ECONOMIC REGULATION: Controlling price and other aspects of competition

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ECONOMIC REGULATION Controlling price and other
aspects of competition
Regulation (Partial) Deregulation Transport
Interstate Commerce Act of 1887 Telephone
Communications Act of 1934 Electricity Federal
Power Act of 1935 Natural Gas Natural Gas Act
of 1935 What is a common carrier? What is a
public utility?
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ECONOMIC REGULATION Controlling price and other
aspects of competition
Transport Interstate Commerce Act of
1887 Telephone Communications Act of
1934 Electricity Federal Power Act of
1935 Natural Gas Natural Gas Act of 1935 What
is a common carrier? What is a public
utility?
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ECONOMIC REGULATION Controlling price and other
aspects of competition
Seller of goods or services Distribution
network delivery services Buyer of goods or
services
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Economic Regulation Evolution of Legal Rules
Energy 1865 First natural gas utility opened in
Fredonia, NY 1877 Munn v. Illinois 1882 Edisons
Pearl St. Station power plant opened 1887 Intersta
te Commerce Act (including telephony) 1880s
Rise of state utility commissions passage of
federal major antitrust legislation 1930s Federal
Power Act Rural Electrification Act Public
Utilities Holding Co. Act

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ECONOMIC REGULATION Controlling price and other
aspects of competition GOAL Prevent monopoly
pricing

• Antitrust/Competition law
• Acquisition of price-setting power
• Collusion to fix price
• Use of market power unfairly or unreasonably to
  squelch competition

• Public Utility Regulation
• chartered monopoly
• administrative price setting
• Government Ownership

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Economic Regulation Evolution of Legal Rules
1880s Rise of state utility commissions
passage of federal major antitrust
legislation 1930s Federal Power Act Rural
Electrification Act Public Utilities Holding Co.
Act ELSEWHERE norm of government
ownership and provision of service
DEBATE Public/nonprofit power vs. private power
limited to just and reasonable rates

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• PUBLIC POWER MOVEMENT
• Federal Power Agencies (TVA, BPA)
• REA
• Municipal power
• Federal and municipal preferences
• Why government ownership? Why not government
  ownership?

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• Commission Regulation
• COMMISSION FORM
• Plural executive appointed (feds) or elected
  (some states)
• Rate cases few rulemakings
• Staff represents ratepayers

CONGRESS Staff PRESIDENT COMMISSION Intervenor
s Regulated Firms
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• Commission Regulation
• COMMISSION FORM
• Plural executive appointed (feds) or elected
  (some states)
• Rate cases few rulemakings
• Staff represents ratepayers
• REGULATORY PRINCIPLES
• Natural monopoly certificate of convenience
  and necessity duty to serve
• In return for what?

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Characteristics of modern, regulated public
utility

• Monopoly license within service area
• Duty to serve all
• Regulated rates

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• Commission Regulation
• COMMISSION FORM
• Plural executive appointed (feds) or elected
  (some states)
• Rate cases few rulemakings
• Staff represents ratepayers
• REGULATORY PRINCIPLES
• Natural monopoly certificate of convenience
  and necessity duty to serve
• Cost-based rate setting fair rate of return
  for shareholders on prudent investments
• How might this fair return be established?

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• Under traditional rate regulation, how are rates
  set?
• rate case

R Br O
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R Br O

• What is rate base?
• Is all utility capital equipment included?
• Once the eligible assets are identified, how is a
  value assigned to that rate base?

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R Br O

• What is the rate of return?
• What sort of rate of return is the utility
  entitled to? What policy objectives underlie the
  requirement of a fair return on investment?

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R Br O

• How closely do regulators scrutinize expense
  claims made by utilities?
• What if the expenses were incurred imprudently?

