Attitudes Toward Retail Competition
In general, the attitudes of many respondents towards retail competition were positive, although a number expressed reservations about the potential impact on low-cost states, low-income consumers, rural consumers, and generators facing stranded costs. A number of state consumer advocates voiced concerns about competition, particularly in light of recent merger activity, and stipulated that without adequate protections smaller consumers could be harmed.
Nonetheless, very few respondents spoke out against retail competition as a goal. The sharpest differences had to do with issues of authority and prerogative, such as who should decide whether competition is appropriate for a particular state, and what the timetable should be for making the change from regulation to competition.
Respondents also differed markedly on a multitude of transition issues such as stranded costs, reciprocity, and grandfathering of prior state action. Respondents expressed differing levels of concern, and offered varying suggestions about the need for protections to ensure that all consumer classes benefit from competition and that the most vulnerable consumers are not harmed.
Differences of opinion also were evident with respect to a number of structural issues: the proper role of public power and federal power; what to do about environmental concerns; renewable energy; whether changes in tax policy are needed; how to maintain transmission system reliability; and various market power issues, ranging from the need to extend the Federal Power Act to cover all transmission owners (particularly federal power agencies) to proposed changes to the Public Utility Holding Company Act of 1935 (PUHCA) and the Public Utility Regulatory Policies Act of 1978 (PURPA).
Attitudes Toward a Congressional Mandate
There was no consensus among respondents on the need for or desirability of a congressional mandate for retail competition by a date certain. No state asked for a mandate that would limit its own decisions with regard to retail competition, and every state requested that its own actions be respected. State consumer advocates were unanimous in opposing a federal mandate.
Regulatory commissions in states which have already established timetables for retail competition in the early 2000's, like Oklahoma and Wisconsin, warned that an earlier deadline would play havoc with their plans (see section on grandfathering below). Many other commissions in states which currently are considering adopting retail competition took strong positions against a federal mandate.
For example, the Oregon commission wrote:
"We have not sought any Congressional action in these areas. Generally, we prefer to address these issues at the state level, since our citizens are closest to the issues under review.. [we] very much prefer that the Federal government not prescribe solutions to problems that may be significant elsewhere, but that can be addressed as necessary at the state level here."
Other state commissions, such as Virginia's, opposed a federal mandate, but felt there could be a need for other congressional action:
"Congress could assist the [state commission] by refraining from enacting preemptive legislation mandating retail competition by a date certain. Congressional action that would be helpful would clarify the states' authority over all aspects of retail competition...[and] enable Virginia to join with other states in regional regulatory undertakings...".
A number of state commissions had specific suggestions for congressional action in other areas -- particularly with respect to reciprocity and public power -- which are discussed in greater detail below.
The Utility Workers Union of America echoed the state commissions' call for deference to state action, writing, "although the Union generally prefers federal legislation over individual state enactments, we do not believe it advisable on this issue...state legislation can be more responsive to consumers than in the federal forum." The union added, "we respectfully submit that restructuring of other industries, such as airlines, trucking, banking and telecommunications, based on federal law, has not been particularly consumer friendly. There is no reason to believe that federal deregulation of the electric power industry would be any more successful."
In contrast to the relative unanimity of state commissions' responses, utilities and other respondents offered a range of views on a federal mandate. Some, like Cinergy, strongly favored a mandate:
"Cinergy strongly believes that Congress needs to enact legislation requiring states to provide for retail customer choice by a date certain to avoid a patchwork quilt of different and possibly conflicting state programs...Given the undeniable economic benefits resulting from replacing command and control regulation with competition and customer choice, can anyone seriously argue that we should await action by all of the states before this policy becomes the law of the land?"
In a similar vein, the Electric Power Supply Association (EPSA), which represents independent power producers, wrote, "The result of a state-by-state approach is likely to be a crazy quilt' of vastly different, and potentially incompatible, programs which range from aggressive, full competition to none at all...even when states have completed their restructuring efforts, litigation is likely to delay or stymie implementation efforts."
"The current system is not broken and retail competition involves significant uncertainties that affect a critical element of U.S. infrastructure...With time, retail competition may become more attractive for some states as more information is gathered through the experiences of others that have already adopted retail competition because of the unique circumstances that exist within those states...There is no significant demonstration that retail competition can't be offered on a state by state basis."
Other utilities who did not favor a federal mandate nonetheless felt there was a need for complementary federal action. Commonwealth Edison wrote, "there is a clear role for Congress in removing barriers to market access." In a similar vein, Detroit Edison wrote, "State and federal regulatory jurisdictions need to be clearly defined. In particular, federal legislation should codify the authority of the FERC over unbundled transmission service."
