Question: Will your commission still be around in the year 2000? If so, what will it look like? Are you restructuring your commission with the same fervor you devote to electricity, gas, and telecommunications?Response by Nancy McCaffree, Chair, Montana Public Service Commission:
As a regulator I have had the opportunity to listen to economists, energy planners, and other professional soothsayers. I have come to the conclusion that the only certainty pertaining to future forecasts is that they will be wrong 100 percent of the time. Therefore, I am safe in making my own predictions, knowing that I will fare as well as any. Like many forecasters who want to narrow the odds (and presumably keep their jobs), I offer two different scenarios. There are simply too many variables that must be settled in the latter half of the 90's that will determine what regulation will look at in 2000.
I believe the Montana PSC will still be in business as the new millennium dawns. My first scenario follows conventional wisdom and predicts that our PSC will be around, but a mere shadow of its former self. Form will have followed function, and increased competition in the utility sector means the MPSC will oversee fewer companies and markets. Remaining regulated companies and markets will transform oversight from rate-base, rate-of-return regulation to some alternative regulatory model that includes price caps and pricing flexibility. Regulation will largely be centered around retail electric distribution companies and limited review of natural gas services. The MPSC will also act as arbiter in the endless spats that will take place in the telephone industry over interconnection and access rates.
Regulation will remain stronger in Montana than in many states because our sparse population and wide-open distances have prevented some markets from becoming robust. In some of the larger states in the east, regulation may just be a historic memory. The western states will control NARUC, because the rural states will be the survivors in the organization. NARUC staffers will abandon the Beltway, looking for Western jeans and boots, and hoping to make it to retirement.
On the other hand (I have been listening to too many economists, haven't I?), my other scenario, which goes against conventional wisdom, I happen to consider more plausible. I predict that regulation in Montana and across the country may in fact be stronger in 2000. As Mark Twain once observed about erroneous newspaper reports of his death, I believe reports of regulation's
impending death are much too premature. Remember when everyone said nuclear energy would be too cheap to meter? Recall the natural gas shortages of the 70's and predictions that there would be no gas left by 1995? Remember when everyone said the Ice Age was returning and the climate was getting colder? Remember the electrical shortages of the early 80's? Those who champion the impending extinction of regulation may very well be as correct as all these folks!
And I think that forecasts may be wrong for the same reason: Planners overestimated customer demands for electricity; they forgot about rate shock and customer response to prices. I submit that the end of this decade may very well see a customer backlash against utility mega-mergers, higher rates to pay for acquisitions, and poorer customer services from anorexic utilities that slimmed down too much.
Regulation came into existence when the public rebelled against the prices and services of the railroad barons who controlled the main transportation system of the 19th century. I submit that as we approach 2000 an indignant public may once again demand regulation over industries that control the Information Highway - the significant transportation system of this new age. If the masses do not have access to the affordable telecommunication services and energy rates enjoyed by the rich and the business community,
customers may very well storm the legislative and congressional halls demanding stronger regulation. They will be asking for the 21st century version of the protection originally instituted by the Interstate Commerce Commission in the 1800s - old fashioned protection like common carriage, tariffed prices, and nondiscriminatory offerings to small and large customers alike.
Whether conventional wisdom prevails and regulation withers, or my guess of reenergized regulation comes to pass, is entirely in the hands of the captains of industry. If they proceed to merge into ever bigger monopolies under guise of preparing for regulation, they may very well assure full employment for regulators. If industry continues on a path where more energy is spent on merging than on serving customer needs - due to downsizing, shutting offices, and centralizing in distant centers - then the public will cry out: "If you don't serve well, then you must be regulated" (my apologies to Johnny Cochrane). Regulation came into being to protect against corporate excess and greed, and that same type of monopolistic behavior could revive regulation. We are ready, willing, and able to fulfill our historic obligation to the public.