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GENERATION TRANSMISSION DISTRIBUTION
Retail Customer
Power Plant
IOUs
Rural Coops
Retail Customer
State or Municipal Utility
Retail Customer
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Interconnections of the North American Electric
Reliability Council in the Contiguous United
States
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North American Electric Reliability Council
(NERC) Regions for the Contiguous United States
and Alaska
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GENERATION TRANSMISSION DISTRIBUTION
Retail Customer
Power Plant
IOUs
Rural Coops
Retail Customer
So what, if anything, is wrong with traditional
rate regulation? In energy? In telephony?
State or Municipal Utility
Retail Customer
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• Deregulation/Restructuring
• Deregulating the airlines (CAB)
• FCC deregulating cable TV
• Abolition of the ICC
• Restructuring of the natural gas industry
• Telecommunications Act
• The logic of deregulating

1970s 1990s
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Estimated Average Revenue per Kilowatthour for
All Sectors at Electric Utilities by State, 1999
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Toward Competition in Wholesale Markets Late
1990s-present
1980s and Early 1990s Wholesale generators began
to enter market (PURPA) FERC nudged transmission
line owners to wheel power, and Number of
cross-service area wholesale transactions
increased. Transmission line owners began filing
transmission service tariffs. 1996 FERC Order
888 Mandating Open-Access Transmission
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Restructuring Retail Markets State
Restructuring Program Issues What is the
objective of state restructuring programs?
TRADITIONAL REGULATION Generation ? transmission
? distribution ? end user retail sale
RESTRUCTURING Generation ? transmission ?
distribution ? end user IPP transmission
LDC/ESP/REP owner ESCO/LSE
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Restructuring Retail Markets State
Restructuring Program Issues What is the
objective of state restructuring programs?

• How can states promote competition in retail
  sales given the history of regulated monopoly
  service?

ESPs compete on price. Old generating assets
must be able to compete on price.
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SB 7 Texas

• Step 1 Freeze existing retail base rates of
  incumbent investor-owned electric utilities (IOU)
  for two years beginning 9/1/99.
• Step 2 Utility Unbundling by 9/1/2001
• Generation
• Distribution and transmission
• Retail electric provider (REP)
• Step 3 Retail market opens January 1, 2002.

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SB 7 Texas

• Step 4 All IOUs must cut their rates by 6.
• The "price to beat" for new retail competitors.
• IOU rates will be kept at this level for 5 years,
  or until they loose 40 of Customers. Why?

• Capacity Ceilings
• No power generation company may to own or
  control, directly or through affiliates, more
  than 20 of the installed generation capacity in
  a qualifying power region. Why?

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California Restructuring Design Much of ESCOs
supply acquired on wholesale spot
market Generators ESCOs wta bids
CalPX wtp bids Marketers All sales are at
market clearing price. Wholesale price set by
market retail price capped. Eventually,
wholesale price gt retail price wholesale price
capped temporarily
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• California Restructuring Design
• Supply lt demand
• Increase in demand no new plant
• Northwestern drought
• Interruption in gas supply
• NOx emission credit supply
• Other causes of price increases
• gas prices
• NOx credit prices
• Risk premiums

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Restructuring Retail Markets State
Restructuring Program Issues What happens to the
duty to serve? How do restructuring plans
protect the difficult to serve customers? How do
state programs protect customers who choose an
unreliable ESP?

• POLR or default service
• Reserve capacity mandates/taxes
• What about the stranded costs of deregulation?

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APPA Consumers need public power as a viable
alternative and a not-for-profit yardstick
against which to compare the performance of other
competitors.

• What if state maintained reserve units (at
  taxpayer expense) willing to enter generation
  market anywhere in the state at 12c/kwh?
• See Burbank generators

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Municipalization Options City may condemn lines
and act as nonprofit LDC. Or city may act as
POLR, serving low-income residents. What if city
became an ESP in a deregulated market, offering
to act as a nonprofit buyer representative for
its citizens?
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EEI Government shouldnt compete against private
companies. Allowing government-owned utilities to
compete against shareholder-owned utilities is
just as unfair, and makes as little sense, as if
government-owned dry cleaning stores competed
against private ones.
APPA Does anyone really believe electricity is
like dry cleaning? Comparing the essential
life-giving service of electricity to a dry
cleaning business is nonsense.
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Should fairness or efficiency be the goal of
our regulatory system? How do you balance these
two concerns with respect to electricity?
Telephony?
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• Privatization Overseas
• Why is it happening?
• Is it for the same reasons that it happened in
  the U.S.?
• How is it happening?
• What is the impact of electricity privatization
  in other countries?
• The CA restructuring approach copied much of the
  UK system. Why hasnt the UK experienced the
  same sorts of problems CA did?