With states restructuring regulations, utilities competition is on the way, and electricity cooperatives are already forming to protect the interests of consumers.


American News Service

North Walpole, N.H.

Sandy Knowles was courted with promises of free birdhouses, free light bulbs, even free fir trees. In the end, she went with the trees.

Knowles, a North Walpole town commissioner, was offered the premiums by some of the 43 utility companies vying to sell electricity to the town.

Knowles and the village's other 1,100 residents are part of an experiment that will reshape the future of the U.S. electric power industry. The town is one of a handful of nationwide test sites where utility companies are competing to sell electricity.

Until now, electric utilities have been legal monopolies. Each company is given the legal right to be the only supplier of electricity within a given geographic area. In exchange, its charges to consumers are regulated by a state public utilities commission.

But now virtually every state is busy restructuring its regulations to let any generating company compete for customers within its borders. Most states are expected to implement competition among electric utilities within the next five years.

"This is a snowball rolling downhill," said Iowa state Sen. Patrick Deluhery, who has worked on electricity competition in his own state and with the national Center for Policy Alternatives, a private policy study organization. "And no one is going to stop it."

Advocates say competition will lower electric prices while boosting service, just as some claim price deregulation has done in long-distance telephone services and the wholesale natural gas industry. In several states, environmentalists also see an opportunity to move toward renewable energy sources.

In pilot programs, the lower-price claim is proving true for sizable users like North Walpole's village government. "We chose the lowest rate," said Knowles, "which included a guaranteed 15 percent savings over what we'd been paying but actually is saving us closer to 20 percent each month. That means a lot when we've been paying $800 a month for electricity."

But some observers expect individual consumers to fare less well.

"Deregulation will be good for large users who can use their buying power to bargain for better rates," said Bob Walker, community outreach organizer for the Vermont Consumers Energy Cooperative. "But individuals by themselves have no bargaining power. They'll have to pick the best of whatever options are left to them."

He and others fear individual consumers may wind up subsidizing the rock-bottom rates that the largest users can win for themselves.

TO AVOID THAT FATE, consumers already are banding together in the form of consumer cooperatives to pool their purchasing power and bargain for better electric rates from generating companies.

Some believe these new alliances could result in a fundamental transfer of power, taking control of the electric generation industry away from utilities and placing it squarely in the hands of consumers, especially those pushing for more efficient, environmentally friendly and cleaner-burning energy technologies.

Yet those behind the cooperative push acknowledge they're just trying to adjust to the new regulatory realities.

"There are no consumer or low-income-advocacy groups that started out advocating price competition," said Beth Sachs, executive director of the Vermont Energy Investment Corp. The private nonprofit organization provides energy-related advice and services to consumer organizations across North America.

In the U.S. Congress, at least six bills have been introduced requiring all states to open their electric markets to competition by some fixed date between 1999 and 2003 and imposing a variety of conditions on generating companies.

The idea of competition is relatively simple. Individual consumers would be free to buy electricity from any generating company they wish, not just the single local utility monopoly that supplies them now. Utilities would compete by offering the same or better service at a lower price, lowering overall electric bills.

THE GENERATING COMPANY a consumer chooses would send electricity into the existing regional transmission network, and the consumers would withdraw electricity from the network over the single set of poles and wires already serving them. Local electric companies would continue to own and maintain the poles and wires throughout their traditional service areas as regulated monopolies, billing consumers a fixed monthly charge for that service.

The impetus for competition has come chiefly from large commercial users of electricity, particularly manufacturers. Factories in some states found themselves paying higher electric rates -- and therefore having to charge higher prices for their products -- than competitors in others. Seeking a level playing field, manufacturers began pressuring regulators to open the electricity market to competition.

In April 1996, the Federal Energy Regulatory Commission issued rules that forced utilities to carry on their own wires electricity generated by competing suppliers. By the time of the ruling, several states already had developed plans to allow utilities to compete.

UNDER COMPETITION, instead of being fixed by regulators, prices will be set by market forces -- in which the largest purchasers, whether the commodity is corn or long-distance-telephone time, can leverage lower prices for themselves.

To give individual consumers as much bargaining clout as giant corporations, consumer cooperatives are being formed in several states. Mimicking rural electric co-ops formed in the 1920s and 1930s, the nonprofit groups would buy electricity in bulk and resell it to members.

Many plan to offer a range of additional services, including home energy audits and sales of rooftop solar power cells.

Nearly a dozen towns along Cape Cod in Massachusetts are uniting in a regional compact to negotiate bargain-basement prices on behalf of 180,000 local customers.

Several co-ops in the northeastern United States are even mulling the creation of a "co-op of co-ops" to give the groups even greater leverage in negotiating prices.

"To the degree that small consumers can band together and act like one big one, they'll be better off," said Sachs of the Vermont Energy Investment Corporation.

ONE OF THE MOST ambitious projects is under way in Nevada. A nonprofit consumer cooperative, backed by private financing, is planning to buy the transmission and distribution system -- the poles and wires now owned by the Nevada Power Company, which currently provides electricity to 1.2 million people in the Las Vegas area.

"When the same company generates and distributes electricity, there's no great incentive to maximize efficiency because that reduces sales," says Eric Blank, energy project manager with the Boulder, Colo.-based Land and Water Fund, which is helping to structure the deal. "By breaking apart generation and distribution, you remove that incentive."