A number of utilities felt that changes to adapt public power and federal power agencies to a fully competitive market were needed, and a number called for changes to the tax code (see related discussions below).
The questionnaire sought input on whether or not any federal legislation should flatly grandfather states' competition plans or whether a grandfather clause should include certain conditions. In general, state commissions disfavored conditional grandfather clauses -- particularly those states that are already implementing competition plans. Utilities' responses were more varied, with some arguing that at least minimal conditions ought to be imposed in order to ensure parties cannot evade competition.
State commissions unanimously opposed including a prescriptive grandfather clause in federal legislation. The California commission, which plans to implement full retail competition in January 1998, wrote, "The question correctly presupposes the fact that a failure to grandfather existing programs in any new federal legislation would impact several states. For California, everything from the basic industry structures of power exchanges, independent system operators and direct access...would be imperiled and our start date of January 1, 1998, would be rendered inoperable."
Similarly, Oklahoma, which plans to adopt retail competition by July 2002, identified a number of problems that could result if Congress mandated retail competition prior to that date.
Among states that are considering retail competition, the Indiana commission noted that the absence of a grandfather provision could delay competition:
"Failure to grandfather state restructuring activities could reopen previously settled issues which might give some stakeholders an opportunity to disrupt state restructuring activities. This type of disruption could cause a considerable delay in the transition to retail competition. Without grandfathering', states such as Indiana could be discouraged from taking action at the present time if federal legislation may later preempt those state initiatives."
Utilities, however, expressed a greater diversity of views on grandfathering. Wisconsin Energy felt that Congress should establish minimum standards for state plans, writing, "Federal legislation should require those states that have already restructured to show how their plans comply with the federal legislation. Grandfathering existing state restructuring plans without regards to how they impact interstate commerce could impede formation of competitive markets."
In a similar vein, the Electricity Consumers Resource Council (ELCON), representing large industrial consumers, wrote, "no prior component of a state action that constitutes a barrier or restraint of interstate commerce in electricity products and services should be grandfathered. Nor should the implementation of customer choice be delayed -- at any state's discretion --beyond a federally mandated date certain."
In a less prescriptive vein, Entergy suggested a middle of the road approach, writing, "State programs that generally meet the competition policies underlying a federal bill should be grandfathered. However, care must be taken to ensure that a grandfathering provision not be overly broad, allowing states to impose inconsistent policies on important restructuring issues."
At the other end of the spectrum, New England Electric System (NEES), which serves three states in various stages of adopting competition, wrote that it had to agree to divest its generation facilities and accept other conditions in exchange for stranded cost recovery. It wrote, "The NEES companies have now taken substantial steps to implement those undertakings. Our biggest concern is that federal legislation, if overly broad or poorly drawn, will undo or substantially impair these agreements, thereby irreparably harming the NEES companies."
The questionnaire also asked about the impacts of "reciprocity" requirements -- by which access to a state's retail market would be conditioned on the adoption of retail competition by the seller's home state.
Most respondents agreed that the states are barred by the Commerce Clause from imposing reciprocity requirements (although Carolina Power & Light and Northeast Utilities System cited the Supreme Court's General Motors Corporation v. Tracy decision, issued earlier this year, as possibly reviving state power to impose reciprocity requirements).
Nearly all respondents, however, felt that Congress could impose reciprocity through federal legislation. However, there was a divergence of views regarding the desirability of enacting such a policy as part of a retail competition bill.
State consumer advocates generally opposed reciprocity, as typified by the West Virginia advocate, who wrote, "It would appear that the ultimate losers could be the customers in the state allowing retail competition by artificially limiting a source of electricity."
On the other hand, the views of state commissions were mixed. A number agreed with the state consumer advocates, arguing that utilities would be the primary beneficiaries of a reciprocity provision, and that consumers might be harmed. New Mexico, which is considering competition, said it "needs sellers located in other states to market power in the state in order to provide enough competitors to ensure a competitive market."
On the other hand, Oklahoma felt reciprocity provisions might benefit ratepayers:
"Reciprocity benefits ratepayers, as well, by ensuring that local rates do not increase due to out of state providers either taking local customers, and thus increasing the burden on the remaining in-state customers, or reducing rates to their local customers by selling at rates which average the lower rates in Oklahoma with the higher rates in the out of state provider's local territory."
California expressed caution on the subject, writing, "Reciprocity is preferable, and only federal legislation or adoption of an inter-state compact can provide it. But, we would forgo it if legislation would either alter or delay California's program."
Among utilities responding to the questionnaire, opinions covered the spectrum. Some felt a reciprocity requirement is needed to ensure an orderly transition to retail competition. For example, Entergy wrote, "Congress should require reciprocity to ensure an open competitive market...States with low electric rates are currently deciding whether or not to play in the competitive market without such a reciprocity agreement. If states with low rates believe opening up their retail markets will raise their low rates, they are unlikely to open up their markets to competition."
