ELECTRIC UTILITY INDUSTRY & REGULATION.   Term Paper ID:23387 Click to get this paper

Essay Subject: Need for & effectiveness of federal & state control of rates, structure, competition, mergers.... More...

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Paper Abstract: Need for & effectiveness of federal & state control of rates, structure, competition, mergers. Paper Introduction: Historically, the traditional structure of the electric utility industry has been that utility companies are generally publicly owned and highly regulated monopolies that grew out of the large expense of producing electricity. Large monopolies could rely on a fixed client base and offer reasonable rates with the help of government regulation that limited entry into the market and essentially protected the monopolies. However, technological innovations have created a competitive market where excess capacity is sold to other electrical utility companies and where competition becomes a welcome introduction to the industry as a whole. Because their rates are controlled by the government and because they enjoyed protection from competition, utility companies have paid high dividends relative to their stock prices. They are Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. TheISO will take control of the power grid to coordinate the generation andtransmission of electricity and ensure a reliable, safe power supply. In this way, the utility company isexchanging fees for electricity for consulting fees. On theone hand, encouraging conservation measures to consumers reduces the demandfor electricity with the result that fewer power plants, a costly capitalexpenditure, need to be built. Somecompanies, for example, have invested in cable television systems in theirareas (Houston Industries is one such company).Incentive regulation is one way that regulators seek to make utilities morecompetitive in a free market. However, there is increasing concern that jurisdictionissues between the states and the federal government may prevent statesfrom controlling how their utilities are, and are not, regulated.Recently, the Vermont Public Service Board commissioner went on record asbeing concerned about the decreasing influence of state authority in arestructured environment. Public Utility Economics and Finance, Englewood Cliffs, NJ: Prentice-Hall, n.d."Potomac Electric Power Company and Baltimore Gas and Electric Company File for Merger Approval with Maryland & District of Columbia Regulators." PR Newswire, April 8, 1996, 4 8PHM 14."Utilities Seek Approval of Nation's First Comprehensive Electric Restructuring Proposals to Bring Benefits of Competition to California Consumers." PR Newswire, April 29, 1996, 429LAM 65.Warkentin, Denise. Additionally, since the government hasrecognized that conservation is the movement of the future, companies whichencourage conservation can help the industry as a whole avoid increasedregulation with regard to usage.Utility companies can use their considerable expertise in the area toconduct energy audits and point out (for a fee) ways in which companies cansave money in their energy usage. The rate is the rate of return allowed to a public utility,while the base is the total investment on which the return is calculated.Total investment can be determined using different theories. End Notes BibliographyCopeland, David S. Merely implementing a DSMprogram is not enough; without appropriate feedback and responses to thatfeedback, the DSM program will fail to meet the goal of reducing emissionsor otherwise increasing conservation. A market transformation approach has thepotential to increase participation rates because once a market istransformed, (when participation rates are near 1 percent) incentives areno longer needed).Several of the proposed programs seek to advance market transformationincluding residential, commercial and industrial new construction programs;equipment replacement programs for clothes washers, water heaters, ballastsand commercial heating, ventilation and air-conditioning (HVAC) equipment;and the retailer-based compact fluorescent lamp program.[x]One company, PSI Energy located in the Midwest, is expected to reduce totalemissions by as much as 15,8 tons in the year 2 and by 29,1 tons by2 1 through the use of new and existing DSM programs. Jurisdictional issues mayactually hamper competition in the electric utility industry, according tosome analysts. The size of the transaction illustrates the importance ofutilities in the American economy: Texas Utilities will acquire theENSERCH companies for $1.7 billion. However,technological innovations have created a competitive market where excesscapacity is sold to other electrical utility companies and wherecompetition becomes a welcome introduction to the industry as a whole.Because their rates are controlled by the government and because theyenjoyed protection from competition, utility companies have paid highdividends relative to their stock prices. The rate base may be established by evaluating the asset sideof the balance sheet, or by using the liability side (cost of capital).The difference between rate of return for a public utility and rate base isthat the rate of return is the rate allowed by the regulatory body, or thepre-tax earnings of the utility. Existingprograms and plans can be used as a base, then company experts can workwith ACEEE to develop new or enhanced DSM programs that complement theexisting programs and result in additional cost-effective energy savings.To determine the effectiveness of any DSM program, emissions impacts mustbe analyzed based on year-by-year emissions factors developed from a load-dispatch analysis on the utility's system. Boththe Exchange and the ISO will be independent of the state's utilities andwill be regulated by the FERC.