Restructuring of the electric utilities industry: an overview for government finance officials.

• Author: Rutledge, Virginia B.

The emergence of a competitive and less regulated electric power generation and delivery system will raise an array of finance issues for state and local governments.

Three articles comprise this briefing on the fundamental changes occurring in the electric power industry and what the future may hold for electric power companies and, more importantly, the prices and services they provide to the ultimate customers. A background discussion of the players and the playing field provided by the Missouri Basin Municipal Power Agency highlights recent developments in deregulation of the industry and the emergence of retail competition in the distribution and sale of electricity. Competition means consumers shopping the market for retail service. What assurance of uninterrupted service and equitable rates will consumers have in a deregulated electric power marketplace? These and other questions are addressed in the second article, which presents excerpts from a June 1996 report of the American Public Power Association's (APPA) Retail Wheeling Legislative Task Force. Identifying the implications of some of these issues for state and local government finance is the focus of the third article - a commentary by a former president of the Government Finance Officers Association, Virginia Rutledge, who is vice president and chief financial officer of the Orlando Utilities Commission. The editors are indebted to Lori Pickford of APPA for her assistance in developing this briefing.

Current Structure and Trends in the Electric Utility Industry

Missouri Basin Municipal Power Agency

The utility industry is comprised of three basic functions: power generation, high voltage transmission, and retail distribution. Generation is the process of actually creating electricity through such means as coal-fired, gas-fired, hydroelectric, and nuclear power plants. Transmission refers to the network created to move electricity across large distances through high-voltage lines. The distribution system is the set of lower voltage lines that moves power off the transmission system and to the end users. Many electric utilities are vertically integrated, with a single company performing all three functions. While utilities may provide each of these services separately, its core business - providing electricity to retail consumers - bundles all three functions into a delivered service.

Historically, the power-generation sector was characterized by economies of scale - power plants were cheaper to build, per unit, as the size of the plant increased. While power generation was not a monopoly function, these economies of scale and associated capital requirements effectively limited the number of market participants.

High-voltage transmission facilities are a natural monopoly - it is not economic nor socially desirable to construct multiple transmission systems (and not allowed under applicable Missouri law). These transmission facilities are owned principally by large, vertically integrated utilities.

Retail distribution service - the physical delivery of electricity to end-use consumers over low-voltage lines - also is considered a natural monopoly, with a single utility providing retail service in a given geographic region. There are limited cases in which two competing distribution systems exist. The retail distribution market is composed of three types of utilities.

* Investor-owned utilities (or private utilities) are usually part of a vertically integrated company and receive a franchise to serve a specific geographic market for a set period of time. There are 249 investor-owned utilities, serving approximately 75 percent of retail electric consumers.

* Rural electric cooperatives (or co-ops) operate as private, nonprofit membership corporations. There are 937 co-ops, serving about 10 percent of the retail electric market.

* Public power systems are utilities owned and operated by municipalities and other units of state and local government. There are 2,015 public power systems, serving about 13.5 percent of the retail market.

Co-ops and public power systems also are referred to as consumer-owned utilities. Although some consumer-owned utilities are vertically integrated, the majority are distribution systems only. Frequently, these consumer-owned distribution utilities have joined together as joint action agencies or cooperatives to build or arrange for power generation and transmission.

Traditional Regulation

The sale of electricity from one utility to another and the provision of transmission services is considered a function of interstate commerce. These wholesale transactions are regulated by the Federal Energy Regulatory Commission (FERC) under the Federal Power Act. Retail electric service - sales to end-use consumers by private utilities - is regulated by state public utility commissions. The retail rates and services of consumer-owned utilities are set by their locally elected or appointed governing boards and usually not by state public utility commissions. Many consumer-owned utilities, however, are subject to limited state public utility commission jurisdiction (e.g., power plant siting and service territory determinations).

Traditionally, FERC...