Other utilities took the opposite point of view, arguing that reciprocity would retard competition. Utilicorp weighed in against any reciprocity requirement, state or federal, "because they effectively result in barriers to open access and inhibit a competitive electric marketplace. While appearing to promote a level playing field, mandatory reciprocal requirements may provide a delay tactic or avoidance mechanism for utilities to prevent access to their customers or for states to in effect close their borders."
Others, such as Wisconsin Energy, asserted the question is moot, since non-utility generators and brokers who buy from multiple sources -- already fixtures in today's competitive wholesale market -- render reciprocity provisions meaningless, writing, "Reciprocity conditions cannot be made to work...[they do] not prohibit national power marketers unaffiliated with utilities from serving their consumers."
A majority of utilities identified stranded costs as their foremost concern; however, there was little consensus on how to handle the issue. Low-cost utilities tended to downplay the problem, and others felt this issue would work itself out over time in state ratemaking proceedings. On the other hand, a number of utilities urged that any federal retail competition bill specifically address stranded costs, though there was little agreement on how this should be done.
In a response typical of the utilities who favored leaving resolution of stranded cost issues to the states, Cinergy wrote, "Simply stated, we do not want to see litigation over stranded cost recovery derail the movement toward customer choice. Because what constitutes an acceptable resolution to stranded cost issues may vary from state to state, Congress should not restrict the states in their approaches to addressing this issue."
Others were less comfortable with federal legislation taking a laissez faire approach on stranded costs, and many felt that any federal bill should guarantee their recovery. Typical of those arguing for a broad recovery provision was Virginia Power, which wrote, "if Congress dictates a date certain for retail competition and gives FERC an expanded role in the process, then full recovery of stranded investment should be federally mandated."
Others stressed equitable considerations, such as the Southern Company, which noted, "It would be unfair for government to change the rules in mid-stream and require shareholders to bear these costs. Seventy-five percent (75%) of whom, in Southern's case, are individuals with a median age of 68."
Somewhat narrower suggestions were made regarding recovery of PURPA-related costs. Carolina Power and Light wrote, "Many of these costs would not have been incurred in a deregulated environment and will not be recoverable at market-based prices following deregulation. Ignoring these costs or shifting them to other customers or stockholders would be wrong, inequitable, and unconstitutional."
EPSA, the independent power group, also supported some recovery, writing, "While stranded cost recovery may mask some of the immediate benefits of competition, stranded costs must be resolved as a transition issue. Properly calculated, stranded costs reflect commitments and investments already made and largely already included in rates."
And American Electric Power (AEP), which generally did not favor a legislative provision requiring stranded cost recovery, nonetheless commented, "An exception to this rule is that AEP favors federal legislation to address the recovery of costs associated with nuclear power plant decommissioning and nuclear waste disposal."
At the other end of the spectrum, some respondents suggested federal legislation should cap the amount of stranded costs states permit utilities to recover. Wisconsin Energy wrote, "Federal legislation should address the issue of stranded cost recovery. Stranded cost recovery not only rewards high-cost utilities and penalizes low-cost utilities but also delays the time when customers receive the full benefits of competitive markets...the legislation must provide clear, specific directions to the states on the principles for stranded cost recovery."
State consumer advocates were wary of stranded cost claims, stressing the need to avoid rewarding the least efficient utilities and in so doing stifling consumer benefits of competition. Pennsylvania's advocate wrote, "it would be a cruel joke on the American people to mandate competition' by a near term date certain, while at the same time ensuring that most consumers would see no benefit from such competition for a decade or more because of a federal mandate that ratepayers must make their utilities whole for every penny of uneconomic investments that they could not recover in a truly competitive market."
Similarly, ELCON, the industrial user group, wrote, "We are not generally pleased with the manner in which this resolution' was legislated in California and Rhode Island. We do not support any policy purporting to guarantee 100% recovery of such costs from consumers."
Some states that already have adopted retail competition plans have agreed to compensate utilities for stranded costs by means of securitization. Under such plans, the state sells bonds to raise money to pay utilities' costs, and the bonds are secured in part by an added charge for use of transmission and distribution facilities within the state. The questionnaire asked what the benefits and risks might be, and the extent to which states can rely on securitization to resolve the stranded cost dilemma.
Many respondents thought securitization could prove a useful tool in managing stranded costs. California, which has adopted retail competition, stated that its legislation permits "rate reduction bonds to recover costs allocated to residential and small commercial customers...The customers will have a fixed and limited liability. We believe this will work for California."
