Policymakers reflect on how it "coulda been." Nearly all insist "my state did it best."

California, Massachusetts, New Hampshire and Pennsylvania have deregulated their electricity markets. Yet they're all ironing out wrinkles. California at press time was bracing for a vote on the Proposition 9 recall petition. New Hampshire still faced federal lawsuits filed by Public Service of New Hampshire seeking to quash efforts to bring competition to the state. (See, U.S. District Court, Concord, Docket No. 97-97-JD; U.S. District Court, Providence, Docket No. 97-121-L.) In addition, an October hearing was set at the 1st Circuit Court of Appeals (Docket No. 98-1764) in Boston on the appeal of a temporary restraining order blocking deregulation.

Time has come to look back on these restructuring efforts and evaluate what might have been done differently in these states, or what should be done in other states only now beginning to formulate policy.

With this in mind, we asked policymakers to reflect on what they might do differently were they to do it again. Each participant was asked the same questions:

Deregulating Over Again. If you had to deregulate your state's electricity market again, how would you do it differently?

Learning From Mistakes. What mistakes were made? What did you learn from them?

ISO vs. Transco. For the Californians, if you were to visit restructuring again, would you put aside the model of a non-profit independent system operator in favor of a for-profit Transco that owns the grid as a going concern? For other states, should you start off with a Transco instead of an ISO? Either way, do you wish you had more input in what was largely a federal process to choose the ISO?

Interventionist or Free Market? In consumer education and in promoting conservation and renewable energy, should you have leaned more toward a interventionist position or a free-market approach?

Learning From Others. What did you learn from states that have come after you in the deregulation process? Or, if applicable, from those who preceded you?

Plants For Sale. Is the quick selloff of generation good, or will it hurt state interests in the long run?

Who's Best? What state has had the most successful deregulation process?

CALIFORNIA: Jessie J. Knight Jr. and P. Gregory Conlon, commissioners, California Public Utilities Commission.

Coming from the San Francisco Chamber of Commerce and several high-profile corporate positions prior to joining the commission, it's easy to understand how Knight brought a free market perspective to his state's restructuring process. In the state's restructuring order, he dissented from the majority opinion, which was led by Conlon, the commission's coordinator for the electricity industry. The main difference between the two sides was that the majority felt the power exchange was essential for a robust market for small consumers; the minority felt the market could have gotten to the same place without the formal structure. Conlon says he's not an interventionist, that he "falls in the middle" and is for competition.

Jessie J. Knight Jr.

Commissioner, Calif. PUC

?Deregulating Over Again.

"I would have been even more fanatical about introducing and pushing the concept of direct access. Fanatical is probably too strong a word, but certainly trying to promote that agenda even more fiercely.

"Maybe even more important was to work much more diligently at bringing outside points of view of end use customers outside the classic group of intervenors and stakeholders that are usually involved ¼ particularly for small industrial, small commercial and quite arguably, even some large industrial users. Not the regulatory people, but the people who are involved in the operations and the expansion of some of these businesses."

? Learning From Mistakes.

"There are things we could have done better. However, because of the overarching umbrella of a public process, it's hard to say mistakes were made."

? ISO vs. Transco.

"Would a Transco have been better than an ISO approach? The answer is probably yes, but in the real world, that was probably not in the cards because of the fact of the heated debate at the beginning. To even begin to do this we probably couldn't have been successful putting a Transco model into place. I've got to be careful here because I don't want to slam my utilities or anybody else, but I just think that the political will would probably not have allowed that to happen."

? Interventionist or Free Market?

"I was converted...at first I was against it because I thought over time the market would, as it evolved over time, educate its customers in the appropriate way. But considering we were starting, literally, in this restructuring, from point zero, then it did require government to inform people."

Learning From Others.

"The way we stack ourselves up against other states and whether or not one state has been successful or not, in the regulatory world," is not so important.

"What was the heart of this was to unleash the competitive juices that are there in this economy and the smart people who are involved with creating new innovations and technology who are going to put out new products and services in the long run...like in telecommunications.

"The real judgement of success are the cell phones and the satellites and the PCS applications, fax machines...I argue that's what's going to happen in the electric industry...[especially] when you start talking about Southern California Edison trying to become a telephone company or another small telephone company getting into the electric business."

