Opportunities Created by Electric Utility Deregulation

By Bercher, Thomas | Public Management, July 1997 | Go to article overview

Opportunities Created by Electric Utility Deregulation


Bercher, Thomas, Public Management


Utility deregulation at the retail level is just starting to appear on most of our radar screens. New England became the first region to deregulate in the United States, over the objections of utility companies, whose protests were attributable to a number of reasons, some apparent, some not so apparent.

One factor was the cozy, comfortable relationship that had existed between the state regulators and the utility companies. While each side may have complained from time to time, both sides were locked in a symbiotic relationship.

Utility companies were guaranteed a "reasonable" rate of return on investment, cost of production, and maintenance. Utilities were guaranteed a profit regardless of the economic or environmental impacts of their decisions. Bad decisions were not punished by the marketplace; there was no penalty for Edsels in the utility industry. In fact, some observers have argued that the investment in nuclear power plants was a direct outgrowth of the desire to see huge investment that would push up the amount of return.

Deregulation

An early step toward deregulation came when power companies became required to purchase power from alternative producers on a power company's cost-of-production basis. Abandoned dams were given a new lease on life as hydropower was harnessed. While the amount of power generated was not large, in my view this step opened discussion on the concept of "retail wheeling."

The Reagan years, with their panacean belief in the marketplace, saw the end of regulated utilities. After all, the effect of the airline deregulation started by President Jimmy Carter was viewed as good: airfares went down, and ridership went up. Today, little is said of the number of airlines no longer in business or of the places no longer served. But, in any case, deregulation of the utility industry still is undergoing definition. Everyone will be served, though, just as with the airlines, popular destinations will have lower fares. Consolidation within the utility industry already has started.

Utility company executives and investors are scrambling to protect their investments, now that profits are no longer guaranteed by the government. Of special concern is the so-called stranded investment, that for which there is no easy way of providing for a return. Aging or decommissioned nuclear power plants are the most economically alarming examples of stranded costs. Who should be responsible for their closure and cleanup? On the one hand, the executives and investors of power companies argue that the plants were built at the urging of the government to provide power while reducing the impact on the environment and the demand for foreign oil, and therefore the utilities should be protected from the economic impact of plant closure. On the other hand, consumers do not want to be saddled with the cost of abandonment either. And similar problems exist for other obsolete investments.

Electric distribution companies have resisted letting go of their retail business, arguing that retailing electricity is not practical. But they are mounting the same arguments that AT&T long-distance service did when challenged by MCI. Electric utilities will suffer the same defeat that AT&T did.

There is no practical reason why power lines cannot carry power from several sources simultaneously while delivering power to many different locations. The cost of system maintenance, replacement, or expansion has to become a factor of the retail cost, but there clearly is no economic or engineering prohibition for this "wheeling" of power at the retail level. Wheeling of power at the wholesale level has been going on for decades.

Power retailers and wholesalers have been getting together to send energy over systems to where it was needed since the days before the Tennessee Valley Authority (TVA) was begun. At one time, I worked for a community that owned the local electric distribution system but no generating system. …

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Opportunities Created by Electric Utility Deregulation
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