You ask whether our PUC is moving with the same fervor toward restructuring as we are in overseeing the industry. I have to admit we have not yet purchased a Purple Cross burial policy on our agency. We are looking at our functions and budgets to ensure they are appropriate for our statutory responsibilities. Frankly, we aren't devoting as much energy to introspection and contemplating our regulatory navel because we have no shortage of work to keep us and our staff busy. Utilities still want more money, and a number of policy dockets open to our agency and at the federal level keep us occupied. [End of McCaffree response]
Response by Steve Ellenbecker, Chairman, Wyoming Public Service Commission:Yes, the Wyoming PSC will be alive and functioning with real purpose in 2000. We are now taking needed steps to reshape our regulatory model to recognize new realities in regulated industries. We are deemphasizing traditional command-and-control regulation in favor of providing a wider range of needed services to utility customers and encouraging the development of effective competition. We have reexamined and restated our agency's mission, philosophy, and goals in a strategic planning process that was the catalyst for a complete restructuring of our office. To say that we are restructuring with the same fervor we devote to utility regulation understates somewhat the serious attention that we have devoted to regulatory change in Wyoming in 1995. We have refocused the duties, responsibilities, and obligations of nearly every PSC employee.
This process represents a dramatic philosophical shift. Instead of waiting for industry to present proposals for our reaction, the PSC is now working actively to understand industries better and to bring forth initiatives for industry. To reinforce our commitment to actively pursue needed initiatives, we have created a project coordination team to identify tasks and set aggressive deadlines for specific projects, and a customer service and consumer affairs section that handles customer complaints but that also has expanded capabilities to deliver consumer education and support services.
Since March 1995, the PSC has begun three telecommunications rulemaking projects that emphasize improving service quality and providing interconnection standards for competitive entry. We have begun a study of the barriers to competition, opened hearings on our major local exchange company's pricing plan (the first such filing under Wyoming's new telecommunications law, which is among the most procompetitive in the nation), organized a study of Wyoming's telecommunications infrastructure, and prepared a comprehensive report to the governor and legislature on the status of the Wyoming telecommunications. In the electric industry, we have begun a rulemaking for rural electric distribution cooperatives to simplify regulatory oversight. We have also begun a natural gas initiative addressing the challenges to retail customers in choosing commodity suppliers.
Our future focus must be on the customer. When the customer selects a natural gas, electricity, or telecommunications service provider, the PSC must be sure that the customer gets safe, reliable, and high-quality service at a price that fairly reflects its market value. Because utility services are increasingly competitive and technologically complex, our consumer affairs group must reach out to customers through town meetings, educational forums, and dialogues.
Commissions traditionally spoke only through written orders. While orders will remain important, we must also communicate with the public and industry at every opportunity. Technological and legal changes in regulated industries, the competitive reorientation of monopoly service providers, and the proliferation of competitive commodity suppliers will make this communication more vital than ever before. If our PSC is to be successful in the new utility world, our goal must be well-informed customers enjoying more - and better - service choices and options than ever before at lower competitive prices than traditional regulation could achieve. [End of Ellenbecker response]
Response by Boyce Griffith, Chairman, West Virginia Public Service Commission:
The West Virginia PSC will be around in 2000. In some areas of regulation it will look very much the same as today. In other areas of regulation it will not. Regulation as we know it for communication, gas, and industry will fade. Regulation of problems for these utilities have already surfaced and will change the complexion of the PSC. [End of Griffith response]
Response by Lawrence B. Ingram, Chairman, New Mexico Public Utility Commission:
Unless the crystal ball gets confused by actions of state and/or federal legislators, the major role of the PUC in five years will be about the same. We may not be doing as much retro-action as in the past, but doing more activities that encompass the requirements of regulatory competitiveness. More flexible pricing will be developed, reciprocal agreements with other states will go along with tracking of activities in other jurisdictions, competitive bidding on all areas of supply, delivery, and service will become common - regional transmission will take on a more important role. Along with continued exploration of new alliances, approval and denials of mergers will increase. We will see a wide variety of corporate restructuring as well as increased activity in foreign investments. All this will require the PUC to refocus on its main role and adjust as needed. [End of Ingram response]
Response by Daniel Wm. Fessler, President, California Public Utilities Commission:
This issue of agency reform is under active debate both within the California PUC and well beyond it. In mid-September, our legislature embarked on a brief recess between sessions without acting on a variety of initiatives all directed at the future role of regulation and the entity that would perform those functions. While I would hesitate to predict the outcome of that debate, my colleagues Greg Conlon and Jessie Knight have engaged our staff on a broadly cast inquiry into the future mission and composition of this entity. Termed "Vision 2000," we have recently published an assessment of our current strengths and weakness as divined from internal discussion and the solicited participation of the various external "stakeholders" or "customers" with whom we constantly interact. While the initial report does not go beyond the identification of problems and the affirmation of generally stated policy and service objectives, it clearly defines the need for reform.
