Even with convincing evidence that deregulation has failed to deliver promised benefits, efforts to restore public oversight face tough resistance. The reasons involve policy inertia—and blind faith in free markets.

Half-hearted deregulation hobbles the forces of supply and demand before they can get out of the gate.

New baseload generation is needed in many areas of the United States, but financing new plants will be particularly challenging in restructured states where generation facilities are no longer included in rate base and therefore not financed through the traditional rate-of-return paradigm. A market hybrid approach—in which new baseload plants would be partially owned and financed by the regulated distribution company with the other portion owned and financed by the unregulated generation company—would combine the advantages of lower cost capital and regulatory oversight associated with traditional rate of return regulation, with the cost control and efficiency associated with competitive markets.

Perspective

The crisis of confidence in today's power industry is, at its heart, a crisis of ideas.

 

New legislation would tackle the most difficult problem (em low load factors for small-volume customers.

We commend the Natural Gas Competition and Deregulation Act, SB 215, passed by the Georgia General Assembly in March. (Governor Zell Miller was expected to sign the bill in April.) The Georgia legislation envisions a new framework for regulating the retail gas market.

Why will cost-of-service studies continue to prove useful in a competitive market?

Cost is one of more than a dozen factors to consider in setting prices, whether in a regulated environment or a competitive regime. However, the relative significance of these factors will change under competition, when understanding the true cost of an individual service will actually become more important than under regulation.

Performance-based ratemaking (PBR) departs from the cost-of-service standard in setting just and reasonable utility rates, but that departure isn't as easy as it looks.

Up until now, cost-of-service ratemaking has provided relatively stable rates, while enabling utilities to attract enormous amounts of capital. Of late, however, regulators appear to be heeding the argument that changing markets warrant a second look.

Our 13th annual electric rate-case survey covers electric rate orders issued between

April 1, 1994, and March 31, 1995.

The survey tabulates rates of return on common equity (ROE) approved by state public utility commissions (PUCs) in major electric rate orders, but also includes some cases in which rate of return was not directly at issue, or where a rate adjustment resulted from a settlement agreement.

In his recent article, "Cost-of-Service Studies: Do They Really Tell Us Who's Subsidizing Who?" (Nov. 15, 1994), Mark Quinlan proposes an alternative cost-of-service methodology. He claims that under current cost-allocation methods (and given adequate capacity to meet demand) a rate class with increasing sales subsidizes a rate class with decreasing sales.