Plants For Sale.

"I don't think it's a negative whatsoever because you've expanded the portfolio of participation and the number of people in the types of businesses that are involved with generation that is sure to feed the fires of competition and is sure to feed the fires of innovation on how to provide low-cost energy sources."

? Who's Best?

"Of course I'm parochial here, but I think California, by far."

But "there is no wrong answer. We as regulators may use benchmarks to say who's ahead and who's not ahead. What is most important for this country is that the principles of competition are being furthered ¼ it's almost a false comparative."

P. Gregory Conlon

Commissioner, Calif. PUC

?Deregulating Over Again.

"We're very satisfied with what we did. We had the most difficulty with ¼ getting agreement with the legislature and working with the legislature. So one lesson learned is you need to get the legislature involved early on.

"If we would have known the electric utility companies were going to divest 100 percent of their generation, we probably would have done it a little different than the [power exchange]. The PX wouldn't have been as important. Because market power is our number one issue. If we'd known how fast they could have really done a Transco, I personally would have pushed for it."

? Learning From Mistakes.

"I'm sure people would have done other things. But structurally - the ISO, the PX, the opening of the metering and billing, consumer education ¼ it [was] good.

"Consumer education, we were criticized for, for spending the amount of money we had. The criteria for consumer education was how many customers did you want to be aware of what we were doing? And once you make that decision, the second decision is, 'What does that cost?' Well, we first made a decision that we wanted 60 percent ¼ then we went to 25 so-called experts on a panel and they said if you want 60 percent, it's going to cost $89 million. And we said well ¼ should we change our 60 percent? And we said no, let's spend the money. I don't view that as a mistake."

? ISO vs. Transco.

"It's a pragmatic answer. Tell me how fast you're going to do one versus the other. Because it shouldn't be the driver, as to setting the timetable. And that's what we looked at. [Transmission is] only five percent of the bill. So you're not going to hold up the whole deregulation for 5 percent ¼ an ISO was a convenient compromise."

Interventionist or Free Market?

"We did the right thing. We let the legislature decide what to do to make sure we didn't throw out the baby with the bath water on the renewables. And they decided to put up so much money and make sure half of it went to maintaining existing renewables and half of it went to encouraging new renewables - $540 million. And then funds for research. And we respected the legislature to make that decision.

"As far as consumer education, they, in [A.B. 1890] instructed us to have consumer education, they just never realized how much it would cost to do it right."

Learning From Others.

"I think Pennsylvania did an interesting thing. They created an incentive for the customers to switch ¼ in essence, they used the utility stockholders as whipping boy to provide incentive, by not charging CTCs to the people who switch ¼ I'm pretty sure you get a 15 to 20 percent discount if you switch.

"But it all came out of the stockholder. I don't think that's a balanced view. We're supposed to be here to balance the interests of the two."

Plants For Sale.

"I think it's an outstanding development."

? Who's Best?

"I think we have [restructured the best]. Because structurally, we've done the whole thing. I think Pennsylvania's got more customers who switched ¼ but again, the only customers that saved were the ones that switched, where in California, they're given a 10 percent rate reduction up front and they'll get another 10 or 15 percent in 2002 and then they'll get another 10 percent in 2007, 2008."

MASSACHUSETTS: Janet Gail Besser, chairwoman, and Paul B. Vasington, commissioner, the Massachusetts Department of Telecommunications and Energy.

Besser, who comes from nearly 10 years on Massachusetts and New Hampshire regulatory staffs, thinks of herself as a pragmatist, more on the free- market end of the spectrum, but she's "not religious about it." Vasington, meanwhile, didn't begin working on the commission until March 2, four months after restructuring legislation passed. He has been involved with the two companies with whom the commission is litigating, Fitchburg Gas & Electric Co. and Western Massachusetts Electric. Prior to working in the private sector, Vasington was on the commission telecommunications division staff for six years. He worked with former chairman and free marketeer Ken Gordon.

Paul B. Vasington

Commissioner, Mass. DTEDe

Deregulating Over Again.

