role of the regulator in an increasingly competitive market, The

ALBANY--Competition is coming to the electric-power industry. It is driven by economics and technology. The result, at least in the short run, will be a mess. There is a better way, however.create a real competitive market.

The question is not "Will competition come?" but, "When will competition come, in what form, and how fast?"

Competition is driven by economics and technology. The rates now charged to customers, in many cases, greatly exceed the current marginal costs of production. Further, they vary substantially among utilities and regions. The possibility of saving millions of dollars forces customers to seek options, which increasingly, are available.

Electricity prices in New York are too high. The average industrial rate in New York is already nearly 40 percent above the national average. And reserves are projected to be in excess of 35 percent over the next 18 years. The power generating capacity of non-utility generators will grow from 162 megawatts now to more than 1,800 megawatts.

Moreover, power generation is now very economical. Power can be produced for about three to three-and-a-half cents per kilowatt hour. Plus, advancements in metering and switching gear clearly allow for individual customer shopping.

Many competitive options already exist. There are at least 14. These include self- or cogeneration, joint ventures with gas-fired power plants, utilities brokering power, jumping franchises and "wheeling" (buying directly from a party other than your utility) to political subdivisions of states, and municipal takeovers.

How viable are these options? In a word, very. The federal Energy Policy Act of 1992 greatly assisted many of the options, especially self- and cogeneration, municipalization, retail to wholesale load shifts, and wheeling to political subdivisions.

What will be the outcome of these options?

Many new entities will be supplying power and many new entities will be shopping for power. There will be sizable "stranded costs." [That's power industry lingo for an expensive power plant built with the expectation that rates could be raised to recover the construction expense.]

So, what will be the future role of regulators?

The answer depends, in part, whether we're talking about the short term or the long term. A tidy, vertically organized industry with captive customers is not an option.

It is tempting to say, "Regulators, get out of the way!" but it is not that easy. Regulators will have a major, but changing, role for a long time.

I offer the following assumptions for the short term:

* Vertically integrated utilities will continue to exist.

* There will be a sizable number of independent power producers.

* Cities, counties, and cooperatives will engage in active wholesale shopping.

* We will see a growing use of power brokers and marketers.

* Aggressive customers will exercise all available options.

* There will be heavy discounting and a tremendous number of special deals.

* We'll see a number of ratings downgrades by Wall Street.

* There will be growing pressure to eliminate social programs by utilities.

We'll also witness a considerable number of tensions. These tensions will include: utilities versus independent power producers, utilities versus neighboring utilities, and jurisdictional disputes between state and federal regulators.

For the short term, the role of the Federal Energy Regulatory Commission will be to keep jurisdiction over all interstate transactions and over wholesale or bulk-power transactions. The commission will also keep jurisdiction over wholesale transmission access and pricing, along with power pools and regional transmission groups.

Meanwhile, the role of the state public-utility commissions in the short term will be augmented. Additional work will be required, due to the necessity of approving special rates and special deals of every type and kind. Public-utility commissions will also be asked to allow the unbundling of services. This may be difficult for some states. They'll also be confronted with the question of what to do about stranded costs and whether to allow utilities to charge customers for disconnecting from the network. These may even require reevaluation of previously litigated cases.

Meanwhile, the move toward competition in the power industry leaves a number of responsibilities poorly defined or not defined at all. These include:

* Who will regulate retail access?

* Will retail transmission pricing be regulated?

* Who will approve the creation of new wholesale entities? Or will approval be required?

* Who defines "a political subdivision of a state" for the purpose of retail wheeling?

* Will power producers be allowed to include nontransmission costs as a part of transmission rates? (This might be done to recoup stranded costs.)

In the short term at least, the expected results will be messy. We can expected contentious and acrimonious debates. Look for arguments over what can and cannot be subject to competition. Also look for many lawsuits, most involving charges of discrimination or jurisdiction. And, expect more decisions to be made outside the regulatory structure.

To avoid this, I think the answer lies in moving toward competition quickly. All customers should be able to source their power needs competitively. The planning process will be greatly improved. True least cost planning is assured. Cost-effective energy-efficiency measures will be encouraged, because customers are most cost conscious when they shop.

State public-utility commissions can encourage the move toward competition by focusing on cost--real least cost. That means unbundling whenever possible, comparing regulated to unregulated costs, and never forgetting that even captive customers really do care about rates.

They can also help by assuring comparability for all. Nondiscrimination is the key. Ownership should not give preference, and customers should not be punished for taking options. Overall, they should recognize that competition means greater efficiency and lower costs, and that is good for all customers.

In conclusion, competition is coming. Regulation will change, but not go away. In the short run, both the industry and the role of regulation will be quite unstable. But the regulatory role will become clarified as competition becomes more robust. An expedited movement toward real competition is in both regulators' and consumers' best interest.

John A. Anderson is executive director of the Electricity Consumers Resource Council, a group of large industrial companies. Anderson holds a doctorate from the University of Florida with a concentration in public-utility economics and industrial organization.

Copyright Central New York Business Journal Jul 25, 1994
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