Commission Watch

State regulators redouble their deregulation efforts-or abandon them altogether.
State regulators redouble their deregulation efforts-or abandon them altogether.
Fortnightly Magazine - January 15 2003

Retail Energy in 2002: A Regulatory About-face

EES North America



State regulators redouble their deregulation efforts-or abandon them altogether.

The past year was a phenomenal one for state public utility regulators.

A historical confluence of events, including the catastrophic failure of the move to deregulate California electric markets and a nationwide epidemic of corporate financial scandals, led in large part by energy trading firms, helps to explain the developments.

The cry for help by consumers faced with uncertain supply and prices was directed primarily at state public utility commissions (PUCs), which have a legal duty to ensure reliability and fair prices for essential services like electricity.

The PUC responses ranged from full retreat back to traditional regulation in the West, to a dogged attempt to find a way to make the market work in states where the crisis was not as severe, such as Pennsylvania.

Nevertheless, a review of the most important decisions issued by state regulators leaves one with the impression that there now exists a general consensus, albeit a begrudging one in some cases, that electricity may not be the type of product best delivered in an unregulated environment. Further, traditional topics not often mentioned during the heyday of deregulation, such as return on equity, cost of service, and allocation of affiliate debt costs, are once again of the utmost importance to consumers and the public welfare.

California Returns to Regulation

Perhaps the defining moment for the return of the regulator in the wake of the Western power crisis was the decision by the California Public Utilities Commission (CPUC) in the fall of 2001 to cancel, at the direction of the state legislature, its electric direct access program. At that time, the CPUC noted that the state was issuing bonds to cover the cost of power purchases required as a result of the financial failure of the states two largest electric utilities, Southern California Edison Co. and Pacific Gas and Electric Co. Since that time, the PUC has made a number of decisions indicating that any hopes it may have had of relying on the market to replace the traditional role of regulators are far gone.

A recent decision stands as a perfect example of this trend. The CPUC adopted procedures for the state's investor-owned utilities to resume full energy procurement responsibilities on Jan. 1, 2003, removing the state from power-buying responsibilities. The rule marks a return to state-supervised, long-term integrated resource planning and also includes a ratemaking balancing account mechanism to track utility power purchase costs. The CPUC said that it is now developing a long-term planning process to ensure that sufficient new resources are developed to provide a low-cost, reliable electric system for California consumers. The rule calls for the "upfront" approval of the utilities' procurement processes and plans, which should minimize the need for any after-the-fact review of the resulting purchases, the CPUC said.

[Re Policies and Cost Recovery Mechanisms for Generation Procurement and Renewable Resource Development, 220 PUR4th 377 (Cal.P.U.C. 2002).]

Two Flavors for the Grid

In an earlier decision, the CPUC also permitted Southern California Edison