"The commission should have looked more carefully at how long the transition period should be, to a point where the market is able to clear a price for generation service.

"We had a legislative need for short-term rate reductions here and that has impacted our ability to transition the market to a place where we can actually clear a price, a market price for generation. I would have done that somewhat differently.

"I would involve some kind of mechanism to insure that the regulator takes steps away from the process once competitive market forces are sufficient. There is a reluctance for regulators to step back ¼ there's always that temptation to want to direct the process and direct the outcomes."

Learning From Mistakes.

"One mistake that was made was obtaining short-term rate relief at the cost of allowing a market to develop more quickly. There's an impatience in wanting to obtain the benefits of competition right away."

ISO vs. Transco.

"At the moment, we're pursuing an ISO model and from all indications its been fairly successful ¼ we have had quite an ability to affect that and to be a player in that through the New England regional commissioners group. So I think at the moment I'm pretty happy at how that model is working."

? Interventionist or Free Market?

"We leaned very much toward an interventionist position in this state. My personal preference is to rely more on market forces, but we do have legislative requirements in place to be fairly interventionist. We have very strict requirements on labeling and other information that has to be provided to customers. I have a little more faith in the marketplace to provide that information."

Learning From Others.

"We learned from Pennsylvania ¼ the value of a settlement process that involved the active participation of the commissioners. I think they were able to fashion a process that got right down to what the various interests really needed and in that way, they developed something that gave [utilities] the opportunity to recover their stranded costs all at the same time, creating a market that actually can clear a market price for generation.

"Our process was more litigative than legislative. From that I learned maybe their model had some benefits."

From New Hampshire, "we learned the importance of providing principles ¼ what would be allowed and what wouldn't be allowed. And the best example contrasting with New Hampshire was in 1995 we committed to full opportunity for recovery of non-mitigatable stranded costs. And once that principle was set in place, it really created a framework for all the negotiation and all the discussions and legislative debates around what needed to be done."

Plants For Sale.

"I think it's been a very position development. We've had some successful divestitures, successful to the point that no one had dreamed of at the start."

Who's Best?

"I think Pennsylvania [is] because they were able to develop a process that got everyone in a room and got everyone to lay out what their most basic interests were. And then with the involvement of the commission, they were able to craft an agreement that pretty much respected all those most basic interests ¼ without giving away too much to each party."

Janet Gail Besser

Chairwoman, Mass. DTE

Deregulating Over Again.

"There were issues where we needed to balance between easing a transition for consumers and insuring the competitive market could flourish.

"Let me talk about some specifics. One is the standard offer ¼ our original vision, there was no standard offer then. It was basically, we're going to make this change, everyone will be out there, everyone will be choosing."

"It's a seven-year price pass that guarantees customers a 10 percent savings even if they do nothing. The Department's original proposal didn't have anything like that.

"What I would have done differently ¼ is include in that a mechanism for us to revisit it sooner than the seven years. We are, in fact, looking at doing that."

Learning From Mistakes.

"There were dramatic changes in the New England electricity market with the electricity outages that changed that market price. When 2.8 [cents per kilowatt hour] first showed up, people were talking market prices around 3. Then the nukes go out. The nukes are staying out longer than anyone anticipated and into that market you suddenly have this 2.8-cent standard offer dropped in. It had some distorting effects.

"As soon as the divestitures took place, that price went up. Millstone 3 came back on line this summer, which was great. And the market is changing, we have a lot of power plants in the pipeline. As they come on line, the market will change. But that lack of flexibility that was built in ¼ I think that's something I would do differently."

ISO vs. Transco.

"I was a big proponent of the ISO model. I don't see it as versus a Transco model, I see it as an evolution to a Transco model.

"The New England Conference of Public Utility Commissioners was actively involved in the negotiations between NEPOOL and the ISO establishing the first ISO contract. We're involved now. The regulators have a seat at the table."

? Interventionist or Free Market?

"Information is important for customers to make effective choices. If they don't know what they're doing, if they don't have ¼ information they need, their choices will not be effective.

"We're not talking about milk here. We're talking about an industry that's making a transition from being regulated to being independent. It's a product most people never think about. I think the information disclosure requirements are important."