Other states saw securitization as a double-edged sword. Maine wrote it is studying the potential benefits and detriments, noting, "Among the risks inherent in securitization are: locking in amounts that turn out to be in error; insufficient benefits for ratepayers relative to the increased benefits provided shareholder and; increasing the State's credit riskiness. In general, securitization shifts risks from utility shareholders to ratepayers and, potentially, the state."
Although some state consumer advocates thought securitization could benefit consumers if done correctly, many were wary. Ohio's advocate wrote, "Securitization might reduce the charges on stranded costs because the interest rate on the securitized bond could be lower than the utility's overall cost of capital. But, ratepayers only benefit if it is completely certain that these costs would have been recovered anyway from ratepayers at the higher capital cost."
Utilities were split on the impact of securitization. Public Service Electric & Gas asserted, "When properly structured, securitization will provide benefits to both ratepayers and utilities by making immediate rate relief both possible and financially sound." However, Entergy observed that, "securitization is an extremely useful tool for dealing with strandable cost recovery. It allows the utility to recover potentially strandable costs while at the same time possibly lowering rates. However, securitization will not lead to large rate reductions."
One of the arguments frequently made in support of retail competition is that small consumers currently are disadvantaged relative to large industrials.
Respondents were asked whether large industrial consumers are able to negotiate reduced prices and, if so, whether this occurs at the expense of smaller business and residential consumers. The questionnaire also asked whether any studies had been done to support the argument that small consumers are in effect cross-subsidizing large consumers.
Many states have authorized special industrial rates for purposes of attracting or retaining large industry and jobs. For example, Kentucky wrote, "There are no studies in Kentucky that support the conclusion that large industrial customers are reaping any benefits that are not also enjoyed by the residential classes. We do have one provision that allows industrial customers to gain a temporary rate reduction if they provide a specified level of new jobs or investment in the state. Overall, this provision helps the economy and the residential consumer."
A number of state consumer advocates also indicated that on balance industrial rates had benefitted small consumers in their states. West Virginia's advocate noted that while industrial rates reflected large customers' bargaining power under regulation, this leverage would not disappear under competition, writing, "Industrial customers will inevitably achieve more beneficial rates than residential and small commercial customers regardless of the degree of regulation, due to the significant market power of large industrial customers."
No respondent identified any analysis indicating that cross-subsidization of industrial users by residential consumers occurs. In fact, many state commissions pointed out that their statutory authorities prohibit subsidization of one consumer class by another. Others, such as West Virginia, indicated that where cross-subsidies have occurred, the small consumer has received the benefit ("where cross subsidization does exist, generally it is the industrial class subsidizing the residential class"). Similarly, ELCON wrote that in a 1986 study, it found that industrial customers paid more than $2.5 billion annually in subsidies to other ratepayers.
In some cases, state law specifically requires shareholders to bear the cost of any industrial discounts. The Texas commission wrote that its state law authorizing utilities "to offer rates that are discounted" includes an explicit cost-shifting prohibition requiring that "utility shareholders, not utility ratepayers, shoulder the cost burden associated with revenues lost through any rate discounting activities of the utility."
On the issue of who should have access to low-cost power supplies, the states' answers varied according to their current circumstances. Relatively low-cost states feared that retail competition might raise their consumers' electricity costs. The Idaho commission responded "a move to market prices and the elimination of regulation may result in higher prices to many Idaho customers and higher returns to utility shareholders."
The State of Washington concurred, asserting that present consumers should share in any increase in value of their existing low-cost resources, and that electricity ought not to be regarded as a commodity, writing, "Where the public has granted usage rights to public resources (condemnation of land, licensing of hydropower, etc.) to monopolies to enhance the public's access to this service, the value of these resources should be captured by the public -- not the highest bidder."
Some state consumer advocates stressed that low-cost states are simply in a different position than others. The West Virginia advocate wrote, "Because West Virginia is already a low cost state, the advent of retail competition may actually harm consumers in West Virginia if the regional market price of electricity is higher than the current regulated price." The Pennsylvania advocate wrote, "It remains to be seen whether our efforts to bring rates down through competition in Pennsylvania will succeed, but I can certainly recognize the concerns of consumers in low cost states who may see little advantage and great potential harm by moving too quickly to a competitive model."
On the other hand, some respondents believed that everyone would benefit from retail competition. ELCON wrote, "Those products and services, such as generation, which lend themselves to competition, should be priced exclusively in the marketplace." Massachusetts wrote, "The benefits of low-cost resources in a market-based system would be widespread as long as all customers have retail choice -- customers would get the benefits of lower prices, utility shareholders should see improved system utilization, and efficient suppliers would enjoy business opportunities."
