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Electrical Utility Deregulation

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Electrical utility deregulation is the process of transforming electricalutility companies from regulated monopolies to market-driven suppliers ofcompetitive energy and services. (Reliant Energy HL&P 1999) It means thatcustomers will have the ability to choose their electrical supplier. Todaysutility customers want lower prices, more choice, and better service as well asreliability. The deregulation of other industries such as railroad, trucking,natural gas, and telecommunications has shown people that choice can providebetter value. The deregulated electric utility industry would look and act a lotlike the long distance phone business.

The market would set electricity rates.

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Sharp increases or decreases in the cost of fuel or customer volume would affectthe prices. Prices have decreased even without deregulation however. Accordingto the Edison Electrical Institute, real electricity prices have dropped 27percent in the last 15 years. But with deregulation there is the potential thatthey will drop even more. The main issue that is of concern to electricalutility companies is stranded costs. Stranded costs are the past investmentsutilities were obligated to make in the regulated electric system.

Theseinvestments were prudently incurred and government-approved to ensurereliability of supply and were partially recovered through customers rates.

(Reliant Energy HL&P 1999) Electrical utilities believe the recovery of pastinvestments should be part of the overall deregulation process since they willbe hard to recover in an open, competitive marketplace. If this issue isresolved to the satisfaction of the utility companies, it will open the way forderegulation. As stated in the previous page, the main obstacle to electricalutility deregulation is stranded costs. Two of the main issues surroundingstranded costs are their impact on electricity prices and stranded costs willaffect the financial viability of an individual electrical utility. It is hardto determine exactly how much stranded cost will be. They have been estimated tobe anywhere from 10 billion to more than 500 billion. And stranded costs may behigher in some parts of the country than in others. According to Research DataInternational, 86 percent of the stranded costs lie in 10 states that have 43percent of the electricity market. California is at the top of the list,followed by New York, Texas, Illinois, Pennsylvania, New Jersey, Ohio, Georgia,Massachusetts, and Connecticut. The utility companies want to be able to recovermost of if not all of their stranded costs, and if they are not able toelectrical prices may be higher because of it. Another problem that has arisenis the concern over possible environmental and social protections built inthrough regulation would be lost. The Utility Workers Union of America believesthat a competitive market would give profit driven companies an incentive topromote consumption, which would undermine many of the conservation programsthat are promoted today. I think that we should not rush to judgement on theseproblems. Many states are implementing deregulation, and we will see exactlywhat happens and doesnt happen during these experimental times. Similarconcerns were raised before the airline industry was deregulated, but it workedout just fine. There are 3 main objectives that electrical utility deregulationhopes to achieve. First and foremost are lower utility rates. Granted thatutility rates are relatively low at the present time, with deregulation thereexists the potential for them to be even lower. Businesses would have the mostto gain from deregulation because of the large amounts of electricity that theyutilize. They would be able to use the money saved on other methods or capitalto better serve their customers. The everyday household would benefit becauseinstead of having to purchase all the services from a utility company, theywould have the option to purchase only some of them, or choose a differentcompany of their liking. Secondly, better quality of service and product as aresult of the competition is another objective of deregulation. With manydifferent companies competing for customers, the companies will not benefit fromproducing an inferior product or poor service. The customers will simply taketheir business elsewhere. Prices will also be lower, because all the companieswill be trying to entice customers with the lowest rates. Competition is whatmade the American economy into what it is today. It is a vital component ofcapitalism. The freedom of choice enjoyed in a capitalist system is so oftentaken for granted. It is what this nation was founded upon. The third objectiveof deregulation is the creation of more jobs through privatization. Withderegulation there will be many more utility companies forming with the adventof an open market. These new companies will obviously need to hire people. Notjust for their installers and service crews, but salespeople, office personnel,shipping and receiving clerks, stock clerks, order pullers, and many otherpositions. So jobs are Created not only for the skilled utility laborers, butalso for people with sales experience, office training, and people seekingentry-level positions such as stock clerks and shipping and receiving personnel.

