Regulatory oversight of the electric utility industry, as it evolved since its inception, is essentially an artifact of State economic regulation.(211) While the evolutionary development of this industry into a "natural monopoly" insulated it from market forces of competition, a regulatory regime monitored various facets of the industry's pricing and earnings activities as a surrogate for competition. Federal legislation followed State regulation and is "premised on the need to fill the regulatory vacuum resulting from the constitutional inability of States to regulate interstate commerce."(212)
Since the passage of the Energy Policy Act (EPACT) in 1992 and the issuance of Order Nos. 888 and 889 by the Federal Energy Regulatory Commission (FERC) in 1996 to promote competition in wholesale electricity trade, States have been active in paving the way for promoting competition at the retail level—the next frontier.(213) All but one of the 50 States, either through their regulatory commissions, legislatures, or both, are considering or implementing policies to provide greater options for retail electric customers.(214) By early 1998, 18 States had acted to restructure the electric industries in their States and to facilitate development of competition in retail electricity trade in their States during the next 5 years (Figure 22).(215) Some States have already called upon their jurisdictional utilities to unbundle the generation, transmission, and distribution components of their tariffs; others are working with partial unbundling during the currency of their experimental pilot programs.(216) Only a small number of States have so far postponed immediate action on restructuring by moving at a slower pace. In addition, members of both the 104th and 105th Congresses have introduced legislation to facilitate competition at the wholesale and retail levels.
Both State and Federal legislators strongly believe in the conceptual outcome of opening electricity generation to the discipline of the market. A competitive industry, as claimed by its proponents, will lead to greater economic efficiency and lower prices for consumers.(217) In the process, shareholders may assume greater risks but will also enjoy the prospects of higher rewards. Skeptics contend that the benefits of competition may not be evenly spread and that smaller consumers may be at a disadvantage.(218)
The potential benefits of bringing more competition into the industry in the form of lower prices will depend on the nature of the implementation strategies adopted. Current proposals take two distinct approaches: wholesale competition and introducing competition at the retail level. The terms of wholesale sales between utilities or between utilities and independent power producers are regulated by the FERC.(219) Generation, transmission, and distribution services provided by any integrated utility to all its customers within its franchised territory are considered retail sales or retail transactions. Retail customers invariably pay single, combined, or bundled prices regulated by State regulatory authorities. Significant differences characterize the needs of wholesale and retail customers. The prevailing diversity of interests between the two groups—wholesale and retail—and among stakeholders within each group creates complexities that do not easily lend themselves to a solution.
Proposed congressional legislation aims to open electricity markets to retail competition so that all customers can exercise the option to choose their own electricity providers and impediments to competition can be removed. To meet these objectives, a number of bills were introduced in the 104th and 105th Congresses. A brief summary of bills introduced in the 105th Congress is provided in Table 19. More detailed information is available in Appendix F.
Legislation introduced in the 105th Congress covers diverse spheres of restructuring activity. Some bills are comprehensive—expanding on initiatives contained in EPACT and building on the actions of the FERC (in promoting competition at the wholesale level) to facilitate retail competition by a date certain. Others focus on a variety of selected restructuring issues.
Eliminating impediments to competition that may result from continuing the provisions of the Public Utility Regulatory Policies Policy Act of 1978 (PURPA) or the Public Utility Holding Company Act of 1935 (PUHCA) have been addressed specifically. Rectifying constraints imposed on public utilities resulting from the use of tax-exempt financing constitutes another critical issue on the legislative agenda. Finally, there are a number of transitional and/or non-economic regulatory issues that either are part of the comprehensive legislation or have been addressed separately. Providing jurisdictional demarcation of Federal and State authority, recovery of stranded costs, implementation of environmental protection, reliability, public assistance programs, demand-side management, and others have also been included. It is possible that additional subjects may be added in the future.
The House and the Senate also organized many workshops in 1997 with an intent to seek a collective consensus on relevant issues in the restructuring debate from interested stakeholders. Whether Federal legislation is necessary was one of the early issues before the Committee on Energy and Natural Resources of the U.S. Senate. In a hearing in 1997 before the Committee, issues that may warrant Federal legislation were assessed by the FERC. Its recommendations included:
Another study undertaken by the Congressional Research Service recommends a similar framework by raising the following issues:221)
The Administration released its Comprehensive Electricity Competition Plan in March 1998.(222) The plan advances legislative changes which aim to provide customer choice, enhance competition, and diversify generation sources. Key components include:(223)
Overall, the Administration expects that its proposals—by promoting competition—will combine long-run economic savings with environmental benefits.