If I may conjecture on the conclusions that will emerge from stage two of the Vision 2000 exercise, I anticipate a continuing shift of our focus from ratemaking and command-and-control responsibilities to reliance upon competition. Contrary to the vocal expectations of some, I do not see in this future the elimination of a role for government. Indeed, I see competitive models as a means to an end rather than an end in themselves. In 2000 I predict that our successors at the PUC will not have witnessed a fully accomplished shift from the realm of regulated monopolies to the reality of fully competitive markets. We will thus still be in the "meantime" concentrating on facilitating the emergence of competition and ensuring the integrity of the markets. I suspect that we will be heavily involved in making certain that customers have access to information so that their choices may be informed and there are remedies to discipline those who engage in consumer disinformation. Finally, I anticipate a renewed concern for both safety and reliability with respect to the provision of many of the goods and services society - for good reason - has long identified as "necessaries." In the classical era of the regulated monopolist functioning in a cost-plus environment these objectives were readily attainable. In an atmosphere of competition with its inevitable emphasis on the "bottom line" it would be irrational to conclude that safety and reliability are assured.
Assuming that we maintain the confidence of a population that will probably approach 40 million Californians, the CPUC will be tasked to reinvent itself so as to be of service in its third century. My ability to foretell the future will doubtless have been unmasked as flawed if not nonexistent, but my successors will retain significant responsibilities. [End of Fessler response]
Response by Hugh A. Wells, Chairman, North Carolina Utilities Commission:
We expect the NCUC will still "be around" in 2000, and beyond! We do not anticipate that the configuration of the NCUC will undergo significant change before 2000, but restructuring should be "open" to meet changes in regulatory response to changes in regulated enterprise. [End of Wells response]
Response by Roger Hamilton, Chairman, Oregon Public Utility Commission:
Yes, I expect the Oregon PUC will be around in the year 2000, if electricity, gas, water, and telephone services remain natural monopolies at the distribution level, and the legislature upholds its commitment to quality regulation. It will be more difficult to ensure adequate funding of energy conservation and risk-averse renewable and universal telephone service, among other public policy goals. But it is clear that the need to assert leadership in these areas will fall more heavily on the PUC's shoulders as short-term prices and profits supplant long-term generation and societal interests in the mindset of utility directors.
The deregulation mantra was chanted as loudly in Salem as it was in Washington, DC, last spring, and the federal preemption of intrastate trucking provided an opportunity for legislators to
eliminate the PUC's transportation function. This, in turn, gave us the opportunity to look at ourselves and ask, with sharpened focus on energy and telecommunications, what future five years out would drive our structure.
In electricity, I think there will be pressure on utilities to divest generation and transmission assets despite our low regional costs. But, unlike telephones, it is unlikely that new technologies will overwhelm franchise customers at the distribution level. The electricity industry in 2000 will look like natural gas today, with only LDCs regulated. More, not less, staffing may be required to monitor
performance-based ratemaking and pick up responsibilities passed to the states by the feds. Of course, an alternative scenario of inflationary fuel prices and utility incremental costs rising more rapidly than embedded costs is quite possible in this uncertain world. In this case, traditional regulation remains compelling.
