ELECTRIC UTILITIES AND DEREGULATION.   Term Paper ID:24059 Click to get this paper

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Paper Abstract: Background of public utilities regulation, legal limits on govt., court cases, effects of deregulation on industry & consumers. Paper Introduction: DEREGULATION OF THE ELECTRIC UTILITY INDUSTRY This research paper discusses various legal aspects of the deregulation of the electric power industry in the United States, especially the legal constraints on the power of government, state and federal, to regulate the industry and the rights of the electric utilities (EUs) to recover through the public rate-making process costs and commitments undertaken by them before deregulation becomes fully effective. Generally, the regulatory power of state governments stems from their police powers to regulate an industry which affects the public interest. Constitutional limitations on that power under the Fifth Amendment and the Contract Clause are relatively weak: however, the industry can be expected to use its considerable leverage with state public utility commissions (PUCs) to work out 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. Tradeoffs and Current Issues Obviously, it is not in the interest of consumers nor the publicgenerally to deny reasonable returns to investors in EUs nor todeincentivize them from undertaking needed capital investments. To the extent deregulation failsto achieve its objectives, state governments have the power to re-regulatethe industry but only at a high cost to all parties concerned. L. 1 (1), "No State shall ... of Law & Public Policy 835 (Summer 1995). Electricity Industry,93 Columbia L. Goffman & John R. No. v. Cogeneration After PURPA; Energy Conservation andIndustry Structure, 33 J. Ashmond, Deregulation of Bust?, 133Public Utilities Fortnightly 32 (May 15, 1995). Baumol & J. 113 (1887).Permian Basin Rate Cases, 39 U.S. Spannaus, 438 U.S. 2776 (1992)(codified in scattered sections of 16 U.S.C.)Public Utility Holding Company Act, 15 U.S.C. STATUTESEnergy Policy Act, Pub. . 133 PublicUtilities Fortnightly, 32-33 (May 15, 1995).William B. Studness. Paul: West Publishing, 1987), 27 . 95-617, 92 Stat. . 3117(1978) (codified in scattered sections of 16 U.S.C.). These two approaches, onepremised on competitive markets and the other premised on central planningto correct market failure, cannot long co-exist."[22] The shape deregulation of the industry will finally take is not yetclear. Congress and state legislatures need to exercise somemoderation in this area as they pursue their new found zeal forderegulation and not permit the IPPs to benefit unfairly from the largeinvestments of the EUs. An Unthinkably Horrible Situation, 128 PublicUtilities Fortnightly 14-18, 4 (September 15, 1991).Michael D. Industryconsultant Yorrell noted that energy capacity grew rapidly between 197 and198 , from 34 and 523 gigawatts, but has stagnated since then; and (3) thearrival of what Senator Charles Percy called "an array of promising newsmall energy-producing technologies."[11] Some of those technologies, suchas solar power, can provide only a small part of the nation's energy needs;others are uneconomic, so long as oil and gas prices remain low. 591 (1944).Georgia Railroad Banking Co. 1 5th CongressTakes on Electric Restructuring in Earnest, 135 Public UtilitiesFortnightly 15 (March 15, 1997). Regulators and Utility Deregulation: The Seedsof Failure, 131 Public Utilities Fortnightly 41-42 (January 15,1993).Joseph C. sec. 1 (1977), Justice Harry Blackmun for the Court said that"an impairment [of a private contract] may be constitutional if it isreasonable and necessary to serve an important public purpose."[6] Moreimportant and the principal basis relied upon the public utilities inresisting what they perceive to be confiscation of their investment is thecase law under the taking clause of the Fifth Amendment. 444 (1889) andBluefield Water Works & Improvement Co. Swidler. [9] Peter S. There is some evidence that the industry hasused environmental concerns, which are politically popular in many states,to push energy conservation programs, known as NAPs, under which the EUsare permitted to earn a return on the 'negawatts' or energy saved. 