Public Power, Federal Power
One of the most controversial issues the respondents addressed is how public power -- municipalities, rural cooperatives, and federal entities -- fits into a more competitive retail market. Public power answers to different stakeholders, operates under different federal power laws and tax regimes, and faces different advantages and disadvantages from independently owned utilities (IOU's). The longstanding debate between IOU's and public power about tax and other advantages each group enjoys has been sharpened by the retail competition discussion, and there was no consensus among them as to what federal legislation should include.
Larger public power systems generally favored state and local decisionmaking, were wary of securitization of utilities' stranded costs, and cited the "private use" restriction under the tax code as a major concern (the private use rule limits the degree to which public entities can use their facilities in private transactions). Municipal power systems also felt changes in the private use rule were essential. Wisconsin Public Power wrote, "If retail competition is to be permitted, it is essential that IRS private use restrictions be lifted on existing generation and transmission in order to prevent public power systems from incurring substantial new stranded costs and to enable them to compete vigorously in new markets."
Municipal systems also strongly favored state and local control over whether, how, and when to move to retail competition. Most felt that IOU's enjoy significant advantages which should be addressed as part of any restructuring legislation, as reflected in the comments of the Michigan Municipal Electric Association, which wrote, "The level-playing field' is actually tipped decidedly in favor of the private utilities who enjoy the advantages of size, political and financial superiority [and] market power...".
Municipals expressed strong concerns about market power issues, including the need to retain some of PUHCA's protections. Santee Cooper wrote, "market power issues are being given inadequate attention in the ongoing debate over the future structure of the electric industry...There appears to be almost a blind faith that if Congress deregulates the industry, somehow the market place will make everything work out."
The National Rural Electric Cooperative Association (NRECA) strongly opposed a federal retail competition mandate, writing, "NRECA's members are very concerned that residential, farm, inner city, low income and small business consumers of electric service will not benefit from retail competition to the same extent as large industrial and commercial consumers, and that they may in fact end up with higher bills and less reliable service." The Association asserted that their tax treatment is appropriate to their not-for-profit mission, and disputed IOU arguments that they enjoy an advantage.
In many respects, the Bonneville Power Administration (BPA) operates under unique rules. Bonneville indicated it is working to reduce stranded costs and participating in both regional and federal executive branch discussions on how to adapt the agency to retail competition. Bonneville wrote that it "plans to support states in their efforts to provide for consumer choice," but stipulated that any changes must enable it to recover sufficient revenues to meet its costs and repay the federal investment in the Federal Columbia River Power System.
Bonneville posited several scenarios under which increased competition could cause it to incur stranded costs, and explained that "any cost underrecovery faced by Bonneville -- whatever its source -- ultimately would redound to the detriment of the Treasury." It added, "In the unlikely event that we underrecover our power revenues, we believe we do have the authority to use the transmission system to generate additional revenues to recover power costs." Recognizing this would be litigated, Bonneville concluded, "Bonneville needs and the Administration supports a contingent stranded cost recovery mechanism, to help avoid burdening the United States taxpayers, who under law stand last in the line of Bonneville creditors."
In contrast to some IOU comments, the Tennessee Valley Authority (TVA) described itself as "entirely self-supporting financially." TVA asserted it should be permitted to compete in a competitive market, and that the statutory "Fence" barring it from selling outside its historic service area should "come down on the date retail competition begins in any State in which TVA presently provides electric power...". Otherwise, it wrote, "there will be significant negative impact on the State and local economies of Tennessee; northern Alabama, Georgia, and Mississippi; and western Kentucky."
State utility commissions voiced concern about integrating public power in a competitive retail market. The Kentucky commission wrote, "we are concerned that federally funded power generators have a significant market advantage over investor-owned utilities. True competition could not be achieved if these advantages are allowed to continue." Idaho's commission noted difficulties in establishing an Integrated System Operator (ISO) in the west because of Bonneville's unique status under federal law, writing the agency "controls a significant portion of transmission in the West, and yet because of reservations about its ability to fully participate in INDEGO without congressional action allowing federal transmission resources to be a part of this effort, BPA has withdrawn from discussions."
Regardless of their views on retail competition, IOU's believed that public power enjoys significant advantages that should either be contained or eliminated in order not to skew increasingly competitive markets. Central and South West Corporation noted, "A pattern appears to be developing in all of the states that are deeply into the restructuring process where public power entities are either exempted from restructuring or restructuring is optional on the part of such entities. The penalty for not restructuring generally is a requirement that public power entities build a fence around themselves and not participate in the restructured market." The company continued, "it will be difficult for public power entities to hide from competition behind their fences when their customers demand customer choice."
Nonetheless, the "fence" concept appeared to satisfy some utilities that retail competition could go forward without addressing all the arguable inequities between IOU's and public power. Utilicorp wrote that it "supports an approach whereby public power entities are allowed to retain these advantages if they provide electric suppliers with access to their transmission lines and do not provide service outside of their historical boundaries."