Learning From Others.

"Particularly looking to Pennsylvania, I think the standard offer pricing [has helped us] ¼ Their standard offer, which they call a shopping credit, was high enough and is high enough to let a real market-clearing price develop. And ours is not."

Plants For Sale.

"It is a great development. We are getting premiums for our power plants. One and one-half over book [value] for Mass Electric, something like one and one-half to two over book for Boston Edison, and six times over book for Com Electric. Com Electric is one of our highest priced utilities here in Massachusetts. Clearly the subsidiary of The Southern Co. that bought the power plants there wants to be in this market, wants to get a foothold. Selling your plants early is a real advantage. Six times over book. In a regulatory setting we could have never gotten that. We would have probably been thrown out of court on one and a half times over book."

Who's Best?

"So far, Massachusetts. "We all can learn from each other ¼ We're going to pick the best successes out of Pennsylvania and use them. We're going to pick the best successes out of California and use them. And I trust they'll do the same."

NEW HAMPSHIRE: Rep. Jeb Bradley (R), chair of the House Science, Technology and Energy Committee; and Michael W. Holmes, consumer advocate, Office of Consumer Advocate.

Bradley, author of the state's deregulation legislation, might qualify as an "interim interventionist." He believes there needs to be transition service for small business and residential customers. Although the litigation with Public Service Co. of New Hampshire was a driver, he helped pushed through his committee S.B. 341, which updated the restructuring law and instituted transition service for 2.5 years.

The state has a restructuring settlement with New England Electric System, so those customers already are in transition service or are choosing suppliers. Unitil Corp. also has filed a restructuring settlement with the Public Utilities Commission.

Holmes believes regulation has failed in his state. He has supported restructuring from the beginning. At press time, he was trying to win more funds for his office from the legislature. He says no one imagined what restructuring was going to cost - for litigation, for hearings, for the legislative process, for lobbying, and lastly, for consumer education. He says he knew it was going to cost more than planned, but perhaps "didn't sound the horn loud enough."

Michael W. Holmes

N.H. Consumer Advocate

Deregulating Over Again.

"If it could be done, to have somebody who was more of an overall coordinator.

"[Also] I think you better understand, up front, that it's going to take resources and you better have those resources ready, set aside. Because if you have to go through the legislative process to get that after the fight starts, you're already way behind.

"I would say that for our office to have gone through this we would have basically needed double the budget that we have. Our budget's about $400,000 a year."

Learning From Mistakes.

"I believe what the utilities will do to the extent that they can is they're going to try to get it to federal court and try and litigate these issues in federal court for no other reason than to delay. Every day of delay is a day of victory if you have high rates and you don't want to absorb any of your stranded costs."

ISO vs. Transco.

"We have not contemplated a fully regulated transmission system ¼ that's an interesting concept. I haven't thought about it.

Interventionist or Free Market?

"The approach we've taken is the interventionist approach. I believe in free markets, but I think you first of all have to establish that you have a free market. I don't think there's any such thing as simply pulling the plug and assuming a free market is going to happen. Free markets are free markets because the government has set up over the years vigorous anti-trust policies and has enforced them. To take something that's been a strictly regulated monopoly and to simply draw a line and date and say after this date, this is going to be a free market, I think is really naive."

Learning From Others.

"Massachusetts and Rhode Island ¼ we learned that they were too generous. That they, in my opinion, did not make as a good a deal as they could with the utilities and we could see, sit here and watch, that there wasn't any market developing. They hit their [customer choice] days and nothing happened."

Plants For Sale.

"Yes, they sold these plants [in New England] and they got a nice market-to- book ratio of 1.5, but they ended up taking a big chunk of that. Now you have to ask yourself: if you're a sensible ratepayer, why is it such a good deal for you?

"If that was the value of them, weren't you going to be just as well off as holding on to them? Value is value. And you look behind it and you realize one of the things that was going on is several of the large plants were going to be depreciated in 2007, so there would have been no capital carrying costs or depreciation. To just say we've got a market-to-book ratio of 1.5 and we'll give customers a good piece of it and we'll walk away with a good piece I think is very short sighted."

Who's Best?