Telephone regulation will become increasingly more demanding and more complex as the PUC fosters a competitive environment in an industry still dominated by Baby Bell and the long-distance giants, and customers who perpetually redefine service standards. There will be less rote determination of rate levels and returns, more refereeing among numerous competitors. Universal service standards will change, but the need to enforce them will not go away. Concerns about privacy, consumer advertising and education, and the sale of exchanges to jockey for market niches will increase.
Finally, water regulation will become a much higher priority for the PUC. Oregon is perpetually thirsty, growing in leaps and bounds, and confronting rising costs to extract safe drinking water. Companies face more pressure from both customers and environmental regulators. The PUC will be smack in the middle of these demands in 2000 - torn between affordable rates and a clean, healthy environment.
If we continue to care about equity, quality of service, environment, and our economic future in 2000, then the PUC will be challenged to foster a competitive environment while correcting for inevitable market failures at the same time. If we don't care how the next century begins, we can fold our tents, throw the dice at the gaming table, and tell our children to pick up the pieces. [End of Hamilton response]
Response by Ken Stofferahn, Chairman, South Dakota Public Utilities Commission:
We, and I expect everyone else in the utility world, tells a tale of how deregulation has multiplied and complicated the workload. We don't have a staff large enough to engage in regulatory tail chasing and game playing; we assist in doing what must be done to add some common sense to the process. Common sense tells me there will be a need for us in 2000. We are applying competitive principles to improve the system, and we will have competition in some fashion. That doesn't mean all elements of the industries will be competitive. They won't.
Our past focus was on maintaining fair arrangements between monopolies and retail customers. That will remain. Added to it will be maintenance of fair arrangements between monopolies and "wholesale" customers. Certainly the scope of "what was" versus "what will be" a monopoly is shrinking.
Restructuring is a grand term, but it may overstate the case, given our small number of staff. Virtually all of our staff is and has been involved in deregulatory processes since they began. Our PUC is of necessity characterized by flexibility, not inertia. We are adaptable and we adapt. If restructuring means a shrunken bureaucracy, broadened and updated job descriptions, and development of new skills, we are restructuring. [End of Stofferahn response]
Response by Al Mueller, Chairman, Missouri Public Service Commission:
I think the answer is a definite "yes." At a summit conference of utility commissioners in April 1995 in Denver, CO, it was the general consensus of the 60 commissioners present from 40 states and Canada that a vital role for state PUCs would continue to exist 1) during the transition to more competitive markets, 2) for those portions of the utility marketplace that may not be fully competitive in the short-or medium-term, and 3) even in fully competitive markets. At the same time, the group acknowledged that the role of PUCs will change substantially to accommodate changes in the industries that we regulate. I generally concur with the conclusions that state commissions will continue to play an important role in the utility industry, and that our role in the process will change considerably between now and 2000.
The telecommunications, gas, and electric industries are all in the process of major change. This has been forced by technological development, the markets, and decisions of Congress, the courts, and various regulatory agencies. The divestiture of the Bell operating companies by AT&T to settle an antitrust case, the FERC's Order 636 for gas utilities, and the pending FERC Notice of Proposed Rulemaking for electric utilities have imposed, or will impose, on the regulated industries the requirement to disaggregate and unbundle their various service functions to allow competitors to enter markets that were previously monopolies. While this may foster the development of a competitive market, total deregulation of fixed-facility utility services will require a lengthy transition period.
While regulators must change their approach, and in many cases their attitudes, about regulation, I anticipate that there will still be some traditional regulatory functions to perform. We must continue to provide assurance that core customers that have little opportunity or incentive to "shop around" for utility services can still obtain services and are protected from injury during the transition. We must ensure that service quality remains at adequate levels and that new entrants into the markets are treated fairly by the dominant players already entrenched and providing services.
In the electric business, for instance, the transmission and distribution functions will quite likely remain regulated, but it will be necessary to unbundle service rates to separate the competitive from the regulated services. Transmission services will also need to be unbundled from distribution services to keep retail business distinct from wholesale transactions. This will impose upon regulators the requirement to ensure opportunity for full and fair competition in generation markets, and to prevent the monopoly transmission and distribution services of regulated utilities from becoming bottlenecks that impede the free flow of energy between suppliers of energy and their customers.
