Is there a need for electric utility reform?

• Author: Taylor, Jerry

The rollback of regulations meant to protect consumers from "monopolistic industries"--or to protect "monopolistic industries" from competition, depending on how you look at it--has been proceeding apace for two decades. The trucking, railroad, airline, banking, busing, natural gas, and telecommunications industries all have been deregulated to some degree or another. Now comes perhaps the most important challenge of all--the electric utility industry.

After several years of regulatory skirmishes, interest group negotiations, academic agitation, and political posturing, the introduction of H.R. 655--the Electric Consumers' Power to Choose Act of 1997--by Rep. Dan Schaefer (R.-Colo.) signals the beginning of what promises to be the deregulatory "trial of the century" with a verdict likely sometime during the 105th Congress.

That is what the "reformers" would have us believe. However, the political jury is not being asked to judge whether the electric utility industry should be deregulated, but whether a different set of regulations ought to be substituted for the status quo. It is not altogether clear that the regulatory changes proposed actually would reduce the regulatory burden on this industry, much less reduce the price of electricity to American consumers.

For the time being, Schaefer's bill appears to be the main vehicle for electric utility reform. Its central features include:

* State public utility commissions (PUCs) must submit a plan to the Federal Energy Regulatory Commission (FERC) by Dec. 15, 2000, that would allow all retail consumers of electricity a choice in retail electric energy service providers. If states refuse or otherwise are unable to submit a plan, FERC is required to impose a plan for them. States can not restrict any entrant from the field.

* FERC is directed to ensure that utilities allow third-party access to their transmission and distribution grids at regulated, nondiscriminatory rates. States are directed to ensure that third-party energy providers have reasonable and nondiscriminatory access on an unbundled basis to the grid under rates, terms, and conditions that are just, reasonable, and not unduly discriminatory, with the understanding that grid operators have a right to recover all costs incurred in connection with the local distribution service and necessary associated services.

* Upon implementation of a plan, states are required to impose flexible pricing and incentive rate regulation on electric utilities until the state PUC determines that such utility is subject to effective competition. Nonutility electricity service providers, however,

Mr. Taylor is director of natural resource studies, the Cato Institute, Washington, D.C. are exempt from any such rate oversight.

* States are required to consider tariffs or surcharges to make sure that adequate electric service is available to all retail customers on a competitively neutral, nondiscriminatory basis, ensure service reliability, guarantee the recovery of stranded investment costs incurred prior to July 11, 1996; and promote energy efficiency, conservation, and environmental protection.

* States may regulate retail electricity service to preserve universal service, protect public safety and welfare, ensure the continued quality of service, and safeguard the rights of consumers as long as such regulations are nondiscriminatory and competitively neutral. They also may levy fees on electricity service providers on the same nondiscriminatory and competitively neutral basis.

* Owners of transmission grids are prohibited from using revenues from such facilities to subsidize other business undertakings, such as electricity generation.

* Municipal-owned utilities and electricity co-ops are prohibited from reselling electricity from Federal power marketing administrations to consumers who are not served currently by that utility or co-opt

* FERC is empowered to order utilities to deliver electricity from third-party power generators to their customers (and even to mandate the enlargement of transmission capacity necessary to provide such service) across state lines under such terms and conditions as the commission finds are necessary and appropriate to ensure nondiscriminatory access to electricity transmission facilities.

* All electricity generators are required to have renewable energy credits equal to two percent of their generation once the state "competition" plan is adopted, three percent by 2005, and four percent by 2010. This credit requirement is a base line only: "Nothing in this section shall be construed to prohibit any state from requiring additional renewable energy generation ... under any program adopted by that state." Credits may be obtained either by investing directly...