95-617, 92 Stat. . The basic principle was summed up by the Court in WestOhio Gas Co. 747 (1968).Smyth v. The Choice Between Markets andCentral Planning in Regulating the U.S. DEREGULATION OF THE ELECTRIC UTILITY INDUSTRY This research paper discusses various legal aspects of thederegulation of the electric power industry in the United States,especially the legal constraints on the power of government, state andfederal, to regulate the industry and the rights of the electric utilities(EUs) to recover through the public rate-making process costs andcommitments undertaken by them before deregulation becomes fully effective.Generally, the regulatory power of state governments stems from theirpolice powers to regulate an industry which affects the public interest.Constitutional limitations on that power under the Fifth Amendment and theContract Clause are relatively weak: however, the industry can be expectedto use its considerable leverage with state public utility commissions(PUCs) to work out transitional arrangements which will enable many of themto maintain their investment base and to cover their costs of capital asthey adapt to a more competitive marketplace. NewJersey, 431 U.S. New Jersey, 431 U.S. 1 (1977).West Ohio Gas Co. Constitutional Law (1991).Almarin Philips. [13] William J. 299 (1989).Federal Power Commission v. Itmeans essentially the introduction of competitive market forces as thegoverning factor in setting the rates (prices) and the making of investmentdecisions of the EUs. Industry supportersargue that it is unfair to saddle the electric utilities with non-recoverable costs which they undertook in good faith and which their newercompetitors do not have to incur. Powerproduction was no longer a natural monopoly, though it continued to beregulated as such."[12] One of the consequences of deregulation is large amounts of so-calledstranded costs, which Baumol & Sidak define as "those costs that theutilities currently are permitted to recover through their rates but whoserecovery may be impeded or prevented by the advent of competition in theindustry."[13] These costs included expenditures incurred by an EU in thepast to meet its obligations to serve all customers, including expenseswhose recovery has been deferred to keep rates temporarily from rising,fuel expenditures under long term purchasing contracts and other socially-mandated costs, such as subsidies to low income consumers and "incentivesfor the supply of energy from renewable sources," in order to meetenvironmental goals.[14] If PUCs will not allow EUs high enough rates so they can recoup thosecosts, "these problems could hinder a utility's ability to service itsdebt, invest for the future, and provide a reasonable rate of return toinvestors."[15] Pro-competition advocates, such as Studness, argue that theadverse consequences of uneconomic past investment or operating decisionsof EUs should "be borne by shareholders instead of ratepayers."[16] Someutilities, such as El Paso Electric and Public Service Co. Paul: West Publishing, 1991), 359. Illinois, 94 U.S. Spannaus, 438 U.S. Pierce, Jr., Regulated Industries in aNutshell (St. Swidler says that during the past 12 years[1978-199 ], "regulation has been given a bad name; competition has beenexalted and prescribed as a cure-all for every problem of society."[19] Hewarns that because of the highly integrated nature of the nation's electricutility grid, its integrity could be jeopardized. No. Justice Potter Stewart, commented on the Contract Clause, said inthe case of Allied Structural Steel Co. [5] Quoted in Lockhart, Kamisar, Choper & Shiftrin, 381. Smith, 128 U.S. Stranded Costs, 18 Harvard J. Schuler. [22] Black & Pierce, 143 . Origins of the Power to Regulate The power to regulate electric and other public utilities stems fromthe need to protect the public interest against the adverse consequences ofnatural monopolies. Public Service Commission, 262U.S. As Studness puts it,"almost a century of cost-plus pricing has saddled the industry with deeplyrooted inefficiencies that only competition is likely to eliminate."[1 ]Cost-plus pricing and indulgent PUCs encouraged the EUS to overinvest infixed assets and to generate more energy capacity than was needed. Gellhorn & Pierce define a natural monopoly "as asituation in which high fixed costs yield economies of scale of great thatthe relevant market can be served at lowest cost by a single firm."[1]According to them, "electricity generation is a classic example of anindustry typified by substantial economies of scale through a wide range ofoutputs."[2] In the late 19th century, public support grew for the regulation ofnatural monopolies which developed in transportation, communications andin the delivery of essential services to the public such as water, heat andpower. The Fifth Amendment states, inter alia, that "nor shall privateproperty be taken for a public use without just compensation." UnderArticle I, sec. 1 2-486, 6 6 Stat. Public Service Commission,262 U.S. 299 (1989), offerslittle hope for the industry that it can beat back unreasonable pressuresfrom PUCs for lower rates by raising constitutional issues. Ames, 169 U.S. Yorrell, The Decline and Fall of the Regulated ElectricUtility Industry, 125 Public Utilities Fortnightly 38 (May 24, 199 ); andFox-Penner, 518. Ames, 169 U.S. Electricity Industry, 93Columbia L. v. . In Permian Basin Area Rate Cases, 39 U.S. v. PUCS were established by state laws to regulate the intrastateoperations of utilities. [17] Baumol & Sidak, 843. v. Factors leading to deregulation include: (1) aconcern which developed in the late 197 s and 198 s that the industry waswasting a good deal of energy. Federal agencies were created by federal law todeal with interstate and international aspects of public utilityregulation, principally the Federal Power Commission, now the FederalEnergy Regulatory Commission (FERC), and later the Department of Energy.Enactment of the Public Utility Holding Company Act (PUHCA), 15 U.S.C. Hope Natural Gas Co., 32 U.S. Choper & Steven H.Shiftrin, Constitutional Law (St. It was designed "to assure fairprices to consumers [and] . The IPPs are lobbying for federal laws which would require the EUsto build new transmission facilities at their own expense for the solebenefit of the IPPs. Black & Richard J. Deregulation or Bust ? As a result of the Public Utility RegulatoryPolicy Act (PURPA), Pub. . 591 (1944). 747 (1968), the Supreme Court retreated even further, indicating itsunwillingness to overturn a state regulatory action so long as it "fallswithin a zone of reasonableness."[7] Problem of Stranded Costs During the 197 s and early 198 s, electricity costs to consumers rosedue to high inflation, rising oil and gas prices, the high costs ofconstructing nuclear power plants, the costs of environmental regulationand relatively slow growth in demand for electric power. The Court saidat 312, 314 that decisions on rates of return for EUs "should becommensurate with returns on investments in other enterprises havingcorresponding risks" and should not "jeopardize the financial integrity ofthe company," but it basically left PUCs free to decide what rate-makingmethodology best suits their needs in balancing the interests of the EUsand the public. Fox-Penner. [6] Quoted in Lockhart, Kamisar, Choper & Shiftrin, 387. to induce future investors to provide the capitalneeded for replacement, modernization, and necessary expansion . The Energy Policy Act eliminatedprevious size and technology limits on independent generators that can sellpower under PURPA. Barasch, 488 U.S. [2] Gellhorn & Pierce, 45-46. [24] Almarin Philips, Book Review, 133 University of Pennsylvania L.Rev. It also amended PUHCA to permit utilities to formunregulated power producing subsidiaries and exempted from PUHCA smallindependent power producers (IPP's) and cogenerators, firms which generate"electricity as a by-product of the manufacture of another good, such aspaper or steel."[9] FERC has interpreted these laws to require utilitieswith transmission lines to power wheel or sell power to wholesale powerproducers at the utilities' marginal or full-avoided cost; (2) as electricpower charges to consumers grew in the 198 s, the perception becamewidespread that many utilities were operating inefficiently and makingunnecessary and costly investments in fixed assets. Conclusion Deregulation of the electric utility industry is well underway. Swidler, An Unthinkably Horrible Situation, 128 PublicUtilities Fortnightly 16 (September 15, 1991). [and] "will clearly violate the implicit regulatory compact."[18] Theyestimate that the magnitude of such costs could involve tens and probablyhundreds of billions of dollars. [2 ] Swidler, 18. Some degree of regulation of the IPPs, especiallyconcerning whether they have the necessary capital backing, may benecessary to prevent a rerun of the early 193 s. Schuler, Jr., Bipartisan Energy Politics? . [4] Gellhorn & Pierce, 88. Rev.287-29 (December 1987).Joseph E. [12] Black & Pierce, 1345. L.No. Rev. 1346 (October 1993). However,Black & Pierce say that "utilities began to exhaust economies of scale inpower production . Yorrell. See Georgia Railroad Banking Co. of Law & Economics 517-552 (October 199 ).Ernest Gellhorn & Richard J. [7] Quoted in Gellhorn & Pierce, 168. v. However, according toLockhart, Kasimar, Choper and Shiftrin, "not since 1937 has the [Supreme]Court struck down economic legislation as violating substantive dueprocess."[3] The intrastate aspects of public utilities have been primarilyregulated through the rate-making process. Hopefully, they will properly balance theinterests of the consuming public in lower rates with the need to ensurethat the present industry is not unfairly penalized for past decisionstaken under a different regulatory framework and to encourage needed long-term private investment in the nation's electric power infrastructure. Baumol & J. [15] Jay M. Regulated Industries in aNutshell (1987).Jay M. [8] Bernard S. 174 (188 ).Munn v. Pierce, Jr., The Choice BetweenMarkets and Central Planning in Regulating the U.S. 2776 (1992), the rapid growth of an independentpower production industry was fostered. 