FREE ESSAY ON ELECTRICAL UTILITY DEREGULATION

ELECTRICAL UTILITY DEREGULATION

Electrical utility deregulation is the process of transforming electrical utility
companies from regulated monopolies to market-driven suppliers of competitive energy and
services. (Reliant Energy HL&P 1999) It means that customers will have the ability to
choose their electrical supplier. Today's utility customers want lower prices, more
choice, and better service as well as reliability. The deregulation of other industries
such as railroad, trucking, natural gas, and telecommunications has shown people that
choice can provide better value. 
The deregulated electric utility industry would look and act a lot like the long distance
phone business. The market would set electricity rates. Sharp increases or decreases in
the cost of fuel or customer volume would affect the prices. Prices have decreased even
without deregulation however. According to the Edison Electrical Institute, real
electricity prices have dropped 27 percent in the last 15 years. But with deregulation
there is the potential that they will drop even more. 
The main issue that is of concern to electrical utility companies is stranded costs.
Stranded costs are the past investments utilities were obligated to make in the regulated
electric system. These investments were prudently incurred and government-approved to
ensure reliability of supply and were partially recovered through customers' rates.
(Reliant Energy HL&P 1999) Electrical utilities believe the recovery of past investments
should be part of the overall deregulation process since they will be hard to recover in
an open, competitive marketplace. If this issue is resolved to the satisfaction of the
utility companies, it will open the way for deregulation.
As stated in the previous page, the main obstacle to electrical utility deregulation is
stranded costs. Two of the main issues surrounding stranded costs are their impact on
electricity prices and stranded costs will affect the financial viability of an
individual electrical utility. It is hard to determine exactly how much stranded cost
will be. They have been estimated to be anywhere from 10 billion to more than 500
billion. And stranded costs may be higher in some parts of the country than in others.
According to Research Data International, 86 percent of the stranded costs lie in 10
states that have 43 percent of the electricity market. California is at the top of the
list, followed by New York, Texas, Illinois, Pennsylvania, New Jersey, Ohio, Georgia,
Massachusetts, and Connecticut. The utility companies want to be able to recover most of
if not all of their stranded costs, and if they are not able to electrical prices may be
higher because of it. 
Another problem that has arisen is the concern over possible environmental and social
protections built in through regulation would be lost. The Utility Workers Union of
America believes that a competitive market would give profit driven companies an
incentive to promote consumption, which would undermine many of the conservation programs
that are promoted today. I think that we should not rush to judgement on these problems.
Many states are implementing deregulation, and we will see exactly what happens and
doesn't happen during these experimental times. Similar concerns were raised before the
airline industry was deregulated, but it worked out just fine. 
There are 3 main objectives that electrical utility deregulation hopes to achieve. First
and foremost are lower utility rates. Granted that utility rates are relatively low at
the present time, with deregulation there exists the potential for them to be even lower.
Businesses would have the most to gain from deregulation because of the large amounts of
electricity that they utilize. They would be able to use the money saved on other methods
or capital to better serve their customers. The everyday household would benefit because
instead of having to purchase all the services from a utility company, they would have
the option to purchase only some of them, or choose a different company of their liking.

Secondly, better quality of service and product as a result of the competition is another
objective of deregulation. With many different companies competing for customers, the
companies will not benefit from producing an inferior product or poor service. The
customers will simply take their business elsewhere. Prices will also be lower, because
all the companies will be trying to entice customers with the lowest rates. Competition
is what made the American economy into what it is today. It is a vital component of
capitalism. The freedom of choice enjoyed in a capitalist system is so often taken for
granted. It is what this nation was founded upon.
The third objective of deregulation is the creation of more jobs through privatization.
With deregulation there will be many more utility companies forming with the advent of an
open market. These new companies will obviously need to hire people. Not just for their
installers and service crews, but salespeople, office personnel, shipping and receiving
clerks, stock clerks, order pullers, and many other positions. So jobs are 
Created not only for the skilled utility laborers, but also for people with sales
experience, office training, and people seeking entry-level positions such as stock
clerks and shipping and receiving personnel. So the ongoing unemployment issue in this
country will get some relief from deregulation.
On the other side of the issue, some argue that environmental and social protections
built into regulation would be lost as a result of deregulation. The feeling is that with
more and more private utility companies competing for customers, little attention would
be paid to environmental regulations. Power lines would be erected in places that are
harmful to the surrounding environment, and power plants would operate outside of the
environmental guidelines in order to increase output at the lowest possible cost. Social
protections may also suffer. With so many independent companies competing with each other
without government oversight there may be companies that would offer one rate and then
charge a much higher one instead. Or promises services and not follow through with it.
The fear of shady business practices by independent companies is one of the main issues
that opponents to deregulation bring forth. 
The policy that began the debate over free market electricity was the federal Public
Utilities Regulatory Policy Act of 1978 (PURPA) which opened generation markets to
independent power producers. Next came the Energy Policy Act of 1992 which set forth a
mandate of wholesale wheeling of power over a grid from one electric utility to another.