[vi]The process that led to this announcement is guided by a steering committeecomprised of representatives from California investor-owned and municipalutilities, independent power producers, power marketers, customerorganizations, consumer advocates and state regulatory bodies broughttogether by the three investor-owned utilities to develop Exchange and ISOimplementation recommendations for regulators.While California's move may be unprecedented, other states are seeing anincrease in the level of competition which is now taking place. Michaels, "Antitrust, Rent-Seeking andRegulation," Antitrust Bulletin, Fall 1994, 692. The move toward deregulation of the industrymay mean that dividend yields fall relative to pricing, but it is unlikelythat major utility companies will move to cut dividends because of thenegative effect that would have on the overall stock price.The Federal Energy Regulatory Commission (FERC) regulates corporate salesof power to municipalities and cooperatives for resale. Long-termoriented investment that might yield alternative technologies for deliveryutility services are discouraged under incentive regulation, which someanalysts believe should be reserved for true monopolies. This information can be comparedwith historical information to determine where savings have occurred, andwhere the utility can focus additional efforts. Rasmussen, Public Utility Economics andFinance, Englewood Cliffs, NJ: Prentice-Hall, n.d., 34.[iii]Ibid.[iv]David S. By providing incentives to help cover the incrementalcost difference between standard efficiency equipment and high-efficiencyequipment, utilities can encourage customers to save energy at a modestcost.Some utilities are developing long-term strategies to transform the marketso that efficient equipment or practices are the norm and utilityincentives are no longer needed. Large monopolies could rely on a fixed client base and offerreasonable rates with the help of government regulation that limited entryinto the market and essentially protected the monopolies. Because of this, states are finding that the deregulationenvironment is a great deal more complicated than they initially thought. Copeland, "Requiring Transmission Access by ElectricUtilities," Antitrust Law Journal, Winter 1996, 292.[v]Warkentin, 15.[vi]"Utilities Seek Approval of Nation's First Comprehensive ElectricRestructuring Proposals to Bring Benefits of Competition to CaliforniaConsumers," PR Newswire, April 29, 1996, 429LAM 65.[vii]"ENSERCH Corporation and Texas Utilities Reach Agreement to CombineCompanies," PR Newswire, April 15, 1996, 415NYM 74.[viii]"Potomac Electric Power Company and Baltimore Gas and ElectricCompany File for Merger Approval with Maryland & District of ColumbiaRegulators," PR Newswire, April 8, 1996, 4 8PHM 14.1"DSM Programs Help Meet CAAA Compliance Targets," Electric Light andPower, August 1995, 13-14.[ix]Denise Warkentin, "States Voice Concern Regarding Jurisdiction Issuesat NARUC Meeting," Electric Light and Power, January 1996, 1, 14-15.[x]"DSM Programs," 13.[xi]Andrew N. The rate base is the after-tax earningsof the utility.Rate base regulation is used to control the profit that any one utility canreceive from its operations and offers regulators one of their strongesttools in controlling the utility industries.While the rate base regulation system has come under severe criticism bygroups both within and outside the utility industry, no one has developedan alternative which has gained wide acceptance in the United States. Fair returnon fair value, original cost, investment cost, prudent investment cost andreproduction new cost are all ways in which total investment can becalculated. Howe and Eugene F. All such"wholesale" transactions are federally regulated, even if the parties werein the same state, in the same basic way as states regulate retail rates.The FERC is also the sole regulatory of large volume, high-voltage "bulkpower" sales by corporate utilities to other utilities. On the one hand, regulators wantto promote healthy competition to encourage better rates to consumers, butthey also do not want utilities driven strictly by the vagaries of the freemarket. In addition, theprice elasticity of demand is larger in the long-run than in the short-run,and this holds true for all types of consumers, including residentialconsumers as well as industrial and commercial consumers. Market forcesshould be used in order to align prices for services that are more readilyavailable, and rate payers should be more involved in the development ofincentive regulations.There are four guidelines which can be used for expanding demand sidemanagement (DSM) programs, which provide market forces for conservation.These guidelines include: influencing purchases that are already happeningin the market, thereby addressing lost opportunity resources; promotingmarket transformation where possible; addressing major efficiencyopportunities and customer segments not addressed by current programs; and,limiting retrofit programs primarily to customer segments that might beunderserved by other programs.