Electrical Utility Deregulation

     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. Todayís
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 customersí 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 doesnít 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 wonít 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 donít 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 couldnít 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.