States do not consider Federal legislation to be a requirement for promoting retail competition but concede that a carefully defined Federal framework would be useful in advancing the economic and social benefits of competitive markets. States seek Federal legislation in areas where jurisdictional conflicts are a possibility. Some States prefer that the role of Federal legislation be limited to eliminating impediments to the promotion of competition in electricity markets and that they should be left to craft restructuring proposals at their own pace to meet specific conditions prevailing in the States. Imposing a "date certain" by which competition must be in place in all States is not universally accepted. In no case should Federal legislation harm State initiatives or penalize States with unwanted Federal requirements.(224)
The National Association of Regulatory Utility Commissioners (NARUC), in its capacity as the national representative of State regulatory commissions, would like the Congress to resolve the following jurisdictional issues:(225)
NARUC also recommends that the States be allowed to form regional bodies to address transmission and system operation issues to ensure the reliability and sustainability of markets. It favors either a reform or repeal of PUHCA and a reform of PURPA legislation and supports the position that States should decide whether, when, and how to restructure local markets.
While NARUC's views enjoy wide support among State utility regulators, regulators in the northeastern States emphasize that restructuring should bring about an improvement in environmental performance of the industry. Their apprehension is that an increase in the use of coal in midwestern States would lead to increasing airborne pollution in their States. Low-cost States, such as Idaho, find it difficult to consider restructuring as a standalone economic issue (in view of the multiple uses of water used in generating electricity in the State) and would prefer to retain their independence in handling issues that are local and regional in nature. States such as California and others that have already enacted legislation prefer being "grandfathered" in any Federal legislation. Most States, however, prefer that Federal legislation should not attempt to set a specific date for commencement of competition at the retail level.(226)
In addition to what the Federal legislation should achieve and the requirements of the States, there are other issues that merit consideration. For example, the opening of transmission lines on a nondiscriminatory basis and the required establishment of independent system operators will bring about a decline in the vertical market power exercised by incumbent utilities. Horizontal market power issues, however, remain and may be exacerbated by the wave of ongoing mergers and acquisitions in the industry. How to contain the growth of market power in the context of a continuing decline in the number of participating corporate entities owning transmission facilities poses a challenge.
Stakeholders in the restructuring debate—investor-owned utilities, public power representatives, Federal power marketing units, large industrial customers, small businesses, consumer advocacy groups, independent power producers, power marketers, natural gas and coal producers, and environmental and financial interests groups—representing diverse interests have contributed to the debate over the direction that Federal legislation should adopt. Since the interests of most groups are not always congruent, any proposed Federal legislation will be extremely complex and problematic.
Environmental issues have begun occupying the center stage in negotiating a consensus in the legislative process. The recognition that power generation using fossil fuels creates an unacceptable pollution level is nothing new. The renewed attention in this area stems from the recent mounting concerns associated with global warming issues, and the role that electricity generation can play in its mitigation through a process of partial internalization of known externalities.
The above difficulties partially explain why no Federal legislation has yet been enacted despite the number of bills pending in the Congress during the past 2 years. Senator Frank Murkowski, Chairman of the Senate Committee on Energy and Natural Resources, succinctly summarized the situation by saying "if we legislate, we must get it right the first time. There won't be a second chance."(227)
States have a different and somewhat limited focus in the legislative arena. Lowering electricity prices is the single most critical element in the process. Reducing electricity prices in States like California and in the Northeast corridor has become a priority because of the perceived impact of electricity prices on regional economic development in general. It is, therefore, not surprising that States in which electricity prices are higher than the national average have spearheaded restructuring activities. Securing lower prices for all customer classes while providing options to choose their suppliers in retail electricity markets are the main objectives of the States.
In addition to the above primary objectives, States invariably have set related goals to be achieved in the process. For example, the New York Public Service Commission set the following goals:(228)
Instituting operational modes to attain the above goals is challenging in view of the issues involved. Standards for fair conduct need to be set up, questions of affiliate relationships may arise, market power issues need to be taken into account, and procedural requirements even for experimental measures need to be clearly defined. Agreement on some or all of these issues may be necessary for utilities to unbundle their rates and proceed further.
Some of the issues confronting the State legislatures are significantly different from those facing Federal lawmakers. They include:(229)
States that have finalized plans for industry restructuring find that additional issues arise when competition is being implemented. Local authorities may be confronted with tax revenue losses as incumbent utilities exit or reduce their sales. New tax measures, if and when contemplated, may require new legislative mandates. Divestiture of generating assets—mandatory or voluntary—would be partial for utilities with nuclear generating units and would lengthen their recovery of related stranded costs. Ways and means may be designed to sustain assistance to low-income families, to reimburse utilities for demand-side management activities, and to ensure that protection offered by universal service does not dissipate as competition progresses. State regulators and legislators generally try to reach a consensus in finding solutions, but the process is time-consuming and the results are not always predictable. Differences resurface even after initial agreements have been worked out.
