A State Legislator Looks at Retail Wheeling

Deck: 

As FERC moves forward, most state legislators have remained content to sit back and wait for others to act. Part of this reticence stems from politics—the difficulty of changing course, invading someone else's turf, or tackling a new subject outside one's area of expertise. Legislators view problems differently than do regulators.

Fortnightly Magazine - July 1 1996

With the start of the 1996 legislative year at least 30 states were studying some aspect of electric competition. These studies have spanned a wide range of activities: from a simple generic docket opened by a regulatory agency, to actual pilot programs involving certain customers, or the creation of new market structures, such as a competitive power pool.

Most discussions have focused on pricing, stranded investment, and easing restrictions against market entry. However, many other issues must be addressed before policymakers can hope to achieve an equitable result for all customers, regardless of size or geography. In fact, experience (drawn from telecommunications and natural gas) teaches us that residential and small commercial customers often lag behind other customer classes in achieving benefits from competition or gaining access to rates that reflect the true cost of service.

As the Federal Energy Regulatory Commission (FERC) has moved forward, most state legislators have remained content to sit back and wait for others to act. Part of this reticence stems from politics—the difficulty of changing course, invading someone else's turf, or tackling a new subject outside one's area of expertise. Legislators view problems differently than do regulators.

The Legislator's Perspective

Legislators, more than regulators, often seek simple, expedient solutions. Many factors (election campaigns, political rhetoric, and partisan, regional, or philosophical differences plus a frequent lack of expertise in new technology or economic drivers) all combine to produce legislative inertia and a reluctance to become involved.

Different viewpoints also arise between legislators and electric industry executives.

The energy executive will generally focus his or her attention on a range of commercial priorities:

  • (a) retaining existing markets,
  • (b) expanding into other service territories,
  • (c) escaping universal service requirements to concentrate on high-profit customers,
  • (d) maximizing stock-market share value and rate of return on investment, and
  • (e) protecting the company's public image.

The legislator sees a different set of imperatives:

  • (a) protecting affordable universal service,
  • (b) increasing opportunities across the state for economic development,
  • (c) protecting constituent jobs (energy company employees),
  • (d) protecting the local utility company's investments in the community (tax base, franchise fees, charitable contributions, and so on), and
  • (e) projecting a strong image to the electorate.

These different perspectives can lead to conflict between corporate and elected officials, obscuring shared interests and marring what is essentially a symbiotic relationship. Nevertheless, both parties share the capability to organize multimedia campaigns to influence each other and the general public. Shared interests and perspectives can and must be nurtured and developed. The public debate must be removed from the media arena and brought back to the negotiating table, where constructive dialogue can develop.

Happily, both institutions (em industry and politics (em share at least one common objective. That objective is improving the satisfaction of customers and voters (who are one and the same). Starting from that common interest, utility executives and state legislators ought to be able to achieve at least some of their mutual objectives.

Thus, as one who has served both in the state legislature and for a major investor-owned electric utility, I offer some ideas to kindle discussion between industry and elected officials. This article describes a legislative initiative I introduced to encourage competition in retail electric service. While it focuses on Kansas, the article describes issues that transcend state boundaries.

Two Major Concerns

The national debate over electric deregulation has tended to follow the same general patterns established by the telecommunications, natural gas, airline, and trucking industries. Two major concerns have emerged:

  • Increasing ease of entry to encourage competition
  • Reducing prices to secure the benefits of competition.

Both objectives are laudable and, in an era of multibillion dollar utility company mergers and acquisitions, should be very achievable. Yet, as we have seen, customers suffer the consequences when good intentions go bad. Attractively marketed airline companies occasionally go out of business and strand travelers; long-distance telecommunications carriers close suddenly and leave callers without service. These common carrier services are not as essential as electric utility service, so we as legislators must be even more concerned about protecting our citizens from potentially destructive competition, while permitting the benefits of market innovation and competition to filter down to customers and service providers.

We have also seen "cream skimming" or "cherry picking" occur, where the best customers, usually large industrials, profit from competition, leaving smaller-volume customers to struggle with the high overhead costs associated with maintaining the "traditional" supplier. As legislators, we must be concerned about ensuring our constituents' health and well-being. Universal, affordable electric service is a vital component.

H.B. 2623, the bill that I introduced in the Kansas legislature, reflects several simple, basic truths. Reliable, affordable electric service should be available to all Kansans. Existing electric suppliers and their shareholders and members (em including municipal taxpayers and members of rural cooperatives (em should not be punished financially by changes in the regulatory environment. Moreover, competition should offer the potential for price reductions while maintaining acceptable service quality and meeting customer needs for service growth. Finally, the regulatory role of the Kansas Corporation Commission (KCC) should be maintained as it relates to protecting electric customers, even as deregulation and competition move forward.

