The Cause Of Electric Utility Deregulation
You make your choice, calculate your monthly bill, and complete a transaction with a company that will locate or produce your electricity a thousand miles away then deliver it to your home over power lines they don't own. Next month, you may buy from someone else at a higher or lower cost depending upon where the market happens to set the price. For many, this is the ultimate promise and allure of deregulating the electric utility industry: creating a free and open marketplace where electricity is bought and sold like any other commodity and prices are set through competition.
As part of an international shift toward free markets other major industries in the United States have been deregulated, now "the winds of change" are blowing through the electric utility industry. Just where did this drive toward deregulation originate? In recent history, it is traceable to the trend which matured in the early 1980s leading to deregulation of the savings and loan industry and the airline industry. It since has spread to the telecommunications industry and flexed its strong muscles in the insurance and transportation industries. Thus, the changes underway in the electric utility industry have been emerging slowly for years. A confluence of technology, legal, and economic changes have brought electric industry restructuring to center stage.
Advances in turbine technology have made it easier to produce electricity efficiently from smaller generators. This has helped encourage new entrants in the independent power field, leading in turn to calls for greater access to customers for those power plants.
In the legal arena, the 1992 Energy Policy Act assured wholesale competition, and altered the marketplace in ways that favor competition. This federal legislation opened up the nation's transmission grid and has helped create a thriving independent power-generation sector. Over the past few years, competition at the wholesale level of the electric industry has been increasing throughout the country. Concurrently, at the federal and state levels, regulators are evaluating this change. Hundreds, if not thousands, of questions are being asked. How will a competitive market work? What will be the benefits and costs to the public? Will reliability of service be maintained?
The provision of electricity service has traditionally been considered to exhibit the characteristics of a "natural monopoly." In theory, a natural monopoly exists in a market if one service provider in the market can serve customers more efficiently than many competing service providers. In markets exhibiting the characteristics of a natural monopoly, government intervention in the form of regulation over a single firm is considered necessary to provide the market discipline that competition cannot provide. The government, industry, and residential electric consumers have long considered this arrangement to be the only way to guarantee reliable and reasonably priced electricity for all American consumers. However, some in the electric industry argue that the generation sector of industry no longer exhibits the characteristics of a natural monopoly, thus continued regulation of this sector may no longer be necessary. As the underlying economic rationale is perceived to be eroding, the calls for deregulation and increased competition have increased. In recent years, thinking has changed, and many now believe that the pressure of market competition would more effectively ensure lower prices.
Both nationally and in individual states, legislators and regulators are feeling pressure from large industrial electricity customers and non-utility electricity generators to restructure the electric industry to allow competition at the retail level. These large consumers and free-marketers have hired lobbyists and consultants to make their viewpoint known. Each state is proceeding at its own pace and are actively considering how or whether to implement the change. Pilot projects and multiparty agreements are altering the marketplaces in dramatic fashion. All of these pressures have combined to encourage state regulators and now Congress to examine the possibility, and the complexity, of bringing choice to all customers nationwide. As change occurs in one state it is expected that pressure for action will likely mount in the slower paced states. Ultimately, it is probable that commerce and industry will lead the charge in demanding access to free choice and the potential for lower costs.
The major cause for the push towards deregulation is based on economics. Americans paid $208 billion for electricity last year (Energy Information Administration, 1996) and electric energy is often a significant portion of many industries' total overhead. The US electric industry burned 868 million tons of coal in 1994 (Energy Information Administration, 1995) and operates hundreds of dams and over 100 nuclear reactors across the Nation. As might be expected with stakes this high, the prospect of destabilizing change has sparked conflicts between a multitude of groups with economic and environmental interests.
Members of the public utility commissions, utility executives, proponents and opponents of deregulation are in unanimous agreement that the movement to deregulate utilities began with large industries. Their goal is to force electric utilities to compete for the right to serve them and reap the cost advantages of a highly competitive marketplace. They are joined in this strategy by free-marketers along with some commercial and residential customers who believe they too will benefit.