A major component of this act was Order 888, known as the open-access rule. It requires
utilities that own transmission lines allow others access to those lines. To implement
the Energy Policy Act, the Federal Energy Regulatory Commission (FERC) ordered utilities
in 1995 to open their transmission systems to outside energy providers. (National
Association of Development Organizations, 1998)
So far fifteen states have approved electrical utility deregulation. What follows here is
a summary of some of their plans, based on information from the states and surveys
collected by the Electrical Power Supply Association, and the National Rural Electric
Cooperative Association.
Arizona
State regulators will allow competition for 20 percent of customers by 1999, for 50
percent by 2001 and for all by 2003. Two utilities have filed suit to challenge the plan
California
The state permitted customers to choose their electric service providers as of Jan 1 of
1998. The customers have three options: retaining their current provider, switching to
direct service by another provider or purchasing from a non-profit clearinghouse called
the Power Exchange. The exchange bills its customers based on a metered hourly rate that
fluctuates with the cost of electricity. State regulators will allow California utilities
to collect $28 billion for old debts. 
Illinois
The Illinois General Assembly passed a plan to require competition for local utilities
beginning in 2002. The plan delays changes in assessed values of power plants for 3 years
to soften the impact on local governments, which will collect lower property tax receipts
if plants decline in value under competition. 
New York
The state will introduce utility competition through agreements reached with utilities.
The state determines how much each utility collect to pay off old debts. Competition will
be phased in for customers of Consolidated Edison of New York from 1998 to 2002, and the
state will allow the utility to collect for some bad debts.
Pennsylvania 
The state has begun a pilot program to introduce utility deregulation and will phase in
utility customer choice to one-third of customers by 1999, two-thirds by 2000, and all by
2001.
Michigan
State regulators plan to phase in utility deregulation by 2002 and will allow recovery of
old debts for utilities. Michigan Attorney General Frank J. Kelley has joined consumer 
And business groups in filing suit against the Michigan Public Service Commission to
challenge its utility restructuring plan.
One way to solve the main concern of deregulation, stranded costs, would be to do what
many states have already done, allow the utility companies to recover the costs of old
debts, old debts being part of stranded costs. Long-term utility contracts and the
building of new power plants to meet future electricity demand are a large part of these
old debts. With deregulation the utility companies will no longer be mandated to serve
all customers in a specific territory as they were in regulation. They will be able to
pick and choose how many or how few to serve. Therefore they feel they should be
compensated for their investments because they were required by the government to build
more plants and enter long-term contracts. If the national plan for deregulation includes
an effective and feasible way to recover stranded costs, it would answer the main problem
concerning deregulation. That would probably be the thing that would bring most everyone
on board right there.
As far as the problem regarding possible loss of social and environmental protections,
the government could pass legislation that would require the private companies to operate
within social and environmental boundaries. We won't know if this is going to be a major
problem yet, the government is doing the right thing by allowing the states to experiment
with deregulation. That way the kinks can be worked out with as little 
Trouble as possible. You are going to have your bad apples in the bunch, some people just
want to make as much money as they possibly can. They don't care if they destroy the
environment or alienate people. But measures need to be taken to ensure that the people
and companies that choose to operate in that manner are dealt with harshly. If they are
allowed to get away with it then deregulation could become quite a disaster. 
We are on the verge of a major change with the advent of electrical utility deregulation.
It couldn't have come to light at a better time, here at the end of the 20th century. The
face of business has changed many times throughout the course of American history without
many problems. Deregulation presents a whole world of opportunities for business as well
as the consumer. Entrepreneurs are afforded a marvelous opportunity. The ability to start
or get in on the ground floor of a new and potentially lucrative business. With
privatization literally thousands of new jobs will be created, something that is always
welcome with the United State's ever growing population. For the consumer a whole range
of choices will be in front of them. Before they had to use the utility company that
served their region or they didn't get any service. Didn't matter if they didn't care for
the company, or they constantly got bad service, you were stuck with that company. With
deregulation the consumer will be able to choose whichever company they like. Better
still, they can choose to purchase all or just a portion of the services, much like cable
TV. Business owners will also benefit from lower electricity costs. And they can choose
the package of services that best fit their needs. 
To the opponents of deregulation, I would say to them let's see how it works out with the
states before you condemn deregulation. There is an upside and a downside to every issue,
we will see in time that the upsides far outnumber the downsides. And if it turns out
that it isn't practical, then we can always go back to the old way. All in all, I believe
electrical utility deregulation is the future of the electrical utility industry, and of
the United States as we usher in the new century.
Bibliography
Reliant Energy HL & P 1999
http://reliantenergy.com 
Power Watch Volume 3 No.1
Orlando Utilities Commission
OUC Print Shop
Jan 1, 1999
C Three
Electrical Utility Deregulation: A State By State Analysis
http://cthree.net/reports/dereg/index.html
Houston Lighting and Power
http://www.hlp.com
NW Energy Coalition
http://www.oz.net/ncac/facts.html
Cost Control Associates-Energy and Telecommunications Consultants
http://www.costcontrolassociates.com
pur.com the Online Resource for Public Utility Information
http://www.pur.com
Low Income Home Energy Assistance Program (LIHEAP) Home Page
http://www.ncat.org/liheap/dereg.htm
The Roanoke Times Politics
Utility Power Shifts
February 25, 1999
http://rtonline1.roanoke.com/roatimes/news/story49900.html
Stranded Utility Costs
The Nation, November 2, 1998
V 267 n14 p 23(2)
Electrical Utility Deregulation 
By
William Peterson
PAD 4034 Tues-Thurs 11:30-12:45