As a tax-exempt venture, the Nevada cooperative expects to save at least $20 million annually in taxes that the for-profit utility now pays. With no need also to pay dividends or pile up profits, the co-op claims that it can serve Las Vegas's growing population more cheaply than the current utility.

Under the plan, the nonprofit also would invest in energy efficiency as well as solar power systems and other small-scale generation technologies.

"We hope this can be a model of how restructuring can occur in a way that enhances competition in electric generation while protecting consumers and other long-term public interests," Blank says.

AMONG THOSE PUBLIC interests, environmental issues loom large. The Vermont Consumers Energy Cooperative plans to buy as much electricity made from renewable fuels as it can while keeping retail electric prices affordable. Citizens of Davis, Calif., are working to form a municipal utility district that will buy electricity generated from sustainable fuels.

In Vermont and other states, regulators plan to mandate a minimal percentage of renewable fuels that competing utilities must use. Some emerging co-ops and municipal utility districts are drafting regulations that will permit only utilities meeting stringent environmental standards to use their wires.

"Moving to a competitive market can fundamentally shift the way energy is generated and used," said Scudder Parker, director of the energy efficiency office of the Vermont Department of Public Service. "This has the real potential to create an efficient electric system that benefits consumers and the environment at the same time."

Bennett Daviss is a free-lance journalist. With Nobel physicist Kenneth Wilson, he is co-author of the book Redesigning Education. For more information, contact: Sandy Knowles, commissioner, North Walpole Village District, North Walpole, N.H., 603-445-2453; Patrick Deluhery, Iowa state senator and assistant professor of economics and business administration at St. Ambrose University, Davenport, Iowa, 319-333-6139; 319-381-1477; Beth Sachs, executive director, Vermont Energy Investment Corp., Burlington, Vt., 802-658-6060, ext. 20; Bob Walker, community outreach organizer, Vermont Consumers Energy Coop, Thetford, Vt., 802-785-4126; Eric Blank, director, energy project, Land and Water Fund, Nevada Power Co., Las Vegas, Nev., 702-367-5000; Scudder Parker, director, energy efficiency division, Vermont Department of Public Service, Montpelier, Vt., 802-828-2811.

Regulatory Tangles Could 'Strand' Electric Utilities

While the idea of electric rate competition seems simple, regulators and electric companies are finding that implementing that idea can be fiendishly complex.

The issue of "stranded costs" is among the thorniest. By law, utilities now earn a guaranteed rate of return fixed by their states' public utilities commissions. Counting on those guarantees, utilities have invested in generation equipment -- sometimes billions of dollars to build nuclear power plants -- knowing that they will be able to pay off the resulting debt while still making a profit. Those guaranteed rates of return have made utility stocks a favorite among investors looking for a safe way to earn dividends.

In a competitive market, a utility still would earn a fixed rate of return on its investment in poles and wires. But there would be no such guarantee on its investment in generation plants. As competition drives power prices lower, utilities that have built expensive plants might not be able to earn enough income to keep up payments on the debt remaining from building those plants. The debt becomes "stranded" -- unpayable.

"In states such as Vermont and New Hampshire, where utilities have invested billions in nuclear-powered generating plants, those fixed costs are certainly big enough to bankrupt the utilities if even a portion of those costs have to be swallowed," said Scudder Parker, director of the energy efficiency office of the Vermont Department of Public Service.

The investor-owned Public Service Company of New Hampshire, which borrowed more than $15 billion to build the Seabrook nuclear plant during the 1970s and 1980s, already has filed suit against the state's public utilities commission in an attempt to block statewide electric-rate competition until the company and its investors are assured of a safe financial future.

Consumer advocate Ralph Nader has attacked a Massachusetts proposal to allow utilities to build stranded costs into their service charges and recoup them over 10 years. Nader, arguing that the plan would force consumers to subsidize utilities, contends that the companies should write off the unpayable debt and pass the savings on to consumers in the form of lower rates.

The state attorney general counters that Nader's approach would bankrupt every utility in the state, prompting a protracted court battle to settle the question of whether legislators can suddenly disallow investments that regulators had permitted under the old regulatory structure.

"There is no good solution to the issue," says Patrick Deluhery, an Iowa state senator who has worked on energy issues for a decade. "It will take time for each state to explore the issues unique to it and find its own least painful answer."

Other issues wait to be settled. Vermont is drafting regulations to require electric companies to make a fixed minimal percentage of their electricity from renewable fuels. Other states are mandating that customers who do not abandon their present in-state generators be given at least a 10 percent discount. Most regulators will demand detailed disclosure from utilities about fuel sources and other operational details.

In addition, bills in Congress variously would bar stranded cost recovery, impose levies on generation companies to support renewable energy and low-income fuel assistance, make it harder for electric companies to merge or diversify, and curb utilities' ability to sell electricity in their current service areas.

The National Farmers Union is opposed to deregulation that would mean higher rates and decreased reliability in rural areas as larger customers leave local electric service systems. "These 'one-size-fits-all' proposals members of Congress have offered to restructure the electric utility industry would supersede any state law and demand that states like South Dakota follow the same guidelines as California, regardless of differences such as population and energy needs," said NFU President Leland Swenson.

"Please don't call this deregulation," Parker urged. "It's anything but." -- American News Service, with staff reports

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