retail wheeling on older citizens.
Minorities, too, may face many of the same difficulties as the elderly: They may be unaware of opportunities, unable to take advantage of sophisticated information, and inadequately organized to form aggregates. In addition, minorities may suffer from the impact of racism on quality of service in a deregulated environment. To anyone who doubts that elitism and racism play a role in the retail wheeling debate, I say: Who do you think the "last resort" customers are?
Rural Residents. In 1935, rural cooperatives helped to pioneer the concept of universal service. At the time, many utilities did not want to serve rural areas because of the low-density population and the difficulty of accessing remote regions. Under a retail wheeling environment, however, various utilities or other generators could cherry-pick the most attractive customers of a rural cooperative. Since cooperatives often serve only one or two large customers - e.g., a ski resort - rates for native load rural customers could rise to offset lost revenue. To put the magnitude of this potential impact in perspective, cooperatives (a) serve about 12 million customers in 46 states, and (b) maintain about half the distribution lines in the nation.
A host of other socioeconomic factors remain unaddressed by the retail wheeling paradigm:
Utility Cooperation. For decades, utilities have cooperated in crises, sharing data, equipment, and skilled personnel. The internecine warfare on the horizon will come at a huge socioeconomic cost as utilities square off against each other over probable takeovers and competition for large users. And, in the area of research and development (R&D), the impact of deregulation on the Electric Power Research Institute will be substantial.
Mergers and Takeovers. An inevitable by-product of deregulation, the recent spate of merger proposals is just the first swell of a gathering wave. Despite academic theories of economic efficiency, consolidation carries a huge social cost that cannot be ignored. The question is: Who benefits in this process? Certainly not the working class: "Labor has always lost ground during conservative deregulatory periods."5 The economic devastation in certain Chicago neighborhoods after the loss of Midway Airlines offers testimony to the human cost of deregulation.
Conservation. Perhaps the most important achievement of the energy industry in the last two decades has been the implementation of an array of conservation measures. Through the combined efforts of utilities, regulatory commissions, and environmental groups, for example, demand-side management programs have saved substantial quantities of oil, eliminated the need for new base-load generation, and reduced air and water pollution. However:
"[R]etail wheeling would eliminate current and future incentives for energy-efficiency programs and would create a demand for the cheapest available power. . . . The long-term energy future would be no more than the aggregate of a myriad of short-term decisions based on price and price alone."6
Environment. The most important environmental concern relating to restructuring is the potential increase in air pollution under the Mega-NOPR. Both the Environmental Protection Agency and a coalition of officials in the Northeast have raised serious concerns over the impact of the open-access provision on transported pollution - especially nitrogen oxide (NOx). There seems little question that the Mega-NOPR would increase demand for less-expensive coal-based generation from areas subject to less stringent environmental standards. Expanded use of these upwind plants could have a significant impact on ozone-related health problems in the densely populated downwind nonattainment areas of New Jersey, Connecticut, New York City, and Philadelphia.
Tax Revenues. Stranded investment is much discussed, but the potential loss in tax revenue to state coffers requires much more empirical analysis. States with substantial amounts of stranded investment - Ohio, Pennsylvania, Michigan, and New York - have at risk a major revenue stream in the form of property, gross receipts, income, and capital stocks. These states already have revenue difficulties and relatively high taxes. Such taxes discourage the industrial development sought by proponents of retail wheeling. For those states, the prospect of marginally lower electric rates in the context of higher taxes or lower revenues will appear a poor tradeoff.
Reciprocity. And what about adverse revenue and general economic impacts if one state institutes retail wheeling but its neighbor does not? The Municipal Electric Systems of Oklahoma - a group that might well benefit from retail wheeling - has shown remarkable lucidity in warning their legislators:
"If we lead in retail wheeling, states with high cost and excess power will have a new market and will 'dump' power here. . . . We would give weaker utilities an opportunity to compete with our healthy ones, with the probability being a weaker OG&E. That's not good for Oklahoma."7
The void of knowledge regarding its socioeconomic consequences will push retail wheeling farther and farther away in time. Each half-baked proposal by a posturing state legislator, and each self-serving analysis by an industrial group, reveals more clearly that proponents of retail wheeling have not examined both sides of the equation. Such asymmetrical proposals are increasingly unconvincing to a skeptical public. If retail wheeling is ever to become a truly viable option beyond pilot projects and experiments, the focus of discussion must turn to impacts beyond the benefit of a few large users. We must not limit ourselves to discussing how this nation might reach competition. Rather, we must obtain answers to a far more important question: What would happen to us once we got there? t
Frank Clemente is professor and head of sociology at Penn State University. He formerly served as director of the University's Environmental Policy Center. Professor Clemente's research on the socioeconomic impacts of electric energy policies has been funded by the National Science Foundation, Rockefeller Foundation, Ford Foundation, and U.S Department of Energy. He has presented his research findings in professional journals, public conferences, and testimony before various utility commissions.
1 See, George Loehr, "Transmission Reliability in the 'Brave New World," Public Utilities Fortnightly, Feb. 1, 1996, p. 14.
2 Those who seek retail wheeling typically aim to change only one thing about their current electricity services: They want to shift elsewhere some of the costs they are now paying. In this aspiration they are joined, of course, by approximately all of mankind." Ralph Cavanagh, The Great "Retail Wheeling" Illusion, E-Source, Boulder, Colorado, 1994, p. 10.
3 See, Alex Henney, "The Power Exchange California Goes Competitive?," Public Utilities Fortnightly, Mar. 1, 1996, p. 24.
4 See, David Birch, Job Creation in America: How Our Smallest Companies Put the Most People to Work, Free Press (1988), p. 14 "[N]et change for comparatively diminutive companies is far more than that for the giants. ... Companies with 1-19 employees accounted for 82 percent of the job expansion, and concerns with over 5,000 employees lost 13.5 percent net. ... [S]mall firms demonstrate a greater propensity to expand than do large ones."
5 See, Kevin Phillips, The Politics of Rich and Poor, New York: Random House (1990), p. 98.
6 See, Douglas Wolf, "Retail Wheeling and the Environment," Sourcebook (September 1994) pp, 14-19.
7 Municipal Electric Systems of Oklahoma, Testimony before the Joint Interim Committee on Electric Utilities, Oklahoma State Legislature, Oklahoma City (January 1996).
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