"I don't know that any state has had a successful deregulation process yet."

Rep. Jeb Bradley

Chairman, N.H. House energy committee

?Deregulating Over Again.

"I would want to have placed more emphasis on negotiations prior to a restructuring order. And would have like to have seen that process move forward rather than watch us end up in court.

"We have one of the more aggressive sections on stranded cost recovery which clearly, on the interim order, was a 60 percent recovery and it forced the litigation. So, having said that, there needs to be burden sharing on the issue of stranded costs when you have a utility that has rates that are significantly higher than a regional average."

? Learning From Mistakes.

"Not having intense negotiations prior to having a restructuring order. That was clearly a mistake ¼ The issue is stranded cost and I think negotiations would have been helpful for us."

ISO vs. Transco.

"I think we're going to have to wait and see how the ISO model works out. I think there's been, at least in New England, some unanimity about going with an ISO model but there's still some questions remaining as to when it's going to be operational in terms of a market-clearing price."

Interventionist or Free Market?

"From my perspective, having seen what the PURPA-related rate orders have done ¼ My sense of a renewable policy is it's got to be across the board and it's got to be federal.

"I think the market should be deciding this. My point is if there's going to be a renewable policy, it should be a nationwide renewable policy that doesn't place individual states at disadvantages.

"Customer education, that's one of the critical roles of the Public Utilities Commission to make sure that the customer education is funded and it's adequate and it's information-based as opposed to opportunities for different entities to promote themselves."

Learning From Others.

"I think the Pennsylvania securitization with PECO is a good precedent. So that's clearly something we've learned. In terms of Massachusetts, I think everybody virtually agreed that the standard offer [transition period] in Massachusetts was too long, so we agreed to something significantly shorter. Ours is called transition service, two and a half years. In Massachusetts the term is seven years.

"We're looking at [California's] securitization proposal again because ours has not passed so, but obviously now there is a referendum that puts that in doubt. Ours [H.B. 651] has passed the House, but did not pass the Senate."

? Plants For Sale.

"I think it's a good development.

"Obviously the NEES assets sold at 1.5 over book [value]. The sale was able to mitigate stranded costs and lower rates. Presumably US Gen, by virtue of the fact that they're very knowledgeable about competitive markets and all the things they've been doing, will be able to have paid the price they've paid and still be profitable and deliver power to customers at affordable rates."

Who's Best?

"I guess I'd have to say Massachusetts ¼ at least with NEES, because it significantly lowered rates. Rates are lower, customers are getting the opportunity to choose.

"Nothing is absolutely perfect, but from my perspective I think it was pretty good."

PENNSYLVANIA: John M. Quain, chairman, Public Utility Commission; and John Hanger, former PUC commissioner.

From watching deregulation and its aftermath unfold in Pennsylvania, one might conclude that Quain and Hanger often stood on either side of the aisle when it came to competition. Both were appointed to the commission in April 1993. But Hanger wasn't reappointed when his term expired this past April. The former commissioner leaned toward a consumer view; Quain comes from a background of representing utilities. Quain insists, however, that he seeks to bring balance to the process and look for "creative ways to add value from everyone's perspective so that we can get all interested parties to have a stake and make it work." Both men sponsored a formal motion to begin the PUC investigation into restructuring in April 1994. The investigation took two years and came after a July 1995 staff report that advised against changing state laws to allow for competition. In 1996, Quain was asked by the governor to convene a collaborative to develop a piece of consensus legislation, which eventually passed. It led to appeals from the state's utilities that are now being negotiated.

John M. Quain

Pa. PUC Chairman

Deregulating Over Again.

"I don't think I would do it differently. I'm very proud of the process we followed and the results we achieved so far."

Learning From Mistakes.

"There's an awful lot of money at risk and people hold very strong opinions as to how you move from the monopoly environment to competition. On the utilities side and on the consumer side.

"We needed to go through the process of litigation. We needed to go through the process of decision making and the process of negotiating results to try to achieve the balance that gives everybody a stake in the outcome."

ISO vs. Transco.

"I think every state regulator who's part of a grid wants to have an appropriate level of influence on the development because it's important to the region, the development of competition."