[ix]During periods of new construction, remodeling and equipment replacement,utility customers spend substantial amounts of money to purchase energy-consuming equipment. ACEEE has found that theutility's expanded DSM programs are making an impact on helping it toobtain compliance, pointing out that other Midwestern states and utilitiesshould closely examine DSM as a least-cost environmental compliance option.Some companies already have extensive sets of DSM programs which can beused to form the foundation for adding CAAA implementation plans. Unlike the Texas merger, thesetwo companies have sought the permission of the Public Utility Commissionof Maryland, and their filing papers indicate that the new company,Constellation Energy Corporation, will provide immediate benefits tocustomers. As a result, firms are reluctant to invest in new technologiesthat might bring greater efficiency and higher earnings. Price elasticitytends to be greater for industrial demand over residential demand.[iii]Because of this, regulators often see themselves as protecting the publicinterest against the predatory pricing techniques of the utility industry.Electricity, for example, is something that most Americans need to haveaccess to, and charging exorbitant rates is certainly something thatutilities could do (or would probably do) if left to their own devices,according to some regulators.[iv]In recent years, some U.S. Through careful monitoring, DSM canbe an effective tool for utilities. Thereason that rate base regulation continues to be used is based in largepart on the nature of the demand for electricity and the fact that it isconsidered a basic necessity for Americans.[ii]Demand for electricity is inelastic, meaning that there is a considerableamount of variance which can occur in the price before there is anappreciable change in the quantity demanded by consumers. PSI has beenworking in conjunction with the American Council For An Energy-EfficientEconomy (ACEEE) to develop new and enhanced DSM programs and explore howthey would affect PSI's federal Clean Air Act Amendment (CAAA) complianceplans.[xi]The findings of the project suggest that while the enhanced DSM programs asstand-alone strategies are insufficient to meet compliance, the programshelp provide some non-trivial emissions reductions, including approximately12 to 18 percent of total reductions PSI is required to make in Phase II ofthe CAAA. The Exchange will post the most competitive "spot" price forgeneration in an open market for everyone to see, much like a stock orcommodities exchange. In the long term, encouraging conservation could result in adecrease in profits.To combat this, companies should consider investing in other businesssegments that are not dependent on utilities for their income. "States Voice Concern Regarding Jurisdiction Issues at NARUC Meeting." Electric Light & Power, 1, 14-15.Conservation is a double-edged sword for most utility companies. What is apparent is that there are issues at this level which need to beresolved in such a way that state and federal regulators work in concertwith regard to the utility industry rather than in competition with eachother.Rate base regulation refers to the way in which regulation is applied tothe industry. Critics of the merger arguethat this represents a reduction of competition that will ultimately harmconsumers, but the merger is considered likely to be approved.Deregulation is an intricate and complex area for state regulators whichholds the potential for severe problems. The merger must still be approved by the Securities andExchange Commission (SEC), but approval by the Public Utility Commission ofTexas or the FERC are not required. These benefits include: a freeze on base electric rates untilthe year 2 ; an array of economic development incentives for theBaltimore/Washington region totaling $1 .6 million annually; new andexpanded programs to assist low-income customers totaling $1 .5 millionannually; and credits to reduce all customers' bills, if Constellationachieves certain predetermined financial targets.