The electric generation service supply "Opt-In, Opt-Out" decision: Determining what's best for member-consumers.

• Author: Lewis, Tom D.

In the 1930s and 1940s, many Americans did not have the ability to receive electric delivery or distribution service since it was not available from investor or municipally owned electric utilities at affordable prices, if at all. Cooperatives were formed by resourceful members who both provided their own money--through membership contributions and patronage capital--and who also obtained government loans to build their own electric systems.

Later--primarily in the 1960s--another major challenge came for electric cooperatives when it become apparent that cooperatives and their members could not count on reasonably priced electric production or generation services from investor or municipally owned utilities. This led to the formation of many generation and long distance transmission cooperatives (G&Ts) in the United States. These G&Ts were made possible by the investments of cooperative members and through financing from governmental as well as private lenders.

Cooperatives face a new challenge today and that challenge is deregulation. This challenge revolves around the concept of customer choice; that is, permitting electric end-use customers to choose their electric production or generation supplier. It also involves possible customer choice in the selection of a provider of certain other electric services.

Deregulation and Its Implications

In the United States, there are 23 states where restructuring legislation has been enacted and one state where comprehensive restructuring orders have been issued. These actions will require many electric utilities to offer generation service choice to their electric customers. There are also 21 more states that have active legislative and/or regulatory processes underway to study restructuring and propose implementing legislation.

The view that drives these initiatives is that by removing barriers to competition, energy prices will be reduced, the quality of energy services will improve, and the quantity of energy service offerings will be increased. And there is evidence in other industries that deregulation does, in fact, lead to these results (Table 1).

Besides price reductions, deregulation has led to the quantity of services being increased. For example, in the telecommunications industry, the competitive demands of the marketplace and technology advances have led to a proliferation of phone technology, which has resulted in more telecommunication services to customers such as call waiting, caller I.D., and better phone messaging services.

Many believe the quality of services has also been maintained. One author explained, "Crucial social goals such as airline safety, reliability of gas service, and reliability of the telecommunications network were maintained or improved by deregulation and customer choice" (Thierer, 1997).

Under current law, federal regulators do not have the authority to order retail customer choice. Deregulation rules and requirements, therefore, will be approved on a state-by-state basis. Given this, some cooperatives will be forced to offer their members customer choice. Other cooperatives will not be permitted to offer their members customer choice. Other states, however, are going to offer cooperatives the option to participate in a particular state's customer choice environment or not. This decision is commonly referred to as a "customer choice opt-in or opt-out decision".

Given the results of the deregulation of other industries and the assumed potential benefits associated with customer choice in the utility industry, each individual electric cooperative facing an optin, opt-out decision must be prepared to determine whether there are benefits of customer choice for its member - consumers. If the benefits of customer choice are not apparent, cooperative leaders must be able to knowledgeably explain to member-consumers why these tangible benefits are not available for the members of the cooperative at the current time.

Because of the magnitude of this decision and its implications for the cooperative and its members co-ops should periodically re-assess this decision. This paper outlines nine steps that can be taken by the management of a co-op when it makes an opt-in, opt-out decision.

The Nine Steps for Determining What's Best for Our Member-Consumers

The next few years will require cooperatives to make many strategic and operational decisions concerning customer choice. These decisions must be made after thorough and complete analysis if cooperatives are to ensure that their members benefit, or are not negatively impacted, in the move toward greater deregulation. Discussed below are nine steps that cooperatives may use when making a customer choice opt-in, opt-out decision.

Step #1: Understand what deregulation is, the driving forces behind customer choice, and what choice is all about.

This paper has already discussed what deregulation is and the driving forces behind it. It is essential that the management of cooperatives very clearly understand these concepts. Management must also have a clear understanding of the detailed implementation requirements of customer choice.

The traditional cooperative utility model (Figure 1) has offered customers no choice at all. Electric power originates at a generation power plant. It gets to the customer by being sent through transmission lines, then through a substation, and finally through distribution lines. It arrives at the member-consumer's location by going through a meter. Customers do and may receive other services from its electric energy provider, such as metering, billing, and customer care. Historically, the provider of all of these services has been chosen for the consumer through various territorial agreements. These agreements vary greatly from state to state.

Under the new customer choice utility model (Figure 2), customers will have a choice as to the producer of its electric power; that is, the customer will select the generation provider that will provide it with electric power. The customer will continue to have no choice as to the provider of its transmission lines, its substation, and its distribution lines. Regarding the provider of its metering, billing, and other customer care services, there are still some questions as to whether the customer will have a choice in selecting this provider.

Given this new utility model, it will be imperative that cooperatives evaluate each of these three primary areas:

1. Power Generation Supply Service [choice]

2. Power Transmission, Substation, and Distribution Services [no choice]

3. Metering, Billing, and Customer Care Services [possible choice]

   Power generation supply service is the service that consumers will have an initial opportunity to choose in the competitive electric marketplace. It is this area, therefore, that a cooperative must examine first to determine if customer choice is beneficial for its members. This paper, therefore, will limit itself to a discussion of the opt-in, opt-out decision concerning power...