So far, 12 States have adopted major restructuring legislation (as of the end of June 1998).(230) Restructuring efforts have failed in 19 other States.(231) Many other States are still studying the problem to chart a course of action.
211. C.G. Stalon, "The Historical Context of U.S. Industry Restructuring: Selections Emphasizing Public Policy Decisions," NRRI Quarterly Bulletin, Vol. 17, Nos. 1 and 2 (1996).
212. Congressional Research Service, Electricity: A New Regulatory Order? Report prepared for the Committee on Energy and Commerce, U.S. House of Representatives, 102nd Congress, 1st Session, Committee Print 102-F (June 1991).
213. Only the generation market is involved in promoting competition at the wholesale and retail levels. As such, transmission and distribution services continue to be "natural monopolies"ONT> subject to regulation in the future.
214. Testimony of Hon. Bruce B. Ellsworth, Commissioner, New Hampshire Public Utilities Commission, and President, National Association of Regulatory Utility Commissioners, before the U.S. Senate Committee on Energy and Renewable Resources on March 20, 1997 (Electric Utility Restructuring Hearing).
215. The 18 States are Arizona, California, Connecticut, Illinois, Maine, Maryland, Massachusetts, Michigan, Montana, Nevada, New Hampshire, New Jersey, New York, Oklahoma, Pennsylvania, Rhode Island, Vermont, and Virginia.
216. States that have already ordered unbundling of tariffs include California, Connecticut, Mississippi, and Rhode Island. In States where pilot programs have been established as a prelude to opening the industry to competition, the unbundling of rates may initially be in two broad categories, consisting of generation costs and transmission and distribution costs. At a later date, the States will require utilities to fully unbundle their rates prior to the commencement of competition in retail electricity trade.
217. Additional benefits resulting from competition in generation are also claimed. Refer to J. H. Moorhouse, "Competitive Markets for Electricity Generation," The Cato Journal, Vol. 14, No. 3 (Winter 1995).
218. J. Taylor, High-Voltage Swindle: Why Electricity Restructuring Could Electrocute Ratepayers (The Cato Institute, February 6, 1997).
219. FERC also oversees the pricing and selling arrangements applied by power pools (like the Pennsylvania-New Jersey-Maryland power pool), because these represent wholesale sales.
220. FERC's open access program applies to all public utilities it regulates. FERC currently lacks jurisdiction over the third of the country's transmission system that is owned and operated by Federal power marketing administrations, municipalities, most cooperatives, and the Texas intrastate activities of the member utilities within the Electric Reliability Council of Texas (ERCOT.)
221. Congressional Research Service, Electricity Restructuring: Overview of Basic Policy Questions (Washington, DC, January 1997).
222. U.S. Department of Energy, Comprehensive Electricity Competition Plan (Washington, DC, March 1998).
223. Adopted from the fact sheet issued by the Department of Energy on the Comprehensive Electricity Competition Plan (March 25, 1998).
224. Testimony of Governor Angus S. King of Maine before the Committee on Energy and Natural Resources, United States Senate on the subject of Competitive Change in the Electric Power Industry: Is Federal Legislation Necessary? (March 20, 1997). A complete transcript of this hearing may be downloaded from the Committee's web page at www.senate.gov/~energy/competit3.htm.
225. NARUC represents all State regulatory commissions charged with the responsibility of regulating the retail rates and services of electric, gas, water, and telephone utilities operating in their jurisdictions.
226. The entire Pennsylvania Congressional delegation sent a letter to Representative Tom Bliley, Chairman of the House Commerce Committee, endorsing a Federal date for State implementation of competition in electricity markets (Committee News Release, July 9, 1997). The following bills introduced during the 105th Congress include language stipulating a start date for commencement of retail wheeling in all States: H.R. 655, H.R. 1230, S. 237, and S. 1401.
227. Comments by Senator Frank H. Murkowsky at the Electricity Workshop (March 6, 1997).
228. New York Public Service Commission, Opinion No. 96-12, Case 94-E-0952 et al., In the Matter of Competitive Opportunities Regarding Electric Service (May 20, 1996).
229. National Governors' Association, Issue Brief—Electric Industry Restructuring: Issues and Opportunities for States (February 2, 1997).
230. The States are : California, Connecticut, Illinois, Maine, Massachusetts, Montana, Nevada, New Hampshire, Oklahoma, Pennsylvania, Rhode Island, and Virginia. Note that Montana and Oklahoma are among the low-cost States to adopt competition.
231. Refer to Leap Letter, Vol. 2 (November-December 1997).
