Electrical Utility Deregulation Essay, Research Paper
Electrical utility deregulation is the process of transforming electrical utility companies from regulated monopolies to market-driven suppliers of competitive energy and services. (Reliant Energy HL&P 1999) It means that customers will have the ability to choose their electrical supplier. Today?s utility customers want lower prices, more choice, and better service as well as reliability. The deregulation of other industries such as railroad, trucking, natural gas, and telecommunications has shown people that choice can provide better value.
The deregulated electric utility industry would look and act a lot like the long distance phone business. The market would set electricity rates. Sharp increases or decreases in the cost of fuel or customer volume would affect the prices. Prices have decreased even without deregulation however. According to the Edison Electrical Institute, real electricity prices have dropped 27 percent in the last 15 years. But with deregulation there is the potential that they will drop even more.
The main issue that is of concern to electrical utility companies is stranded costs. Stranded costs are the past investments utilities were obligated to make in the regulated electric system. These investments were prudently incurred and government-approved to ensure reliability of supply and were partially recovered through customers? rates. (Reliant Energy HL&P 1999) Electrical utilities believe the recovery of past investments should be part of the overall deregulation process since they will be hard to recover in an open, competitive marketplace. If this issue is resolved to the satisfaction of the utility companies, it will open the way for deregulation.
As stated in the previous page, the main obstacle to electrical utility deregulation is stranded costs. Two of the main issues surrounding stranded costs are their impact on electricity prices and stranded costs will affect the financial viability of an individual electrical utility. It is hard to determine exactly how much stranded cost will be. They have been estimated to be anywhere from 10 billion to more than 500 billion. And stranded costs may be higher in some parts of the country than in others. According to Research Data International, 86 percent of the stranded costs lie in 10 states that have 43 percent of the electricity market. California is at the top of the list, followed by New York, Texas, Illinois, Pennsylvania, New Jersey, Ohio, Georgia, Massachusetts, and Connecticut. The utility companies want to be able to recover most of if not all of their stranded costs, and if they are not able to electrical prices may be higher because of it.
Another problem that has arisen is the concern over possible environmental and social protections built in through regulation would be lost. The Utility Workers Union of America believes that a competitive market would give profit driven companies an incentive to promote consumption, which would undermine many of the conservation programs that are promoted today. I think that we should not rush to judgement on these problems. Many states are implementing deregulation, and we will see exactly what happens and doesn?t happen during these experimental times. Similar concerns were raised before the airline industry was deregulated, but it worked out just fine.
There are 3 main objectives that electrical utility deregulation hopes to achieve. First and foremost are lower utility rates. Granted that utility rates are relatively low at the present time, with deregulation there exists the potential for them to be even lower. Businesses would have the most to gain from deregulation because of the large amounts of electricity that they utilize. They would be able to use the money saved on other methods or capital to better serve their customers. The everyday household would benefit because instead of having to purchase all the services from a utility company, they would have the option to purchase only some of them, or choose a different company of their liking.
Secondly, better quality of service and product as a result of the competition is another objective of deregulation. With many different companies competing for customers, the companies will not benefit from producing an inferior product or poor service. The customers will simply take their business elsewhere. Prices will also be lower, because all the companies will be trying to entice customers with the lowest rates. Competition is what made the American economy into what it is today. It is a vital component of capitalism. The freedom of choice enjoyed in a capitalist system is so often taken for granted. It is what this nation was founded upon.
The third objective of deregulation is the creation of more jobs through privatization. With deregulation there will be many more utility companies forming with the advent of an open market. These new companies will obviously need to hire people. Not just for their installers and service crews, but salespeople, office personnel, shipping and receiving clerks, stock clerks, order pullers, and many other positions. So jobs are
Created not only for the skilled utility laborers, but also for people with sales experience, office training, and people seeking entry-level positions such as stock clerks and shipping and receiving personnel. So the ongoing unemployment issue in this country will get some relief from deregulation.
On the other side of the issue, some argue that environmental and social protections built into regulation would be lost as a result of deregulation. The feeling is that with more and more private utility companies competing for customers, little attention would be paid to environmental regulations. Power lines would be erected in places that are harmful to the surrounding environment, and power plants would operate outside of the environmental guidelines in order to increase output at the lowest possible cost. Social protections may also suffer. With so many independent companies competing with each other without government oversight there may be companies that would offer one rate and then charge a much higher one instead. Or promises services and not follow through with it. The fear of shady business practices by independent companies is one of the main issues that opponents to deregulation bring forth.
The policy that began the debate over free market electricity was the federal Public Utilities Regulatory Policy Act of 1978 (PURPA) which opened generation markets to independent power producers. Next came the Energy Policy Act of 1992 which set forth a mandate of wholesale wheeling of power over a grid from one electric utility to another.
A major component of this act was Order 888, known as the open-access rule. It requires utilities that own transmission lines allow others access to those lines. To implement the Energy Policy Act, the Federal Energy Regulatory Commission (FERC) ordered utilities in 1995 to open their transmission systems to outside energy providers. (National Association of Development Organizations, 1998)
So far fifteen states have approved electrical utility deregulation. What follows here is a summary of some of their plans, based on information from the states and surveys collected by the Electrical Power Supply Association, and the National Rural Electric Cooperative Association.