Even while PUCs adapt to the new environment by initiating alternatives to rate-of-return regulation, concerns are rising that make the "new" industries difficult to regulate. The disaggregation of functions, some of which are unregulated, combined with utility diversification into other unregulated and nonrelated businesses, complicated the regulatory process. PUCs are still expected to prevent unreasonable cross-subsidization of new and competitive services by the core group of captive customers of the utility.
I believe our task will still exist in 2000, but it will look much different than it does today, as will the entire utility industry. [End of Mueller response]
Response by Cody L. Graves, Chairman, Oklahoma Corporation Commission:
Will there be an Oklahoma Corporation Commission in the year 2000? Absolutely! Will it perform the exact same function as today? I hope not. As industries change, government policies must change. We cannot apply outdated regulatory policies to industries that may not have existed 10 years ago. Does that mean that there will be no need for regulatory oversight in the future. No, not at all. There will always be a need for regulatory oversight. The better question is what kind of oversight will be required in the future. Old fashioned rate-of-return regulation will become less important in the future. As regulators, we will no longer be required to make decisions as to proper additions to rate base. Those decisions should be made by the marketplace. Our job will be to function as the gatekeeper and referee. It will be our job to make certain that all those players who wish to enter a market are able to do so, provided they meet certain entrance requirements. We will have to be vigilant in our efforts to make certain no new barriers to competition are erected. We will also have a responsibility to consumers. That responsibility will lie in making sure consumers understand fully their options in the new competitive marketplace. All of this assumes of course that we will move toward a competitive marketplace, that we will move toward a competitive model in the areas we regulate. While it is virtually certain this will occur with telecommunications, the jury is still out with respect to retail competition for natural gas and electric service. Thus, the only certainty is uncertainty. If we, as regulators, recognize that basic fact and respond to change in an appropriate fashion, I feel confident we will satisfy our statutory and constitutional obligations.
Response by Robert J. Hix, Chairman, Colorado Public Utilities Commission:
Barring catastrophe, the Colorado PUC still will be around in 2000. The PUC and its staff consist of dedicated professionals with many years of experience dealing with all the facets of utility industries we regulate. As Bob Dylan would say, "the times they are
a-changing." Public policy, customer needs (including the ability to make choices), technology, and finances are some of the forces driving change in the utility sectors regulated by state PUCs. As regulators, we need to position ourselves to facilitate changes that bring the benefits of emerging competition to as many customers as possible. Barriers to effective competition should be eliminated, and regulatory processes should be streamlined to efficiently serve the consumers and providers of utility services.
With regard to the structure of the Colorado PUC, our staff is currently evaluating various restructuring options to determine which one most results in a responsive regulatory agency, through which utilities and their customers can be best served. It is likely that the restructured PUC will place greater emphasis on enforcing quality and reliability of service. We will need a stronger section within staff to provide research, policy development, and advice directed toward specific cases. We will strengthen Consumer Affairs to ensure that utilities comply with the PUC's rules and regulations regarding customer rights and services.
A first effort is a proposed "Telecommunications Consumers' Bill of Rights in a Competitive Market." Ten issues have been identified with the intent of specifying basic consumer rights that should be satisfactorily protected under emerging competition. During September 1995, our PUC began statewide public meetings to receive comments about competition in the local telephone market and the proposed consumer rights. This level of effort logically will be extended into the natural gas and electric arenas as competition emerges for those retail markets in Colorado.
While the Colorado PUC currently is involved in several proceedings that address the major policy questions affecting natural gas, electric, and telecommunications services, we are, primarily on a PUC staff level, continuing with the concerted effort to develop a more productive and responsive agency structure. A "Steering Committee" was created, which will focus on organizational structure and efficient use of agency resources. An anticipated result of our restructuring effort will be teams of professionals with interdisciplinary skills and multifaceted cross-training. Recognizing that a significant role of PUC staff is to provide support and advice to the commissioners, we are fervently approaching the task of creating the proper PUC structure to carry us past 2000. [End of Hix response]
Response by Edward M. Meyers, Commissioner, District of Columbia Public Service Commission:
As competition proceeds in the energy and telecommunications industries, there is vigorous debate over whether regulation can be replaced by the market to bring about fair, effective competition. Ultimately the market may be the best regulator. The D.C. PSC fully supports the development of competition, and is committed to guiding its evolution so that all consumers receive the benefits.