Other utilities, like Entergy, called for bringing public power under "the same regulation at the FERC as other utilities", noting that unless public power is required to make the same open access transmission filings as IOU's, "the approval process to gain access across public power systems will significantly slow down these transactions."
With respect to the federal power agencies, many IOU's felt retail competition could not work fairly without fundamental changes to the existing rules. Commonwealth Edison wrote, "The Power Marketing Agencies (PMA's) must be sold to the highest bidder, ensuring that these giant marketers do not exercise unfair market power resulting from subsidization."
In the same vein, Southern California Edison wrote, "companies like Edison will shortly be facing direct competition with subsidized federal power transmitted by an agency whose transmission lines are not subject to FERC's open access rules. There is nothing fair about this form of competition. Congress should eliminate the ability of federally subsidized power, such as that from BPA, to be sold into the competitive electricity market."
Entergy wrote, "until TVA's historical and ongoing direct and indirect federal subsidies (estimated to be more than one billion dollars) are addressed, the fence should not be taken down. If not, the competitive advantage gained by TVA will significantly tilt the level playing field needed for competition."
Similarly, the Southern Company wrote, "TVA claims immunity from a broad range of federal laws...[which] skews the competitive playing field in TVA's favor" and concluded, "TVA, as a subsidized federal power authority with all its special privileges, immunities and benefits, must be dealt with in any transition to effective competitive markets."
Mandatory Unbundling of Local Distribution Company Services
One of the significant but less widely discussed issues in the electricity debate is whether or not retail competition should mandate "unbundling" of local distribution company services. (This concept is distinct from the broader "unbundling" of the electric industry into generation, transmission, and distribution components, which are increasingly priced separately and may be provided by different entities.)
Respondents widely assumed that there will be a continuing role for the local distribution component of the traditional utility -- the final link in the system that delivers power from the transmission line to the consumer. There was less agreement, however, as to whether opening up distribution services to competition would benefit consumers and whether Congress should mandate this type of unbundling.
State commissions' responses showed strong divisions of opinion. California, which has adopted a plan calling for unbundling distribution services, stated, "we believe that unbundling is a necessary component of electric restructure [sic]." Arizona, which has established a working group on the issue, wrote, "If you choose to include a requirement for unbundling', give the states and the utilities enough time to prepare...".
Most respondents, however, were not convinced that unbundling would benefit consumers. Kentucky commented:
"Many problems may arise if Congress enacts legislation unbundling local distribution services. Primarily, the pricing of these individual services will require significant scrutiny, especially if the generation owners are also the owners of the distribution company. Cross subsidy analysis will be intense. Customer confusion will be heightened, just as we've seen in the telecommunications industry but probably at an even greater degree."
State consumer advocates generally favored leaving this question to the states.
Among utilities, responses ranged from lukewarm to extreme concern. Cinergy, a strong proponent of federal legislation, observed:
"While a competitive market requires the functional unbundling of the generating function, the transmission function, and the distribution function, it does not require the further unbundling of the various distribution services...[which] may continue to be provided without adverse impact on competition...".
Similarly, New England Electric Service asserted:
"There is no evidence to suggest that state regulation of such services has proven ineffective...Nor is there any evidence to suggest that the unbundling or these services would enhance economic efficiency, or advance consumers interest. To the contrary, unbundling distribution services may well delay the introduction of supplier choice and degrade customer service...[and] result in negligible savings."
Reliability of Service and Supply
Respondents expressed varying levels of concern about the potential impacts of retail competition on the reliability of service and reliability of supply.
A number of respondents felt that wholesale competition has already stressed the transmission system, and indicated concern about the added strain which retail competition might impose. Consumers Energy commented, "There is increasing evidence that the reliability of the transmission system is being threatened by the uses of the system that have been spawned by implementation of FERC Orders 888/889." The Southern Company wrote, "The current transmission system may not be capable of handling full retail competition...it is doubtful that the transmission system is robust enough to allow all customers to benefit from full retail competition immediately."
However, a number thought that system reliability could be protected and enhanced through greater use of an ISO under which the transmission system is operated by an independent entity.
A number of respondents thought the reliability of the transmission system could be improved by making the North American Electric Reliability Council's (NERC) voluntary standards binding on transmission system operators, either through FERC regulation or under a self-regulating plan like that used by the securities industry.
With respect to reliability of supply, most respondents believed the market would bring forth supplies adequate to meet demand. A few, however, were less sanguine. Florida Power noted:
"Today, there is an excess of generation supply making the issue of adequate reserves unimportant...in a competitive market where rising price signals induce construction of new generation, shortages become an economic necessity in order to create the needed price signal. Only adequate reliability rules which enforce reserve requirements can effectively counteract economic pressure towards poorer reliability of generation supply."