"I don't hold a strong opinion on [ISOs vs. Transcos] at this point. I'm still looking at the issue."

Interventionist or Free Market?

"We've taken a very proactive role on consumer education, a less active role in terms of labeling. It's very important that consumer education be just that - education and not marketing."

Learning From Others.

"We looked very carefully at the California approach, and tried to factor in how to reduce the controversy surrounding the passage of that bill. And I think we did that through the use of the collaborative process [for] ¼ comprehensive legislation."

Plants For Sale.

"You've got to look at that on a case-by-case basis and look at the specific generation units that are up for sale. We've got two companies in Pennsylvania that have indicated an interest in divesting themselves of their generation and simply becoming a wires company - GPU and Duquesne.

"We're looking at that. The law does not require divestiture, nor does it prohibit it. There are issues to deal with on both sides. For example, with divestiture, which of course the marketing community is much more in favor of, what do you do with the net proceeds of divestitures in terms of crediting it against stranded investment? For example, how do you make sure those assets are sold at an optimum market value so you can maximize the proceeds coming back?"

Who's Best?

"Pennsylvania. ¼ because we've taken a great deal of time and energy to try to bring all the interested stakeholders to the table, hear them out and try to develop consensus approaches where we can iron out our differences through negotiations wherever possible ¼ When the PECO restructuring proceeding was concluded, we came back and renegotiated the settlement that avoided that litigation. When the PP&L decision was final and litigation was filed, we came back to the table and negotiated away those appeals. We're doing the same with the two GPU companies right now.

"We're fortunate in Pennsylvania that we have people that are very interested in making this work, making it a model approach to deregulation and as a result they're willing to compromise for the greater good ¼ I don't know whether other states are dealing in the same kind of interests at those tables."

John Hanger

Former Pa. Commissioner

Deregulating Over Again.

"The lack of either a clear national policy requiring divestiture or a clear national policy requiring independent system operators has stunted the wholesale markets and has created bottlenecks and other forms of market power.

"I believe the country would have been better served if we had a national policy requiring divestiture of generation assets from transmission assets. I think it's an open question whether an independent system operator is an acceptable substitute for that preferred policy. ISOs might work acceptably to meet market power concerns and other issues if they were ubiquitously created and big enough to really prevent the balkanization of the marketplace."

Learning From Mistakes.

"What I learned is the electric utilities have a huge amount of political power in every state capitol. I mean I knew that going in. We assessed it beforehand and I think in Pennsylvania at least, one could make a good argument that, despite that significant amount of power, there's been a reasonable result.

"And for state officials who are interested in competition and want to see competition, they have to understand that somehow or another that FERC has to be made an ally and not an enemy. And that there has to be flexibility and ambiguity about where these lines are between state and federal authority. And if you insist on drawing hard and fast lines, all that's going to do is give comfort to the enemies of competition."

ISO vs. Transco.

"As somebody who's just endorsed a national policy of divestiture, I think ideally we would have had a Transco model.

"Should states be more involved at NERC? Yes. Should states be more involved with their ISOs? Absolutely. But there's only so many hours in the day."

? Interventionist or Free Market?

"The government has a role here to absolutely try to do the equivalent of food labeling and finding the right balance in terms of emission disclosure and other issues. It's tricky. But I don't believe the market by itself should be allowed to operate without some generic rules concerning what customers should be told."

Learning From Others.

"Somebody had to go first. Just because I disagree with some of the things that have been done in California, it doesn't mean I'm not grateful for what California did.

"The things I think other states have done, a few states have done well, better than Pennsylvania, primarily revolve around the issue of divestiture. And perhaps some of the ISO rules."

Plants For Sale.

"If it's tied to quantifying stranded costs and it's tied to remedying market power issues, it's generally a good development. If it's not tied to either of those two things, it's probably a neutral development."

Who's Best?

"I don't believe Pennsylvania is anywhere nearly perfect in terms of creating a genuinely competitive market ¼ I think Pennsylvania so far is the state that has provided the most opportunity for competition in the transition period.

"A state to watch might be Texas. Maybe Arizona. Those would be two states that I think have an opportunity to go beyond Pennsylvania."

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