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ELECTRIC UTILITY RESTRUCTURING

What is Electric Utility Restructuring?
What's at Stake?

By Charles Bensinger

Simply put, electric utility restructuring is the process of establishing the ground rules for how electricity will be generated, bought, and sold for the next 20 to 50 years. Because the industry is so large, restructuring the power industry, in effect, amounts to restructuring the entire economy. Unfortunately, the debate over the issue has occurred outside of public sight and without media scrutiny, leaving it up to individual state legislatures to negotiate the rules with utility executives, industry representatives, and power marketers. Since these special interest groups wield substantial political power, the outcome of restructuring legislation tends to be a foregone conclusion—that any legislation will primarily benefit utilities and big industry.

There will be far-reaching consequences for the economy, public health, and the environment. Twenty-three state legislatures have enacted legislation or regulations to deregulate utilities. Already, some state restructuring bills have stripped some communities of their ability to protect consumers from unfair utility marketing practices, imposed higher rates on residents while lowering rates for the largest businesses, and mandated that consumers must pay hundreds of millions of dollars to utilities for so called "stranded costs." In California, Ohio, and Iowa, citizen groups have sought to overturn or request a careful scrutiny of restructuring legislation because of the perceived inequity of requiring consumers to pay for what some characterize as utility "bailouts."

The primary driving forces behind electricity utility restructuring are large electricity customers who want to buy power at the lowest possible price. If a local utility company cannot provide an equal or better rate than a non-local supplier, the industrial user wants to be able to "wheel" or import power over the transmission lines from the supplier who can provide electricity at the lowest cost. Because many utilities have made longterm investments in high-cost nuclear power plants, they cannot compete with power marketers who have no investments in nuclear plants and can offer much cheaper electricity from newer gas turbines — or older coal plants.

Utilities say they cannot compete in an open marketplace as long as they are encumbered with debt attributable to high-cost generation facilities, power contracts, or failed investments. Those assets or financial or contractual agreements belonging to a utility that are deemed nonrecoverable at present market prices are called "stranded costs." The total cost of these uneconomic investments is estimated at $200 billion-$300 billion nationwide. Utilities are seeking to recover these investments through non-bypassable "access charges" or "wire charges" imposed on existing customers — even if they would choose to obtain their power from new suppliers.

Consumer advocates say utility shareholders should bear the costs of a utility's stranded costs rather than the ratepayers. State and federal legislators have been heavily lobbied by utility and industry representatives; consequently, most restructuring legislation contains provisions highly favorable to utilities and industry. Most state restructuring legislation has granted utilities the right to recover 100 percent of their stranded costs from customers.

The Changing Infrastructure Picture

Shifting Ownership Patterns: As the power industry is restructured, a familiar pattern will appear — consolidation. As certain states require divestiture of utility generation assets in order to resolve the stranded costs issue, local utilities and power companies will suddenly become ripe for acquisition by larger entities seeking to gain control over regional power generation and transmission and distribution systems. The sale of generation assets will create new company alliances and partnerships. And the shuffling of energy resources may result in deregulated monopolies and an absence of market power protections for consumers and small businesses.

Grid Reliability Concerns:  Under restructuring, as generation is separated from transmission and distribution, a single company will no longer be responsible for operation and maintenance of the power grid. Instead, many different companies will provide generation, and transmission and distribution (T&D) may be handled by a statewide or regional entity, sometimes referred to as a "transco" or transmission company and a "disco" or distribution company. Also, municipal governments and communities may desire to capture local grids by condemnation or other forms of buyout. Responsibility for maintenance of the transmission and distribution systems may become less clear and less robust. Some experts predict that grid failures could become common, as generation companies concerned only with generation leave transmission and distribution to other, less qualified entities.

Environmental Factors

The energy industry is the planet's most polluting. Electricity generation is the single largest industrial polluter, responsible for two-thirds of sulfur dioxide (SO₂), one-third of nitrogen oxides (NO_x), and one-third of carbon dioxide (CO₂) emissions in the United States. SO₂ is the primary cause of regional haze and acid rain; NO_x creates smog and is a greenhouse gas, and CO₂ (also a greenhouse gas) is considered by many scientists to be the major contributor to global warming. Coal-fired power plants, which account for 72 percent of the power generation sources in the Southwest, also emit mercury, a toxic chemical that is deposited in lakes and waterways and bioaccumulates in fish. Coal-fired plants emit large quantities of particulates which the EPA believes is a major cause of respiratory diseases.