For some respondents, the potential environmental impact of retail competition was of primary concern. There is a strong division between those who feel retail competition could exacerbate downwind effects of burning fossil fuels and those who did not. Some felt that this issue was too pervasive to be dealt with in a retail competition bill. Others believed that no legislation should be enacted unless the bill addressed clean air issues.
Public Service Electric and Gas asserted that some Midwestern coal-fired power plants that are not subject to the most stringent Clean Air Act standards will become more attractive in a more competitive market:
"PSE&G is concerned, however, that if the current system of unequal environmental standards is carried over into a restructured industry, capacity reserves will be maintained by continued operation of old, dirty generating facilities and investments in new, clean generation will be delayed and displaced."
Similarly, the Connecticut commission felt competition could cause adverse environmental effects, writing, "consistent environmental requirements across the array of suppliers will be necessary to level the playing field', assuring that the economic benefits of competition are not achieved at the cost of our health or environment. The effective internalization of these externalities is not likely to occur if left to the discretion of individual states."
Along the same lines, EPSA, the independent power group, wrote:
"Environmental issues are properly part of the restructuring debate...Today, many older power plants have been allowed to pollute at significantly higher levels than comparably fueled modern plants. A restructured, competitive marketplace should not allow any power plant a pricing edge simply because it has largely avoided pollution controls...Congress must explore how existing legal authority under environmental statues can be used to remedy these concerns or whether new legislation will be required."
Others questioned the scientific basis for arguments that Midwestern coal plants affect East Coast air quality or that retail competition would make any difference, and opposed linking the issues. For example, American Electric Power stated, "although we recognize Congress' role in enacting legislation to protect the environment, we strongly urge that such legislation, if any, be developed independently, separate from the electric industry restructuring initiatives."
One pro-federal mandate utility, Utilicorp, asserted that retail competition might in fact improve the environment, writing:
"Electric industry restructuring should provide an opportunity for innovative solutions to improving environmental quality. These solutions could include expanded appliance efficiency standards, expanded power plant siting reviews, resource portfolio requirements, green pricing' and emissions trading."
Public Utility Holding Company Act of 1935
PUHCA was enacted, in tandem with the Federal Power Act, to stem abuses committed against ratepayers and investors by giant multistate utility holding companies during the 1920's and 1930's. The Act authorized the Securities and Exchange Commission (SEC) to protect investors' interests, and enabled the Federal Power Commission and state regulators to prevent utilities from using captive ratepayer monies to cross-subsidize unrelated ventures.
Respondents' views on PUHCA broke down clearly among various categories of respondents. Interestingly, few respondents thought that PUHCA would be likely to seriously inhibit retail competition since so many other utilities and power providers would vie for customers.
Without exception, the "registered" holding companies strongly supported full PUHCA repeal, on the basis that it is no longer needed to protect consumers and prevents them from entering markets on the same basis as "exempt" holding companies (under PUHCA, the 15 registered holding companies face restrictions that the far more numerous exempt companies do not). The companies also supported immediate PUHCA repeal, regardless of whether comprehensive restructuring legislation goes forward.
Like many other registereds, New England Electric System characterized PUHCA as an anachronism, writing, "Congress need not address market power concerns in PUHCA repeal legislation...The integrity of the market will continue to be protected by the Department of Justice under the federal antitrust laws, and through FERC and State regulation concerning terms of conditions of service."
Entergy's comments typified the registereds' arguments that PUHCA unfairly inhibits their activities, writing, "PUHCA costs investors and shareholders of registered companies lost business opportunities, lost efficiencies and adds costs to one sector of the industry, resulting in an unlevel playing field for electric competition." Entergy also wrote that, as states make individual decisions about retail competition "Any multistate company faces potentially inconsistent regulatory treatment" and asked "Is it fair to allow one competitor to compete in other states but have their own state territory protected from competition?"
On the other side of the debate, state consumer advocates were very skeptical about PUHCA repeal. The Texas advocate wrote, "the repeal of PUHCA is ill-advised at this time. At a minimum, the issue of repealing PUHCA should be deferred until such time as effective competition is flourishing at the retail level." The Pennsylvania advocate wrote, "To the extent that PUHCA could prevent some potential competitors from leveraging their monopoly power in other states to succeed in Pennsylvania, then that is not the kind of competition that we should be concerned about missing."
