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Electric Utility Deregulation - Is it a Good Deal?

Author(s):

Wade C. Ferguson, D.B.A., C.P.M., A.P.P.
Wade C. Ferguson, D.B.A., C.P.M., A.P.P., Santee Cooper, Moncks Corner, SC 29461, (843) 761- 8000

84th Annual International Conference Proceedings - 1999 

Abstract. Electric utility deregulation is a hot topic these days and several states such as California, Rhode Island, and Massachusetts, already have open access for most or all customers in some form, with many other states at various stages of consideration or implementation (Morgan, 1998). Most of us like the idea of competition and the ability to choose power companies like we choose our long distance carrier. But, is deregulation really a good deal for all classes of consumers (industrial, commercial and retail) in every state?

The debate surrounding electric utility deregulation has been in process for many years, but the debate was accelerated by the passage of the National Energy Policy Act of 1992. The Act sought to encourage competition in the wholesale market. Passage of this legislation tended to also focus attention on the issue of deregulation or restructuring in order to promote retail competition. This debate has been fueled by politicians and rate-payers in high rate states that hope deregulation will lower electric prices. And finally, the deregulation, in various forms, that has occured in other industries such as transportation, natural gas, and telephone, further support the question, i.e. should not electric utilities also be deregulated?

It has been suggested that perhaps deregulation is not the most appropriate term. No one really expects the electric utility industry to become totally unregulated. As citizens and consumers, some degree of regulation will continue to remain desirable in order to provide a necessary level of consumer protection. Therefore, perhaps the term re-regulation might be more appropriate. This term suggests a substantial reworking of the current regulatory environment but accomodates the emergence of new, more appropriate regulations.

As this important movement gains momentum around the nation, it is increasingly important that we understand the issues surrounding re-regulation. In order to make informed decisions as business managers and as retail consumers, we must have a basic understanding of several core issues. These issues include affordability, reliability, stranded costs, obligation to serve, compensation for risk, environmental impact, community service, and taxation (English, 1998). Once we understand each issue, we can apply that understanding to the unique circumstances that exist in our own particular state/region at the appropriate decision time.

Affordability - What impact will re-regulation have on the rates for each customer class in your state/region? In some states, it is suggested that electric rates for smaller customers (homeowners and small business owners) might increase, while rates for larger customers decrease. Thus, it is important that the impact be assessed on all customer classes to ensure reasonable and affordable electric rates for all customers.

Reliability - The U.S. electric utility system is perhaps the most reliable in the world. But it is also a very complex system of interconnections and overlapping responsibilities. To ensure that a high level of reliability continues, regulations regarding operation and cooperation may still be necessary. System outages and failures during the summer of 1998 underscore the need to ensure the implementation and enforcement of responsibilities for maintaining a high degree of system reliability.

Stranded Costs - Utility companies have invested in facilities based on the expectation of a projected rate of return based on the current customer base. If customers, both small and large, are allowed to "leave" their current provider, who will pay to recover the costs invested to support customers who leave the system? Will the remaining customers have to bear these costs or will customers leaving the system have to pay an exit fee? Are there other ways to deal with this issue?

Obligation to Serve - Currently, every electric utility has an obligation to serve any and all customers within assigned territories. Will deregulated utilities still have an incentive to serve customers of all economic classes including low income customers, rural customers or customers in economically depressed areas? It is important that re-regulation ensure that all customers will continue to have access to affordable power.

Compensation for Risk - Facilities for the generation of electric power are extremely expensive. Without a guaranteed customer base, guaranteed prices, and therefore a predictable rate of return, will companies still be willing to make large investments in new power plants? Who will build the generation of the future?

Environmental Impact - If competition for customers becomes a "price war," then cost reduction pressures may have a negative impact on continuing efforts to develop and implement "clean" power technologies? Re-regulation efforts must ensure continued incentives for environmental protection.

Community Service - Most existing electric utilities pride themselves in being good citizens, contributing millions to community service projects across the nation. But again, if competition for customers becomes a "price war," then cost reduction pressures may also have a negative impact on community service contributions.

Taxation - Any attempt at re-regulation must give careful consideration to the impact of the proposed re-regulation on taxes paid to local and state tax authorities. Without such consideration, re-regulation could potentially change the way local and/or state taxes are owed and collected and thus create severe and unexpected financial losses for certain taxing authorities.

These same issues must be considered as we evaluate electric re-regulation no matter what state or region we live or work in. However, how we apply the knowledge will be tempered by our own unique circumstances. Our perspective will differ depending upon our circumstances and our role as an evaluator. Some of us live in states with relatively high electric rates. But some of us live in states with relatively low electric rates. While some of us may be evaluating re-regulation from the perspective of a politician, others will be evaluating as a retail consumer, while still others from the perspective of a large business owner/manager. Whatever your perspective, apply an informed consideration of the issues and decide for yourself if deregulation or re-regulation is a "good deal" for you, your neighbors and your state.

BIBLIOGRAPHY

English, Glenn., "Benefits should be driving electricity deregulation." The Island Packet, Hilton Head, SC. (Scripps Howard News Service), May 11, 1998.

Morgan, Phyllis. "Restructuring in the States: Update." The Reddy Corporation International - SourceBook, August, 1998.

Strong, Willard (editor). The Electric MarketPlace. Santee Cooper, Moncks Corner, SC, Various issues.

The Electricity Daily. A Publication of the Electricity Journal, Various issues.


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