The transition to a competitive environment poses many potential dangers, especially for residential and small business customers. As monopoly power shifts to oligopsony power, these consumers could be charged high prices that capture a disproportionate share of a utility's fixed costs. Another danger is the uncertainty created for future energy conservation efforts: If the utility must trim costs to lower rates, will DSM programs become expendable? The need for energy conservation will continue in the era of competition. For the consumer, conservation avoids waste and delivers savings. For the utility, DSM can be a marketing tool to retain consumers that might otherwise choose a competing supplier. To the extent that DSM can reduce the costs of providing energy, it must be maintained, with an emphasis on practical programs that offer a tangible pay-off to consumers.
Energy efficiency can also be promoted through market transformation efforts, a DSM strategy that also provides business opportunities for utilities and financial institutions. Market transformation strategies can include (a) low-cost financing to stimulate cus-tomer participation; (b) increased availability of energy-efficient equipment; (c) development of more efficient technology by manufacturers; (d) customer education and training; (e) financial incentives to upstream market players, such as manufacturers and dealers; and (f) early retirement of inefficient equipment.
The role of the federal government will also be key in the competitive environment. Competition will force utilities to control costs. Thus, state PUCs must be more vigilant than ever. The federal government should also become more active. Over time, all energy service providers should have to comply with more stringent clean air requirements; with stronger efficiency standards - for lighting fixtures, appliances, industrial motors, heating and air conditioning equipment - and with more rigorous building codes designed to minimize waste of energy resources.
With integrated resource planning, we thought we knew what it took to provide reliable service and lower energy bills. Now we are not so sure. The District of Columbia has several large buyers of electric services, such as the federal and D.C. governments, apartment and office buildings, Metrorail, universities, and hospitals. The actions of these entities, when faced with a choice of energy suppliers, could have a profound effect on the remaining customers of the incumbent electric utility. The focus shifts from a centralized least-cost plan to a cooperative, coordinated partnership among all levels of government, utilities, and business, with protection for residential consumers remaining firmly in place.
The PSC must ensure that the public interest aspects of utility service are not overlooked in the move toward the marketplace. Even with increased competition, the PSC must assure that quality of service is maintained, and that adequate, affordable service is provided to all customers. [End of Meyers response]
Response by Kenneth Gordon, Immediate Past Chairman, Massachusetts Department of Public Utilities:
Notwithstanding the wistfulness some of us (de)regulators feel when we recall the shutdown of the Civil Aeronautics Board, we are unlikely to emulate that step very soon in the network industries. Although significant deregulation will likely be desirable in certain aspects of the gas, electric, and especially telephone industries as competition unfolds, there will for some time be a need to regulate critical aspects of the process. First and foremost is interconnection terms and conditions for the retained monopoly elements of the network, whether they are pipes, wires, or loops. Additionally, some straightforward regulation, or perhaps a price cap, will likely be thought necessary for at least a while. Consequently, PUCs are likely to be around for awhile: to regulate and, hopefully, to structure changes as well.
Because the task is changing from one of regulating monopoly to encouraging more open, choice-based markets, new skills and different types of proceedings are needed - even as many and traditional tasks remain, whether by legitimate need or by legal requirement. In Massachusetts the formal structure has stayed in place, but the tasks and job assignments have shifted. In greater part this has meant additional work, but there also has been some substitution of new tasks for older ones. As the new issues predominate, structural changes in PUCs themselves will become essential in order simply to function. At a practical level such changes are likely to evolve out of necessity rather than a priori notions. The details of what needs to be regulated, and how, are emerging as this is written. In electricity,
generation may soon be workably competitive in so