State commissions' views were more mixed. A number felt that PUHCA's protections would be unnecessary once effective retail competition was achieved. Others, though, echoed the Michigan commission, which wrote:
"Easing of regulation must be accomplished very carefully in order to avoid enhancing the advantages of already dominant firms. It is hard to envision effective competition in a region if PUHCA is repealed and not replaced by some legislative constraint on inappropriate exercise of market power."
The questionnaire asked utilities whether, in the event Congress enacts restructuring legislation, changes should be made in federal, state, or local tax codes.
Utilicorp contended that, while changes are needed, retail competition legislation should not wait for related changes to the tax code, stating, "Although Utilicorp recognizes that restructuring will result in the need to make changes in the tax code, we believe it is not necessary to solve all of the tax issues before setting a date certain for retail customer choice...".
However, a number of utilities felt otherwise. While recognizing that federal legislation could only address federal tax issues, Virginia Power identified a number of needed changes, writing, "If federal restructuring legislation is enacted, federal, state and local tax codes should be changed in order to allow consumers of electricity to obtain the full benefits of competition."
Wisconsin Energy went a step further, arguing:
"Federal legislation should examine the federal tax code and make any revisions necessary to ensure all entities in the competitive generation and retail markets are affected by the same tax rules...[and] mandate that the states examine their own tax situations to ensure competitive generation and retail entities are neither advantaged or disadvantaged through tax treatment."
Other companies focused on specific tax concerns. A number, like Commonwealth Edison, stated that some aspects of tax law, such as those applying to nuclear decom- missioning funds, would no longer make sense under retail competition and would have to be modified. A number, such as the Southern Company, felt that tax preferences that advantage municipal systems should be modified "to remove artificial preferences, subsidies or impediments" in a competitive market. Carolina Power & Light wrote, "Cooperatives and municipalities are not subject to federal income tax..to create a fair and equitable marketplace it will be necessary to level the playing field' so that no one who is selling electricity has an unfair tax advantage."
In recent decisions, the U.S. Supreme Court has shown greater sympathy for states' rights and closely scrutinized congressional directives to the states. This is a fluid and unsettled area of the law, and coalitions on the Court have varied in recent years.
The questionnaire asked what, if any, constitutional issues would be raised by (a) federal legislation mandating states to adopt retail competition by a date certain or (b) requiring states to consider competition, but leaving the final decision up to them.
The National Association of Regulatory Commissioners (NARUC) believed either alternative would present constitutional issues subject to extensive litigation:
"In our view, significant constitutional issues are raised in both cases. We would anticipate that if Congress were to adopt either approach, the U.S. Supreme Court would ultimately rule on their consistency with the Constitution...The critical issue raised in these cases is whether the 10th Amendment is violated when Congress enacts legislation requiring States to administer a Federal regulatory program, i.e., whether the Federal government can constitutionally regulate the States as States."
Most respondents felt that a mandate that states adopt competition was more legally problematic than a requirement that states merely consider competition. Idaho wrote, "The Idaho Commission questioned whether the federal government can legally mandate' competition among suppliers of electric energy within the state of Idaho (emphasis added)."
Arizona went a step further, raising Tenth Amendment issues and questioning even legislation that allowed a state to "opt out" of a federal competition mandate:
"The usual tenth amendment issues would possibly be raised...A possibility that a state could opt out' of national commerce in electric energy may create a commerce clause issue, even if it is sanctioned by Congress. An opt out' provision would cause the incumbents to redouble their efforts to obtain an opt out' from the state, and to press their arguments to the state judiciary that they are entitles [sic] to exclusive service territories."
The Alabama commission's response framed the classic Tenth Amendment issue, writing that a federal law requiring states to adopt retail competition or be preempted would:
"...most definitely raise serious constitutional questions, including whether Congress would have exceeded its authority under the Commerce Clause and whether the Tenth Amendment would prohibit such federal intrusion into an area traditionally reserved for the States...[a federal mandate] would fail this test because the States would be forced to choose between regulating pursuant to Congressional directives or completely abandoning the regulation of retail electric rates -- a field traditionally left to the States."
Note: After Rep. Dingell sent out the questionnaires, the Supreme Court issued a decision partially invalidating the Brady handgun law. In Prinz v. U.S., the Court ruled that Congress cannot conscript state officials into implementing a federal program. The Court cited precedent holding that states could be asked to choose between voluntarily implementing a federal policy or being completely preempted -- including assumption of all related costs and enforcement duties -- by the federal government. But because the Brady law required state officers to carry out background checks of potential gun buyers, the Court ruled the law did not qualify under this precedent.
Finally, the Prinz decision stipulated that, in order to pass constitutional muster, the federal law must bear upon an "otherwise preempted" field. The Supreme Court has not ruled directly on the question whether state regulation of the electric utility industry invokes Tenth Amendment interests which could trump Congress' otherwise plenary powers under the Commerce Clause.