689 (1928). [18] Baumol & Sidak, 844-845 and 84 -841. v. [19] Joseph C. Fox-Penner, Cogeneration After PURPA: Energy Conservationand Industry Structure, 33 J. Baumol & Sidak state the industry's caseas follows: "investors committed their capital, the companies in turn haveundertaken the very large investments and contractual commitments infulfillment of their various public service obligations and have acceptedregulatory limitations on their allowable rates of return in exchange for apromise of a reasonable opportunity to recover their prudently incurredcosts."[17] They say that "any regulatory rules that prevent investors fromrecovering [enough] . Instead, a complex process of bargaining is going onwithin the industry, between the large utilities and the IPPs, and betweenthe industry and the PUCs over rates and over the terms and conditionsunder which new entrants can piggy back at low cost on the largeinvestments made by the utilities. Various statestatutes regulating industries were struck down by the Supreme Courtbetween about 19 5 and 1934 on substantive due process grounds under the5th and 14th amendments or because they placed undue burdens on interstatecommerce in violation of the Commerce Clause. improved power transmission efficiency and thedevelopment of regional power transmission networks made it possible tobuild power plants up to 1 miles from power users. [1 ] Charles M. Lockhart, Yale Kamisar, Jesse H. Goffman & John R. ofLaw & Public Policy 835-849 (Summer 1995).Peter S. Illinois, 94 U.S. 287 (December 1987).----------------------- 1 Black & Richard J. 1 5th Congress Takeson Electric Restructuring in Earnest, 135 Public Utilities Fortnightly 18-23 (March 15, 1997).Charles M. 63 (1935). v. It is not a dead letter."[5] TheContract Clause has, however, never been invoked successfully to overturnstate action in the utility industry. 689 (1928).Cleveland Electric Illuminating Co. v. 1 2-486, 6 6 Stat. Philips, in his review ofa book on the subject of deregulation in 1984, commented that "new types ofcomplex long-term contracts (and cooperative ventures) will necessarilyemerge under any substantial program of deregulation, and these contractswould necessarily have some characteristics in common with publicregulation of price and entry."[24] If deregulation fails, government has the power to re-regulate theindustry in the public interest, but the cost of turning the clock backwould be horrendous. of NewHampshire, have already been forced into bankruptcy. Studness, Regulatory and Utility Deregulation: TheSeeds of Failure, 131 Public Utilities Fortnightly 41 (January 15, 1993). v.Smith, 128 U.S. 174 (188 ), Smyth v. v. Bipartisan Energy Politics? [11] Michael D. The relevantgeographic market for power production became regional, not local. CONSTITUTIONArticle I, sec. The Decline and Fall of the Regulated ElectricUtility Industry, 125 Public Utilities Fortnightly 38-39 (May 2,199 ).----------------------- [1] Ernest Gellhorn & Richard J. v. to assure that a regulated firm earns thatamount necessary to remain in business."[4] Allowed revenue equalsoperating expenses plus a multiple measured by a firm's cost of capitaltimes its rate base or investment in capital assets. Constitutional Limitations on Governmental Regulation of Public Utilities The landmark Supreme Court case of Munn v. Gregory Sidak, Stranded Costs, 18 HarvardJ. Rev. 1389-1441 (October 1993).William J. Onlyvery minimal constitutional restraints prevent regulatory authorities frommismanaging the process. 234 (1978),as follows: "Although it was perhaps the strongest constitutional check onstate legislation during our early years as a Nation, the Contract Clausereceded into comparative desuetude [with] the development of the large bodyof jurisprudence under the Due Process Clause. HopeNatural Gas Co., 32 U.S. From the standpoint of the public interest and the consuming public,some such accommodation is reasonable and equitable but conflict betweenthe utilities and regulators will occur in certain areas which may resultin the failure of some marginal utilities. Pierce, Jr. 79 (1935).Public Utility Regulatory Policy Act, Pub. Ashmond. Ohio, 294 U.S. v. In United States Trust Co. TABLE OF AUTHORITIES U.S. According to him, "thereare signs that the reliability structure, which is becoming more complex,is under strain."