So the ongoing unemployment issue in this country will get some relief fromderegulation. On the other side of the issue, some argue that environmental andsocial protections built into regulation would be lost as a result ofderegulation. The feeling is that with more and more private utility companiescompeting for customers, little attention would be paid to environmentalregulations. Power lines would be erected in places that are harmful to thesurrounding environment, and power plants would operate outside of theenvironmental guidelines in order to increase output at the lowest possiblecost. Social protections may also suffer. With so many independent companiescompeting with each other without government oversight there may be companiesthat would offer one rate and then charge a much higher one instead. Or promisesservices and not follow through with it. The fear of shady business practices byindependent companies is one of the main issues that opponents to deregulationbring forth. The policy that began the debate over free market electricity wasthe federal Public Utilities Regulatory Policy Act of 1978 (PURPA) which openedgeneration markets to independent power producers. Next came the Energy PolicyAct of 1992 which set forth a mandate of wholesale wheeling of power over a gridfrom one electric utility to another. A major component of this act was Order888, known as the open-access rule. It requires utilities that own transmissionlines allow others access to those lines. To implement the Energy Policy Act,the Federal Energy Regulatory Commission (FERC) ordered utilities in 1995 toopen their transmission systems to outside energy providers. (NationalAssociation of Development Organizations, 1998) So far fifteen states haveapproved electrical utility deregulation. What follows here is a summary of someof their plans, based on information from the states and surveys collected bythe Electrical Power Supply Association, and the National Rural ElectricCooperative Association. Arizona State regulators will allow competition for 20percent of customers by 1999, for 50 percent by 2001 and for all by 2003. Twoutilities have filed suit to challenge the plan California The state permittedcustomers to choose their electric service providers as of Jan 1 of 1998. Thecustomers have three options: retaining their current provider, switching todirect service by another provider or purchasing from a non-profit clearinghousecalled the Power Exchange. The exchange bills its customers based on a meteredhourly rate that fluctuates with the cost of electricity. State regulators willallow California utilities to collect $28 billion for old debts. Illinois TheIllinois General Assembly passed a plan to require competition for localutilities beginning in 2002. The plan delays changes in assessed values of powerplants for 3 years to soften the impact on local governments, which will collectlower property tax receipts if plants decline in value under competition. NewYork The state will introduce utility competition through agreements reachedwith utilities. The state determines how much each utility collect to pay offold debts. Competition will be phased in for customers of Consolidated Edison ofNew York from 1998 to 2002, and the state will allow the utility to collect forsome bad debts. Pennsylvania The state has begun a pilot program to introduceutility deregulation and will phase in utility customer choice to one-third ofcustomers by 1999, two-thirds by 2000, and all by 2001. Michigan Stateregulators plan to phase in utility deregulation by 2002 and will allow recoveryof old debts for utilities. Michigan Attorney General Frank J. Kelley has joinedconsumer And business groups in filing suit against the Michigan Public ServiceCommission to challenge its utility restructuring plan. One way to solve themain concern of deregulation, stranded costs, would be to do what many stateshave already done, allow the utility companies to recover the costs of olddebts, old debts being part of stranded costs. Long-term utility contracts andthe building of new power plants to meet future electricity demand are a largepart of these old debts. With deregulation the utility companies will no longerbe mandated to serve all customers in a specific territory as they were inregulation. They will be able to pick and choose how many or how few to serve.

Therefore they feel they should be compensated for their investments becausethey were required by the government to build more plants and enter long-termcontracts. If the national plan for deregulation includes an effective andfeasible way to recover stranded costs, it would answer the main problemconcerning deregulation. That would probably be the thing that would bring mosteveryone on board right there. As far as the problem regarding possible loss ofsocial and environmental protections, the government could pass legislation thatwould require the private companies to operate within social and environmentalboundaries. We wont know if this is going to be a major problem yet, thegovernment is doing the right thing by allowing the states to experiment withderegulation. That way the kinks can be worked out with as little Trouble aspossible. You are going to have your bad apples in the bunch, some people justwant to make as much money as they possibly can. They dont care if theydestroy the environment or alienate people. But measures need to be taken toensure that the people and companies that choose to operate in that manner aredealt with harshly. If they are allowed to get away with it then deregulationcould become quite a disaster. We are on the verge of a major change with theadvent of electrical utility deregulation. It couldnt have come to light at abetter time, here at the end of the 20th century. The face of business haschanged many times throughout the course of American history without manyproblems. Deregulation presents a whole world of opportunities for business aswell as the consumer. Entrepreneurs are afforded a marvelous opportunity. Theability to start or get in on the ground floor of a new and potentiallylucrative business.


Cite this Electrical Utility Deregulation

Electrical Utility Deregulation. (2018, Dec 13). Retrieved from https://graduateway.com/electrical-utility-deregulation/

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