Deregulation In The Electric Industry Essay, Research Paper
Electricity is the principal force that powers modern society. It lights
buildings and streets, runs computers and telephones, drives trains and
subways, and operates all variety of motors and machines. Yet most people,
despite their great dependence on electrical power, hardly give it a
thought. They flip a switch, turn a key, or pick up a phone and expect the
power to be there without fail.
The almost-century old structure of the American electric utility industry
is in need of change. Almost all interested parties accept the fact that
technological change and altered views of the nature of government
intervention have made the idea of increased competition attractive (Johnson
35). But just how should the competitive market be structured? Some
participants want complete deregulation so they can derive the fullest
benefits of competition quickly. Others argue that the unfettered free
market, however, will cause hardship and inequities (36).
Stability in electrical power has traditionally depended on a system highly
regulated by federal and state government. In recent years, however, many
leaders in government and industry alike have pushed for deregulating the
system to make it more responsive to changes in business and technology and
more open to the forces of free-market competition (Craven C5).
Deregulation has been successful in reducing costs and promoting innovation
in airlines, natural gas, telecommunications and other industries. The
electric industry is next.
Initial steps to deregulate electrical power are now being taken in the
United States and Canada. Today the subject is being actively debated in
board-rooms and state-houses across the Continent. Everyone is wondering
what deregulation will do to the industry. People do not know how it will
affect businesses and consumers, and they are debating whether to move fast
or slow with deregulation.
The "open access" rule of the Federal Energy Regulatory Commission went into
effect on July 9, 1996. Known as Order 888, it applies only to wholesale
transactions. It requires public utilities that own, operate, or control
transmission lines to charge other firms the same transmission rates they
charge themselves, under comparable terms and conditions of service (Encarta
"Deregulation"). This will open control of the market, and it will prevent
utilities from denying transmission grid access through prohibitively high
Public utilities, municipal utilities, and rural cooperatives are the only
customers that are able to purchase wholesale power for resale. Office
buildings provide the power to their end users, but the tenants, building
owners, and managers do not meet the "obligation to serve" definition that
would enable BOMA members to purchase wholesale marker power (Craven C5).
FERC has since stated that it has no intention of moving further and
mandating open access for retail sales, as it believes that to be beyond its
jurisdiction (Gendy 48).
FERC is clearly leaving retail deregulation to the states and the United
States Congress. As a sign of its importance, several electricity
competition bills were introduced in both the House and the Senate this
year. Additionally, the House Subcommittee on Energy and Power held over
twenty hearings in Washington, DC, and around the country (50). Although
the 105th Congress adjourned without a federal deregulation mandate, the
debate is well underway and congressional leaders have stated that
electricity deregulation will rate high on their list for action in 1999
On one hand, restructuring of the electric utility industry in the coming
years means that deregulation may occur in terms of prices and entry of
competitors into the market. On the other hand, government intervention of
some areas of the business is likely to continue to ensure maintenance of
socially desirable functions (Williams 23). Some make the assumption that
restructuring is the same as deregulating, but this is not true.
As much as some utility executives may protest deregulation of prices, many
parties agree that traditional regulation appears flawed. In the prosperous
years, when new construction of power plants reduced the average cost of
electricity, regulation that set rates based on the value of the new
equipment worked fine because rates generally decreased. In the 1970s and
later, utility construction became more and more costly, and the high rates
were a result of those higher costs (Williams 26). Regulatory rules
encouraged utilities to complete long-delayed power plants even if the
demand for power was not likely to warrant such big plants or because poor
management caused costs to escalate.
Even as states and the federal government debate bills for restructuring the
utility industry, technological innovation could change the entire nature of
the electric supply business. For about a hundred years, the structure of
the regulated industry has included large, central power-plants that
generated electricity for distribution to homes and businesses. These
plants had customers linked to utility companies through a network of wires
(Gendy 48). This structure may change as new technologies allow
decentralized and disconnected users to get power just like they used to
Fuel cells making electricity and water, micro-turbines using natural gas,
photovoltaic cells and energy storage systems which allow people to obtain
electricity from the sun may allow people to isolate or remove themselves
from the electric power grid. They may also connect with their neighbors
and other businesses to create similar synergies that utilities obtained by
interconnecting their transmission systems (Washington Post H04). With the
flourishing of smart electronic technologies used for communications,
monitoring, and energy efficiency, this scenario becomes more feasible
(Williams 22). We may see this in the near future.
More than any other topic raised during the electricity deregulation debate,
the stranded cost issue has the potential to sink the entire reform effort.
This does not have to be the main issue (Craven C5). Calls for stranded
cost compensation are unjustified. There is no evidence supporting the
thought that a literal "regulatory compact or contract" of any sort exists
to justify a multibillion-dollar bailout of utilities. The world will not
end if stranded cost recovery is limited or denied. New firms will come up
to provide the service in place of the few utilities that might fail.
Entrepreneurism and innovation will be shown in an environment free of the
monopolistic methods of the past. Customers, who for so long have been
forced to pay the high costs associated with inefficient and uncompetitive
markets, finally will be given the choice to shop for electricity as they
would any other commodity in the free market (Kuttner A21).
In the end, however, the federal role in this process by necessity must be
somewhat constrained. They can’t have the power to change the whole system
themselves. Although Congress rightly can exercise its constitutional
authority to protect the public interest in the free, unhampered flow of
interstate commerce, it cannot prevent the states from determining how much,
if any, compensation is appropriate. Federal legislators should encourage
the states to proceed cautiously, with the interests of every American
consumer in mind as they examine the claims made by their in-state utilities
for compensation with the interest. This compensation would be given at the
expense of a competitive future. Congress should not shy away from
exercising its authority under the Commerce Clause to ensure that
state-by-state stranded cost determinations will not prohibit the
development of a competitive national marketplace. By working together,
federal and state regulators can ensure that the stranded cost recovery
process will not become an obstacle to the free market future for
"A Primer on How to Deal with the Power of Choice." Washington Post 17
October 1999: H04.
Craven, Eric. "Educating consumers about utility deregulation and
purchasing." Kansas City Star 12 March 1998: C5.
Deregulation. Computer Software. Microsoft Encarta. Microsoft. 1998.
Eastern Maine Electric Co-op. "www.emec.com/deregulation" Internet source.
Electric Potential Inc. "http://www.electric-potential.com" Internet
Gendy, Matthew. "Deregulation in America: Positive?" Newsweek 17
November 1995: 47-53.
Johnson, Nick. "U.S. and International Deregulation." U.S. News and World
Report 4 August 1995: 34-36.
Kuttner, Robert. "Is This an Age of Deregulation of Reregulation?"
Washington Post 2 November 1999: A21
Williams, Terry. "Electric Deregulation." Time 23 April 1996: 21-27.