Hard-and-fast ring-fencing rules are not the best way to maintain order in the partially deregulated utility sector.
Steve Fetter has served as chairman of the Michigan Public Service Commission and was former head of the utility ratings practice at Fitch Ratings. He currently runs Regulation UnFettered, a New Jersey-based energy advisory firm, and serves on the board of directors and as audit committee chairman at CH Energy Group.
In 1992, my colleagues on the Michigan Public Service Commission (MPSC) and I initiated the first retail wheeling case in the country. Retail wheeling was the old name for competition, back when everyone thought that moving electrons from one place to another was a relatively simple task, one that could not in any way harbor underlying sinister acts or motives. Oh, how 12 years have changed those perceptions.
I left the MPSC within a year to go to Wall Street, joining the utility ratings group at Fitch Ratings. It took another 10 years to formalize retail competition within the state. Clearly, from the MPSC's view, that was a good thing. It allowed California to bear the brunt of the ills that often inflict a first mover on radical innovation. But what followed at Enron put the entire energy sector on edge and led to discussions about means to avoid those pitfalls in the future.
At the state level, policy-makers have started to consider the appropriateness of using ring-fencing to protect a regulated utility's operations from that same company's competitive activities. Ring-fencing is defined as the legal walling off of certain assets or liabilities within a corporation, as in a company forming a new subsidiary to protect (ring-fence) specific assets from creditors. Most of the ring-fencing protections to date have followed utility stress situations or have been implemented within the context of a utility merger or acquisition. While I, as a former state regulator, can see the apparent appeal of some of the ring-fencing proposals that have been bandied about, as a former Wall Street utility analyst, I also possess the cautionary worry that hard-and-fast statutes and rules are not the best means to maintain order within the partially regulated/partially unregulated utility sector.