Industry restructuring.

• Author: Wortham, Gregory L.
• Position: Electric utility industry - Industry Overview

OVERVIEW

In the name of "competition," certain industry sectors - specifically large industrial customers, independent power producers, power marketers and some low-cost investor-owned utilities - are trying to take advantage of the new Republican majorities in Congress to bring about major structural and regulatory changes to the electric utility industry.

It is important to recognize the role of energy, and electricity in particular, in U.S. society. Throughout our history, the engine driving our economic growth has been fueled by the abundance of our natural resources and the availability of abundant, low-cost and reliable energy. Industry has continued to turn to electricity for their primary energy supply and has continued to push for new electrotechnologies that utilize energy more efficiently.

The economic magnitude of the electricity sector is also a concept that is critical to understand. Americans spend roughly $200 billion every year for electricity. By contrast, natural gas sales total about $70 billion a year. If a new player in the electric industry could gain only a one percent market share, stockholders in that company would see $2 billion in annual revenue that they did not have before.

In 1994, electric cooperatives had annual revenues from electricity sales of about $16 billion. Publicly owned utility power sales totalled approximately $26 billion, and IOUs had electric revenues of about $160 billion. Revenues of power marketers, energy service companies, and other new entrants were virtually nonexistent in 1994, but these new players have been rising steadily as a force in the electric industry.

Restructuring would change the rules of the game. Restructuring would change the regulatory focus for cooperatives, reducing the pre-eminence of the Rural Utilities Service (RUS) and raising the importance of the Federal Energy Regulatory Commission (FERC) and state regulators. Restructuring would dramatically change the way cooperatives do business.

THE MYTH OF 'DEREGULATION'

Many proponents of electric industry restructuring talk of "deregulation" of the electric utility industry. In this vein, they draw analogies to the "deregulation" of the airline industry, the tracking industry, telecommunications, natural gas, cable television, and other sectors. This is an ideological march, the electric industry is the next agenda item. "Deregulation", however, is clearly a misnomer, and it distorts the debate. True deregulation would mean repeal of all federal and state regulations, let the market reign. No one is proposing to do that.

What has been proposed in every case is, in fact, re-regulation, a re-drawing of the regulatory compact. Each restructuring proposal to date shifts the regulatory burdens. Congressman Schaefer's bill, which is typical, would regulate virtually every activity that new entrants don't want and would de-regulate every venture that power marketers and other pro-competition entrepreneurs want to get into. Transmission and distribution activities would be subjected to new, intensified regulation. Most proposals call for removal of most economic regulation of the generation sector, while a new "energy-services" category would be free of virtually all regulation.

The regulatory shift will create winners and losers - among utilities and new entrants and among consumers. The regulatory allocation between energy companies is usually closer to the surface. The consumer implications are generally less apparent in the words of the proposals. But keep in mind that U.S. regulatory policy for most of the last 100 years has been based on a deliberate policy of protecting the consumer at the end of the line and enabling infrastructure and economic development across the country - rather than just where the "free market" would choose. Most of the re-regulation proposals would shift the regulatory shield from protection of consumers and rural areas to protection of big business and metropolitan central business districts.

One feature common to several federal and state proposals that is particularly telling in the deregulation/re-regulation dichotomy is their treatment of so-called "non-regulated" electric utilities. "Non-regulated utilities is government-speak for cooperatives, municipals, and certain other public power entities. As you are well aware, cooperatives are highly regulated by the Rural Utilities Service, and many are subject to substantial state regulation. The term...