Nothing in the bill I have introduced will stop competition and change in the electric industry. However, while the interests and concerns of Kansas may differ from those of other states, identifying those interests and concerns should be among the highest priorities.

A Modest Initiative

H.B. 2623, the bill I have introduced, would address the unique interests and concerns of Kansas through a half-dozen key features:

  • 1) Geographic service "blocks" containing a cross-section of customers
  • 2) Assignment of suppliers to blocks based on consumer benefits
  • 3) Supplier rates that protect investments of utility shareholders
  • 4) "Opt-out" rights for municipals and rural co-ops
  • 5) Franchise rights within blocks remain temporary (3-5 years)
  • 6) Regulatory oversight of traditional social obligations

1. Customer Blocks. The least profitable, and hence least desirable, customer class for any utility is residential, because the cost of serving a small customer is proportionately greater than to serve a large one. Correspondingly, the return on utility company investments is greater with large customers than small. This fact is even more true when the small customers live in rural areas. Unless an electric provider is required to serve all classes of customers, the likelihood is that residential customers will not benefit from competition and will pay increasingly higher costs to maintain electric service, as large customers take advantage of alternative suppliers.

Thus, H.B. 2623 would require the KCC and existing utilities to divide the state into "customer service blocks," with each block containing industrial, commercial, and residential customers. The blocks would reflect existing utility infrastructure to the extent possible.

2. Assigning Suppliers. To protect consumer interests and provide a "level playing field" for the traditional electric provider and potential new suppliers, the KCC will evaluate prospective electric suppliers for the right to serve each customer block on the basis of economic benefits to customers and reliability, efficiency, and quality of customer service. However, as legislators we must also be concerned about how consumers will be able to intelligently evaluate the offers. H.B. 2623 provides that the KCC will ensure that consumers are protected by evaluating not just the price of electricity, but also how well the potential supplier can serve the customer reliably, including such considerations as storm damage repair.

The bill does not specify how competitors must provide services (e.g., by the electric supplier or on a contract basis for the supplier). The bill does require the KCC to take the service arrangement into account before authorizing a supplier to serve customers within a block.

3. Protecting Investors. Kansans own a very high percentage of the stock of Kansas-based utilities. Thus, "consumer protection" means protecting both electric customers and shareholders. They are likely one and the same. The KCC will also determine the reasonableness of the current provider's proposed charges with reference to previous capital investments in transmission and distribution facilities in the customer block, as well as stranded investment in generation facilities.

KCC review will accomplish two things. First, it will guarantee fair competition and a price as low as possible. Second, previous investments in generation, transmission, and distribution plant will not be lost. The KCC protects interests of customers, shareholders, and members, even while encouraging competition.

4. Municipals and Co-ops. Rural electric cooperatives and municipally owned systems serve many areas in Kansas. Yet, competition will not respect artificial constraints like city limits. Competitors will target commercial and industrial customers, offering them incentives to leave their municipal or co-op systems.

To ensure that municipal and co-op customers benefit from competition, but enjoy protection for their investments as members or taxpayers, the bill grants opt-out rights to co-ops and municipal electric utilities to avoid inclusion in a customer block, by a vote of their members or customers. A vote of the co-op members or municipal residents can keep them out of the competitive provisions of this bill. But if members or voters choose to participate, then the provisions of H.B. 2623 protect their previous investments in generation, transmission, and distribution equipment.

5. Term Limits. Recognizing that defined service territories restrict competition, H.B. 2623 allows the KCC to award customer blocks for periods of 3-5 years and provide for the supplier's recovery of new capital investments.

Nevertheless, suppliers will want a reasonable opportunity to recover investments in capital and new technologies over a longer term, regardless of time limits placed on service rights within a customer block, or which provider supplies electricity to the block. Thus, infrastructure investments made in a block would become part of the capital-investment recovery process of the next bidding process. All potential bidders on that customer block would include in their bids the KCC's approved investment recovery rate.

6. Social Obligations. Legislators must also consider other issues related to the "traditional" manner in which the local energy company has interacted with the communities it serves. The KCC presently has enforced important utility company social responsibilities endorsed by the legislature. These responsibilities include imposing a cold weather rule preventing the disconnection of utility service during the winter (em

even for those unable to pay their utility bills (em and encouraging utilities to support worthy community organizations through charitable contributions.

Protecting the well-being of our communities and less affluent citizens requires a continued regulatory role by the KCC. H.B. 2623 maintains this oversight function.

The Outlook in Kansas

The Kansas Legislature, not surprisingly, has opted to study these issues further before making any decisions. H.B. 2623 is not perfect, but it raises and addresses the most significant issues of concern to electric customers and providers. It offers a likely starting point for discussions on electric utility deregulation.

Perhaps this bill will stimulate discussion not only in Kansas, but nationally as well, on how state legislatures can assume an active role in the debate.