[2 ] He points out that loads are growing faster thangeneration and transmission capacity and that the IPPs are highly leveragedand are dependent on gas turbines, which could lead to large consumer priceincreases, should gas shortages occur. Early SupremeCourt cases tended to take an expansive, pro-industry view of when a takingoccurred and when it was confiscatory. OTHER SOURCESBernard S. One suggestion is that FERC issue a ruleprohibiting PUCs from reneging on previous commitments, abrogatingcontracts between EUs and their wholesale suppliers or disallowing utilitycontracts entered into under a state-supervised competitive biddingprocess. He cautions that underfinanced IPPscould collapse. In theconfrontational atmosphere which developed, the electric utilities and manyPUCs found themselves at loggerheads as to the degree to which the industrywould be allowed to include in its rate base certain sunk investment costswhich might be controversial, lack justification on efficiency or prudencegrounds or otherwise be of little current use, such as the billions ofdollars spent on the construction of nuclear power stations, more than 1 of which were abandoned on the drawing boards or after they were partiallycompleted. L. 113(1887), which involved state regulation of intrastate grain elevators,established the constitutional principle that states under their policepowers could regulate economic activities which affected the publicinterest and that the franchises granted to the public utilities wereconditional upon their compliance with the public interest. .constitutes economic confiscation" and would leave them "with a very largepart of their property expropriated by changes in the rules of the game"... Black &Pierce say that "NAPS were a heaven-sent opportunity" for the EUs and havebeen adopted since 1988 by a majority of states.[21] According to them,regulators and the industry cannot have it both ways: "As competitive powermarkets and market-based environmental regulation are introducing newefficiencies, large megawatt programs and enormous environmental adders areintroducing new distortions and cross-subsidies. FERC has solidly backed competitivecontracting, but is somewhat less prone to the type of local politicalpressures PUCs are under. Public Utilities Commission ofOhio, 4 Ohio St.3d 1 7, 443 N.E.2d 746 (1983).Duquesne Light Co. Public Utilities Commission of Ohio, 4 OhioSt.3d 1 7, 443 N.E.2d 746 (1983), "the Constitution no longer provides anyspecial protection for utility investors." As a result of these denials,the electric utility industry wrote off approximately $22.4 billion innuclear plant costs, which represented 17 percent of the book value oftheir investment in such plants.[8] Deregulation and Its Consequences Deregulation of the electric utility industry, which is underway inmany states begins at the wholesale power generating level and willencompass eventually the transmission and distribution or retail level. 1 (1) (Contract Clause).Fifth Amendment.Fourteenth Amendment. . Nonetheless, the ContractClause remains part of the Constitution. Ohio, 294 U.S. Four very different deregulation bills are currently pending inCongress.[23] The Courts will play a role in this process but the mostrecent case, Duquesne Light Co. [21] Black & Pierce, 1354-1357. v. CASESAllied Structural Steel Co. 3117 (1978) (codified inscattered sections of 16 U.S.C.), and the 1992 Energy Policy Act, Pub. [23] Joseph E. pass any Bill of Attainder, expost facto law, or Law impairing the Obligation of Contracts." Theprohibitions against ex post facto laws and Bills of Attainder havegenerally been restricted to legislation in the political and criminalareas. sec.79 (1935), broke up and prevented the re-formation of national holdingcompanies in the utility industry which had been weakened by the financialmanipulations and other excesses of promoter Samuel Insull and others whichled to the collapse of a number of public utility holding companies in theearly 193 s. L. Pierce, Jr. Although a majority of PUCs allowed the utilities to include thecosts of investments in nuclear power plants in their rate base, whichresulted in a sharing of those costs between utility company shareholdersand consumers, other PUCs, such as in Ohio, Oregon, Wyoming and Washington,did not. 444 (1889).United States Trust Company v. [14] Id. Choper & Steven H.Shiftrin. of Law & Economics 517 (October 199 ). Gregory Sidak. No. In affirming the rejection by the Ohio PUC (PUCO) of the costs ofconstructing four nuclear plants, the Ohio Supreme Court said in ClevelandElectric Illuminating Co. At the sametime, society must balance the tradeoffs involved and not succumb toexaggerated claims for relief from the industry, which can only lead tomuch higher consumer prices. [3] William B. Lockhart, Yale Kasimar, Jesse H. 234 (1978).Bluefield Water Works & Improvement Co. Book Review, 133 University of Pennsylvania L. 63, 72 (1935), when it said that utilitieswere entitled to a return which is "sufficient to assure confidence in thefinancial soundness of the utility and should be adequate, under efficientand economical management, to maintain and support its credit and enable itto raise the money necessary for the proper discharge of its publicduties." Subsequent Supreme Court decisions have focused on thereasonableness of agency decisions and its decision-making process, the so-called 'end result' test set forth in Federal Power Commission v. [16] Studness, 42. Barasch, 488 U.S. If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.

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