In a restructured environment, older coal plants will become the cheapest sources of power and are likely to be run harder. Older coal plants are highly competitive power sources because they are often not used to full capacity and are less expensive to run due to sunk capital costs and avoided pollution controls. It's probable, then, that generation output will be increased to maximum levels to stretch utility profits, thus increasing air pollution.

The loss of energy efficiency programs will be another casualty of utility deregulation. Increasing energy efficiency reduces electricity consumption and air pollution in a very cost-effective manner. But in a restructured energy environment, utilities will have no regulatory requirements and no economic incentives to continue such programs. Renewable energy development may also be delayed or rendered excessively risky under price-based competition unless special renewables mandates, set asides, or incentives are put in place by legislative or public regulatory agencies.

Some Needed Steps

Many states that have passed restructuring legislation have included a small "System Benefits Charge" (SBC), usually 3-5 mills/kWh, as a wires charge. The purpose of the SBC is to fund consumer and environmental benefits that would not otherwise be captured under restructuring. These benefits might include grants for low-income customer bill assistance, low-interest loans for energy conservation and efficiency and renewable energy development, and funds for pollution control. The money from the SBC is deposited in a "Systems Benefit Trust Fund," which might be a nonprofit or government agency set up to administer the funds.

Renewable Portfolio Standard:  Most states have passed restructuring legislation that includes a "Renewable Portfolio Standard," or RPS. An RPS mandates that all power suppliers include a designated percentage of renewable energy in their power mix. Usually it starts at 1 or 2 percent and increases over the years to somewhat larger amounts — like 5 to 8 percent. Some states have a very large RPS (such as Maine's 30 percent) because large-scale hydroelectric power is considered renewable energy. Some other states limit their RPS renewables to solar, wind, geothermal, and biomass only. Arizona's restructuring originally called for a "Solar Portfolio Standard" of a mere 0.5 percent in 1999 rising to 1 percent in 2002.

The California restructuring experience has demonstrated that renewables will decline in a competitive restructured environment unless supported by strong public policies that promote the use of renewables by all electricity suppliers. The RPS is fair because it recognizes that since everyone benefits from the use of renewable energy, everyone should pay for it. The RPS, then, contrasts with the concept of voluntary "green power" purchase plans which require participants to pay for benefits received by nonpaying others — an inherently inequitable situation. [See related articles in this issue.] The RPS also sends a signal to the investment community that a predictable market will exist for certain renewable energy technologies and amounts of energy sales. Market predictability reduces financial and development risk and thus lowers financing costs.

California was the first state to restructure its electric utility industry, opening its market to competition in March of 1998. Several other states are just beginning to head down this path, or perhaps more appropriately, this slippery slope.

The California experience, though, is not seen as a good model of consumer or renewables-friendly legislation. While utilities have been able to recover 100 percent of their stranded costs, residential ratepayers' savings have not materialized, green power options have proved disappointing, and renewable energy has not prospered. A California referendum to disallow utility recovery of stranded costs was defeated in November of 1998. Partly as a result of the California experience, citizen grassroots groups are now voicing widespread concern that state legislators will ignore basic consumer market protections, energy efficiency and renewable energy programs, low-income and elderly supports, and other consumer-friendly provisions. They fear the "big dogs eat first" syndrome, that unless important protections are in place, community concerns will become secondary to utility bailouts of stranded costs and preferential price treatment of large power users.

"Community Choice" — Public Aggregation: Perhaps the most innovative response to proposed electricity competition is the concept of Community Choice. Most communities have been slow to realize the importance and potential adverse impact of utility restructuring. Typical residential and small businesses lack bargaining clout enjoyed by large users of power and, when subjected to a competitive environment, may lose the special discounts and service reliability they currently enjoy. First passed into law by the state of Massachusetts and now recently by Ohio, Community Choice shifts the point of control away from deregulated utilities and revokes their privilege to "own" all customers who do not choose new suppliers. Community Choice restores the constitutional franchise authority of local governments, authorizes local governments to define community goals, and allows them to control the competitive bidding process for their own residents and businesses. Local communities are then able to assemble their own groups of power purchasers, undertake the competitive bidding process for its members, include an RPS if desired, and administer funds paid by citizens for energy efficiency and renewable energy programs.

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Charles Bensinger, a renewable energy consultant and energy policy advisor, co-directs the Coalition for Clean, Affordable Energy and is a board member of the New Mexico Solar Energy Association.