A Model for Alaska: Deregulation in the Far North

• Citation: Vol. 16
• Publication year: 1999

§ 16 Alaska L. Rev. 329. A MODEL FOR ALASKA: DEREGULATION IN THE FAR NORTH

Alaska Law Review
Volume 16
Cited: 16 Alaska L. Rev. 329

A MODEL FOR ALASKA: DEREGULATION IN THE FAR NORTH

Inara K. Scott ^[*]

I. INTRODUCTION

II. DEREGULATION: SETTING THE SCENE

A. Forces Converge on Electric Utilities

B. Federal Intervention

C. FERC Takes Matters Into Its Own Hands

III. ALASKA TODAY

A. The Electrical Market in Alaska

B. The Current Regulatory Scheme

IV. STATE DEREGULATION: FROM CALIFORNIA TO OREGON

A. General Overview of State Deregulation

B. California Residential Customers Ask, "What About Us?"

C. Montana Leaves Retail Customers in the Cold

D. Imposing Residential Protection: The Oregon Plan

V. A MODEL FOR ALASKA

A. Should Alaska Deregulate?

B. If It Deregulates, Alaska Should Look to Oregon for Guidance

C. How Alaska Can Learn From California and Montana

D. Adapting the Oregon Plan to Alaska

VI. CONCLUSION

FOOTNOTES

This Note considers whether Alaska should follow the recent state trend towards deregulation in the electrical market. It first examines the reasons behind the national trend towards deregulaion. Next it describes Alaska's current electrical energy market and regulatory scheme, and how it differs from the rest of the states. The Note then considers the regulatory schemes recently passed by other states, focusing on California, Montana, and Oregon. It then contemplates what Alaska can learn from the other states and concludes that if Alaska decides to deregulate, it should do so cautiously, with due regard to Alaska's unique market conditions and the needs of residential customers.

I. INTRODUCTION

Electrical deregulation is a hot topic. Every state is currently implementing or studying some form of restructuring in the retail electrical market. ^[1] Proponents of deregulation claim it lowers rates and allows for innovation in a stagnant, regulated market. ^[2] Opponents claim that deregulation primarily benefits large, industrial customers, and that residential customers suffer in deregulated markets. ^[3] Opponents argue that electricity is not like [*pg 330] any other commodity; it is a necessity of life, requiring special protection from the vagaries of competitive markets. ^[4]

While each state that implements deregulation must consider its own unique situation, the state of Alaska stands alone in the electrical market. Alaska is not connected to the lower forty-eight states by a transmission grid, and many rural areas of the state have isolated transmission and generation facilities. ^[5] A small customer base limits opportunities for developing competitive markets and economies of scale. ^[6] Still, proponents of deregulation argue that even in Alaska, competition will spark innovation and reduce prices. ^[7] They point to serious inefficiencies in the current market -- particularly the excess energy that goes to waste because there is no market for it -- to support their argument that Alaska residents can benefit from competition. ^[8]

The Alaska Legislature is currently exploring options for restructuring its retail electricity market and is considering implementing a pilot program. ^[9] Alaska should learn from the legislative models presented by California, Montana, and Oregon. If Alaska adopts deregulation legislation based on the Montana model, it could easily find itself with monopoly conditions and market share problems because of the lack of adequate transmission facilities and limited number of suppliers. ^[10] If it adopts the California plan, residential customers could see little benefit or higher rates in the long term, while industrial customers would enjoy lower prices. ^[11] Alaska's best alternative is to adopt a consumer-protective stance similar to that proposed in Oregon. [*pg 331] However, even a plan like Oregon's should be adopted in stages in order to prepare the market for competition. Deregulation could benefit Alaska, but regulators must proceed cautiously, with due regard to Alaska's unique market conditions and the needs of residential customers.