Arizona
State regulators will allow competition for 20 percent of customers by 1999, for 50 percent by 2001 and for all by 2003. Two utilities have filed suit to challenge the plan
California
The state permitted customers to choose their electric service providers as of Jan 1 of 1998. The customers have three options: retaining their current provider, switching to direct service by another provider or purchasing from a non-profit clearinghouse called the Power Exchange. The exchange bills its customers based on a metered hourly rate that fluctuates with the cost of electricity. State regulators will allow California utilities to collect $28 billion for old debts.
Illinois
The Illinois General Assembly passed a plan to require competition for local utilities beginning in 2002. The plan delays changes in assessed values of power plants for 3 years to soften the impact on local governments, which will collect lower property tax receipts if plants decline in value under competition.
New York
The state will introduce utility competition through agreements reached with utilities. The state determines how much each utility collect to pay off old debts. Competition will be phased in for customers of Consolidated Edison of New York from 1998 to 2002, and the state will allow the utility to collect for some bad debts.
Pennsylvania
The state has begun a pilot program to introduce utility deregulation and will phase in utility customer choice to one-third of customers by 1999, two-thirds by 2000, and all by 2001.
Michigan
State regulators plan to phase in utility deregulation by 2002 and will allow recovery of old debts for utilities. Michigan Attorney General Frank J. Kelley has joined consumer
And business groups in filing suit against the Michigan Public Service Commission to challenge its utility restructuring plan.
One way to solve the main concern of deregulation, stranded costs, would be to do what many states have already done, allow the utility companies to recover the costs of old debts, old debts being part of stranded costs. Long-term utility contracts and the building of new power plants to meet future electricity demand are a large part of these old debts. With deregulation the utility companies will no longer be mandated to serve all customers in a specific territory as they were in regulation. They will be able to pick and choose how many or how few to serve. Therefore they feel they should be compensated for their investments because they were required by the government to build more plants and enter long-term contracts. If the national plan for deregulation includes an effective and feasible way to recover stranded costs, it would answer the main problem concerning deregulation. That would probably be the thing that would bring most everyone on board right there.
As far as the problem regarding possible loss of social and environmental protections, the government could pass legislation that would require the private companies to operate within social and environmental boundaries. We won?t know if this is going to be a major problem yet, the government is doing the right thing by allowing the states to experiment with deregulation. That way the kinks can be worked out with as little
Trouble as possible. You are going to have your bad apples in the bunch, some people just want to make as much money as they possibly can. They don?t care if they destroy the environment or alienate people. But measures need to be taken to ensure that the people and companies that choose to operate in that manner are dealt with harshly. If they are allowed to get away with it then deregulation could become quite a disaster.
We are on the verge of a major change with the advent of electrical utility deregulation. It couldn?t have come to light at a better time, here at the end of the 20th century. The face of business has changed many times throughout the course of American history without many problems. Deregulation presents a whole world of opportunities for business as well as the consumer. Entrepreneurs are afforded a marvelous opportunity. The ability to start or get in on the ground floor of a new and potentially lucrative business. With privatization literally thousands of new jobs will be created, something that is always welcome with the United State?s ever growing population. For the consumer a whole range of choices will be in front of them. Before they had to use the utility company that served their region or they didn?t get any service. Didn?t matter if they didn?t care for the company, or they constantly got bad service, you were stuck with that company. With deregulation the consumer will be able to choose whichever company they like. Better still, they can choose to purchase all or just a portion of the services, much like cable TV. Business owners will also benefit from lower electricity costs. And they can choose the package of services that best fit their needs.
To the opponents of deregulation, I would say to them let?s see how it works out with the states before you condemn deregulation. There is an upside and a downside to every issue, we will see in time that the upsides far outnumber the downsides. And if it turns out that it isn?t practical, then we can always go back to the old way. All in all, I believe electrical utility deregulation is the future of the electrical utility industry, and of the United States as we usher in the new century.
Bibliography
Reliant Energy HL & P 1999
http://reliantenergy.com
Power Watch Volume 3 No.1
Orlando Utilities Commission
OUC Print Shop
Jan 1, 1999
C Three
Electrical Utility Deregulation: A State By State Analysis
http://cthree.net/reports/dereg/index.html
Houston Lighting and Power
http://www.hlp.com
NW Energy Coalition
http://www.oz.net/ncac/facts.html
Cost Control Associates-Energy and Telecommunications Consultants
http://www.costcontrolassociates.com
pur.com the Online Resource for Public Utility Information
http://www.pur.com
Low Income Home Energy Assistance Program (LIHEAP) Home Page
http://www.ncat.org/liheap/dereg.htm
The Roanoke Times Politics
Utility Power Shifts
February 25, 1999
http://rtonline1.roanoke.com/roatimes/news/story49900.html
Stranded Utility Costs
The Nation, November 2, 1998
V 267 n14 p 23(2)
Electrical Utility Deregulation
By
William Peterson
PAD 4034 Tues-Thurs 11:30-12:45