[viii]The companies suggest that they will be able to provide greater benefit toresidents and commercial consumers than either could achieve alone and thatthey can do this by combining their resources. The FERC also has the power to order one utilityto interconnect with another or to sell bulk power to it.The dispute between states and the federal government has recently gainedattention, with particular attention paid to who has jurisdiction overtransmission and distribution of utilities. [vii]Company officials on both sides indicated that the merger represents a long-term strategic plan designed to increase shareholder value, and officialsalso noted that deregulation (of natural gas in this instance) and theconvergence of energy markets made the combination of the two companies alogical choice. Kleit and Robert J. The SEC is not concerned with theeffect of the merger on the utility industry, but is interested in thetransaction from a securities standpoint.One of the benefits of mergers cited by company officials involved in themis that utilities can bring better service and rates to customers througheconomies of scale. The recommendations weredeveloped in consultation with a group of California electric restructuringstakeholders.The implementation recommendations include the formation of a PowerExchange and an Independent System Operator (ISO) and details of how theyshould operate in the new competitive market. Michaels. states have begun to restructure their electricpower sector. Through the Exchange,generators will compete against each other to offer the lowest cost powerto consumers. End Notes Bibliography"DSM Programs Help Meet CAAA Compliance Targets." Electric Light and Power, August 1995, 13-14.Kleit, Andrew N. Some federal regulators are concerned that states will not becontent with having influence (and only influence) on regulatory decisions. Rather, the FERC is committed to maintaining state rule andseeking cooperation. Also inApril 1996, ENSERCH Corporation and Texas Utilities, both of which aretraded on the New York Stock Exchange, announced that they were merging.Under the terms of the agreement, the two companies will be merged intoTexas Utilities. This means that states need to recognize FERCjurisdiction where it is appropriate, and also that legal disputes arelikely to occur as the courts are used to determine where state regulationsshould have precedence over federal regulation.In April 1996, California announced that it would become the first state torecommend to FERC regulators comprehensive ways to implement a newcompetitive electric market structure designed to bring about lower pricesand more choices to consumers.There are three investor-owned utilities in the state (Pacific Gas andElectric, San Diego Gas & Electric and Southern California Edison) and theyfiled joint recommendations with the FERC and the California PublicUtilities Commission (CPUC) in response to the CPUC's industryrestructuring decision issued on December 1995. Other companies, including Southern CaliforniaEdison, are also looking at PSI's success and considering ways to implementit in their own environments.[xii]According to ACEEE, PSI is a leader in the Midwest with respect to DSM,spending 2.5 percent of revenues on DSM. Vermont's governor is a strong supporter ofregulatory reform; however, he believes that reform should not diminishstate authority or cause that authority to be transferred to the federalgovernment.[v]Federal regulators respond to states' concerns by indicating that the FERCis not seeking to expand its power under the guise of industryrestructuring. Historically, the traditional structure of the electric utility industryhas been that utility companies are generally publicly owned and highlyregulated monopolies that grew out of the large expense of producingelectricity. "Requiring Transmission Access by Electric Utilities." Antitrust Law Journal, Winter 1996, 291-3 2."ENSERCH Corporation and Texas Utilities Reach Agreement to Combine Companies." PR Newswire, April 15, 1996, 415NYM 74.Howe, Keith and Eugene F. There needs to be a set of clear definitions of when statejurisdiction applies and when federal jurisdiction applies, which iscurrently not the case.[i]States are wary of how competition will affect their jurisdictionalauthority. In addition, DSM programs help reduce customer bill impacts ofoverall CAAA compliance. It also monitorscoordination agreements (power pools), and the rates and terms oftransmission contracts. Conservation can thusbe turned into a product that companies can sell.In the long term, conservation represents a significant competitive threatin that too much conservation, or too successful of conservation measureswill lead to significant decreases in the revenues that the power companiesreceive. and Robert J. Rasmussen. "Antitrust, Rent-Seeking and Regulation." Antitrust Bulletin, Fall 1994, 689-725.Warkentin, Denise. Through the ISO, every generator will be assuredaccess to California's electricity transmission system (power grid). "States Voice Concern Regarding Jurisdiction Issues at NARUC Meeting." Electric Light and Power, January 1996, 1, 14-15.-----------------------[i]Denise Warkentin, "States Voice Concern Regarding Jurisdiction Issues atNARUC Meeting," Electric Light & Power, 14.[ii]Keith M. They are considered aconservative investment that offer safe alternatives to bond investingbecause of their high yield. This was certainly the argument used when twocompanies in the middle Atlantic region announced their merger, also inApril 1996.PEPCO and Baltimore Gas & Electric (BGE) serve more than 4.5 million peoplein Maryland and the District of Columbia. As currently implemented, incentiveregulations set price caps and provide disincentives for exceeding thoseprice caps. 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