II. DEREGULATION: SETTING THE SCENE

A. Forces Converge on Electric Utilities

Traditionally, electric utilities have been vertically integrated companies ^[12] with fully regulated rates. ^[13] This tradition was built, at least in part, on the assumption that the electrical market is a natural monopoly. ^[14] In the 1970's, however, the traditional view of [*pg 332] utilities began to change. Customers, policy-makers, and politicians speculated over the potential for competition to benefit the electric energy market. A combination of forces made this shift in thinking possible. First, forecasts of increased demand and a threat of high prices for oil encouraged utilities to invest significant amounts of money into developing new forms of electrical generation, particularly nuclear power plants. ^[15] A period of inflation and high interest rates increased the cost of this capital development, forced utilities to raise rates, and left customers questioning the high prices and rate increases. ^[16] As the cost of nuclear development rose, so did concern over the environmental impacts of these plants. ^[17] Eventually, problems like the meltdown at Three Mile Island called national attention to the danger of nuclear power production. ^[18]

After investing large amounts of money into new generation, utilities were dismayed to find that the forecasted demand did not materialize. ^[19] Instead, vertically integrated utilities had excess capacity and enormous costs. To make matters worse, inflation increased the costs of operation for the nuclear plants while gas [*pg 333] prices stayed low. ^[20] New technology in generation, particularly gas-fired turbines, allowed independent suppliers to produce lower cost power than integrated utilities. ^[21] Finally, a growing environmental movement questioned the industry's investment decisions, and called attention to the potential for cost-efficient renewable resources. ^[22] As all of these forces came together in the early 1980's, public utility commissions grew impatient with utilities, and started to limit or deny utilities the chance to recover their investments. ^[23] Policy makers began looking for ways to encourage innovation in a seemingly stagnant and flawed monopoly market.

B. Federal Intervention

The government's first answer to the call for innovation was the Public Utility Regulatory Policy Act of 1978 ("PURPA"). ^[24] PURPA created a new type of power producer called a qualifying facility. ^[25] A power producer could become a qualifying facility if it met Federal Energy Regulatory Commission ("FERC") [*pg 334] regulations as a small power producer or cogenerator. ^[26] PURPA forced utilities to buy power from qualifying facilities at "avoided cost" -- the cost each utility would have paid if it had produced the energy itself or obtained it from an alternate source. ^[27] With PURPA, the government hoped to bring innovation to the industry through regulated competition, and to encourage the development of new suppliers. PURPA brought a number of new players into the electric industry -- independent power producers and marketers -- and forced many to question the assumption that the industry remained a natural monopoly. ^[28] After PURPA, FERC authorized new power producers and power marketers to sell wholesale energy at market-based rates on a case-by-case basis if the power producer could demonstrate that it did not have market dominance. ^[29] However, the inability of independent power producers to access transmission systems owned by monopolistic utilities limited their ability to compete in the wholesale market. ^[30] Investor-owned utilities ("IOUs") continued to generate the majority of the power they sold, although they began to purchase some wholesale power from qualifying facilities and other independent power producers. ^[31]

In 1992, the Energy Policy Act ^[32] attempted to address the difficulty faced by the independent power producers by giving [*pg 335] FERC the authority to order wholesale wheeling ^[33] of power for any utility, power marketing agency, or any other person generating electricity for sale or for resale. ^[34] The Energy Policy Act also furthered the trend toward deregulation of electricity generation by designating a new category of power producers called exempt wholesale generators. ^[35] These exempt wholesale generators were excluded from the definition of electric utility companies, ^[36] and consequently were exempt from regulation under the Public Utility Holding Company Act. ^[37]

C. FERC Takes Matters Into Its Own Hands

Although the Energy Policy Act gave FERC the authority to order wholesale wheeling, independent power producers did not rush to FERC to make wheeling requests. ^[38] Seeking out wholesale wheeling on a case-by-case basis actually gave the transmission [*pg 336] utility an even greater advantage over the power producer simply through the time delay caused by filing the request. ^[39] In Order 888, FERC attempted to remedy this situation by ordering all transmission lines to be operated on a non-discriminatory, open-access basis. ^[40] Order 888 required utilities owning transmission to provide open-access tariffs for their transmission services, and required the utility owning the transmission to take service for itself at the same tariff...