Industrial managers are sending the unmistakable signal that, if given the opportunity, they will switch power companies for a price break. ". . . some 30 percent of commercial and industrial customers say they would consider switching to a competing utility for rates just five percent lower than they currently pay" (Electrical World, 1994). Large industrial customers want to be able to buy power from any supplier because the competitive market price will be less than the rate of return required to pay the full cost of power supplied by their current utilities. The question is, who will pay for the utilities' resulting "stranded costs"? While industry is considering it's own best interests, others are concerned about the unintended consequences of utilities offering their best prices to industry at the expense of smaller customers.
In the policy debate about deregulation of the electric utility industry, there has been a great deal of discussion about compensation of utility shareholders for "stranded assets." Stranded assets are described as the capital costs (depreciation and return on investment) for a generating plant that cannot be fully recovered in a competitive market, because the revenue at the market price is less than total operating cost, including the cost of capital. Nationwide, the largest utility customers are already attempting to use their political and market power to transfer "stranded costs" to others by securing lower rates for themselves. One strategy they use is to propose to self-generate, and then accept an offer of flex rates or competitive rates from their utility. Another strategy to win rate concessions or switch to a different supplier is for large customers to attempt to convince a municipality to form a new municipal utility that includes their plant, or to take advantage of obscure legal provisions to switch suppliers. These piecemeal strategies have already been put to use in some states. They are of particular concern because, if they succeed in idling part of a utility's capacity, they can, in fact, create real stranded costs. Even when utilities have assets that would have total costs below the market price in a truly competitive market, if there is no market and the capacity is idled, then its costs are indeed stranded.
Opinions on deregulation are as varied as the vested interests among consumer groups who hold them. Electricity brokers and marketers, who arrange electricity sales between producers and consumers, along with independent power producers, producing electricity via non-utility generators, are relatively new to the business and hope to become major players in a deregulated environment. Large industrial accounts are very attractive to these groups, because large amounts of energy can be sold in one place. Due to economy of scale, this makes it possible to generate electricity less expensively per kilowatt-hour, and it means the generation utility can charge a lower price and still make a profit. Urban area proponents believe that their commercial and industrial neighbors will give marketers' incentives to offer their city areas some sweetheart deals. Consumer groups are demanding that any change protect the interest of all customers regardless of economic status. Existing utilities seem to be split in their opinions. Some utilities are merging as part of their preparations for a more competitive environment, staking out larger territories. Questions are being asked as to whether the formation of mega-utilities with huge service territories, thousands of miles of transmission line and numerous generating plants will benefit the customer? Others claim that smaller utilities are more consumer friendly. While it is certainly not true that all smaller utilities, including municipalities, have lower rates, many of them do. An example of this controversy can be seen in a debate between two utilities in Wisconsin.
Madison Gas & Electric is a small investor-owned utility that serves Madison, Wisconsin. Wisconsin Power & Light (at the time, attempting to become Primergy along with two Iowa utilities) is also headquartered in Madison. The two companies engaged in some mud-slinging on the issue of whether bigger is better. An MG&E ad, featuring a large hog, read, " 'Customer Choice' puts the big guys in hog heaven, and leaves you the scraps." WP&L retorted, "Heard from any dinosaurs lately?" implying that by refusing to combine with a larger utility, MG&E was an antiquated fossil.
In conclusion, the largest reason for the demand of electric utility deregulation dates back to early economists and the free market theory. We have heard the theory so often that it sounds self-evident: "Competition lowers prices and improves service." While this statement is usually true, it relies on the assumption that if an open market is available, companies will compete for control over it. It also relies on the assumption that all classes of consumers will be able to profit from the resulting competition. In reality, our free market economy is the economic and political backlash of a small minority of economic elite around the world, who are busily exploiting both human and natural resources to make fast and easy personal fortunes with virtual disregard for the social repercussions that follow in the wake of their activities.
Capitalism is an economic and social system that evolved from the association of individuals who possessed an ability to dominate their respective societies. Because of their dominance, it continues to provide these individuals with an opportunity to exist and flourish relatively free of restraints, thus the demand for a free market. A free marketing spirit is the natural breeding ground for innovative discoveries and rapid development, as the rapid progress in Western technology triumphantly confirms. Therefore, the free market system has always been promoted as the ultimate expression of freedom for an individual. That certainly might be true for the dominant elite, but, as evidenced throughout history, the reverse has been true for the remaining members of our society.