Utility Regulation Plan Is Due Out Today : Energy: Users may get to choose a power supplier. The only certainty is that competition is coming.
As the California Public Utility Commission today unveils its closely guarded proposals for changing the way electric utilities do business, four broad options are on the table.
All are designed to accommodate the competition--and potentially cheaper electricity--that most believe is inevitable in this once-monopolistic field, as new technology and federal deregulation make alternative sources of power available:
* Price caps: One scenario would place caps on utility company revenue similar to those used in the regulation of telecommunications firms. Efficiency gains in one area could be used to offset unseen expenses in another; PUC hearings would be greatly simplified.
* Performance-based rate setting: This approach is favored by the utilities. Power companies would be rewarded in the rate-setting process for efficiency gains. Rates would be capped based on projected costs of operation; if costs were reduced below the projections, the savings would be split between shareholders and ratepayers.
* Limited retail market: The PUC might call for treating different classes of customers in different ways. Big users could shop for their own electricity, while residential and commercial customers would still deal with a conventional utility. This approach mirrors the regulation of natural gas utilities.
* Retail wheeling: At the extreme is broader retail deregulation--known as retail wheeling in the trade--that could leave the utilities no more than transporters, rather than producers, of electricity. Users could buy power from independent producers--even out-of-state utilities--and simply arrange for their local utility to deliver it.
Elements of these scenarios could be mixed and matched, and each mix would have different implications for customers’ utility bills.
Whether some form of retail wheeling is part of the commission’s proposal “is really the $64,000 question,” said John L. Jurewitz, Edison’s manager of regulatory policy. California would be embarking on an uncharted path, departing from known regulatory principles in setting the price for billions of dollars’ worth of electrical power.
For more than a year, these scenarios have been making the rounds of utility executives worldwide in a PUC document known as the Yellow Report (for the color of its cover).
The report, titled “California’s Electric Services Industry: Perspectives on the Past, Strategies for the Future,” amounts to a concise rundown of the basic challenges and options that regulators, electric companies and their customers face today.
“It’s probably the single most widely circulated and read document on the future of electric generation on the face of the earth,” PUC President Daniel W. Fessler said.
Virtually no one involved wants to leave the regulatory structure unchanged, but neither is there wide agreement on any of the solutions--except for the broad notion that some sort of competition is inevitable.
Deregulation has had varying results in different industries, but the one most often looked at as a model for electric utilities has been the market in natural gas. And there, many observers see success.
As a rough rule of thumb, natural gas deregulation is considered to be 10 years ahead of electricity deregulation in California. And the California Energy Commission reports that consumers have saved billions of dollars on natural gas since 1983, though a more exact figure has not been calculated.
“It’s been very, very significant,” said Charles R. Imbrecht, the commission’s chairman.
Applying market forces to retail electricity sales has attracted attention in disparate parts of the world, from Chile and Scandinavia to Michigan and Ohio. When Britain began to privatize its government-owned electric utilities in 1990 and gave them a clean slate to restructure the business, it too set up retail wheeling.
At first, the largest industrial customers could choose their power supplier, much as one picks a long-distance phone service. By 1998, every Briton will be able to do the same.
The big winners so far? Mid-sized commercial and industrial users, whose rates have dropped 30% to 35%.
There’s no reason to think rates will drop that much in California, but, Fessler said, “a utility will behave in an economically rational mode.”
“It will cater to the customers that are able to make alternative arrangements, and it will be far less sensitive to the needs and concerns of customers it regards as captive,” he said.
Deconstructing Deregulation
The California Public Utilities Commission today will unveil proposed changes to the rules that govern the state’s big investor-owned electric power companies, including Southern California Edison. Here is a short history of regulatory trends in the utility industry.
* The Traditional Electric Utility: In the 19th Century, utilities--viewed as “natural monopolies”--were granted exclusive territorial franchises. The assumption was that big generating plants were the most efficient, and no one wanted overlapping power lines from rival companies. The utility sold power at cost plus a regulated rate of return.
* Wholesale Deregulation: A 1978 federal law allowed the first non-utility production of energy, in part to encourage the use of non-fossil fuels. A 1992 law opened the utilities’ transmission lines to these independent producers. Low-cost natural gas, efficient gas-fired turbines and cogeneration plants allow other companies to compete with utilities. Utilities must buy electricity from this new market of independent producers if it is cheaper than their own power. They still sell at cost plus a regulated return.
* Retail Deregulation: Among the options under consideration by the PUC is “retail wheeling,” which would allow big industrial customers--and perhaps others, eventually--to shop for power among various generators. The utility’s only job would be transmitting the electricity. Proponents say this could apply market forces that would drastically cut electric rates. The utilities say price caps on their revenue would do the same thing without disrupting the utility system. Environmentalists say the lower power bills might come at the cost of environmental and social benefits.
