Monopoly or competition:

Redesigning the electric industry

Indiana forum on competition considers numerous options for a restructured electric utility industry.

Recently, the Federal Energy Regulatory Commission (FERC) approved a proposal to restructure the wholesale market for electricity at the national level by introducing what is called "open access" to the nationwide transmission grid.

Redesign of the electric industry at the retail level in order to introduce elements of competition is also being given serious consideration in Indiana through a series of forums being conducted by the Indiana Utility Regulatory Commission (IURC). The first such "Forum on Competition" was held on December 20, 1994, with subsequent forums being conducted on almost a monthly basis.

Represented at these forums are: investor-owned utilities (IOU's); rural electrical cooperatives (REC's); municipal utilities; industrial and other commercial consumers; and consumer advocates, including the Office of Utility Consumer Counselor (OUCC) and the Citizens' Action Coalition (CAC).

The goal of these forums is to debate the desirability of restructuring the electrical utility industry, and to discuss the specific changes that such a restructuring would involve.

Current structure

Before considering the various proposals for change, it is important to understand the current structure of the electrical utility industry within Indiana.

A. Vertical Integration

The majority of citizens in Indiana acquire their electrical service through one of Indiana's five vertically integrated IOUs--NIPSCO, PSI, IPL, I&M or SIGECO. These utilities are responsible for the generation, regional transmission, and local distribution of electricity. Currently, these utilities offer "bundled" services to their customers. "Bundled" means that the rate which customers are charged for electrical service includes all factors involved in the production, transmission and distribution of that service. The same holds true for those customers who are served by a municipal utility or an REC. For these customers, their service provider may only distribute the electricity locally, while it is actually purchased from a generator that is owned by an IOU or a separate power association.

B. Monopoly Franchise and Exclusive Service Territory

Indiana grants monopoly franchises to electrical utility companies. The franchises carry the exclusive authority to provide service throughout a specific geographical area. This, combined with the integral role served by electrical power in our society, places these utilities in an enviable position. They have a captive customer base, which can neither easily do without their service nor obtain it from another source.

C. Regulation of Price and Quality of Service

Monopolies are granted on the condition that the utilities submit to the regulation of the rates that they are able to charge for their services. Typically, rates are set at a level which allows utilities to recover prudent construction and operating costs, as well as to earn a reasonable profit. In addition, utilities also have a legal obligation to provide adequate service to all customers within their exclusive service territory, without undue discrimination.

Proposals for change

The following is a brief synopsis of the various proposed changes that are being considered.

A. Retail Wheeling, Direct Access and Customer Choice

The change most commonly proposed is to allow for "retail wheeling," "direct access" or "customer choice." This change would allow retail customers to purchase electricity from any producer they wish, presumably at the lowest cost available. The basic argument in support of this proposal is that competition for customers will both drive down costs and improve quality of service.

B. Functional Unbundling or Divestiture

Another idea being offered to change the electric industry is the "functional unbundling" of the vertically integrated IOU's. By requiring utilities to offer separately the various components of electrical service, policy makers hope competition can be introduced for one component (generation) even if it is not yet technically feasible for the others (transmission and distribution).

"Divestiture" would take unbundling one step further and require utilities to sell off their monopoly distribution and transmission functions in exchange for deregulation of their competitive generation function. This, it is believed, would assure that a utility could not abuse its monopoly power over transmission or distribution to give an unfair advantage to its own generation.

C. Deregulation

A third change being given consideration is the "deregulation" of the generating component of the electrical utility industry. The idea here is that if there is competition among generators of electricity, there will no longer be a need for government to set prices and service standards.

Conclusion

The majority of restructuring proposals involve some degree of customer choice, one level or another of functional unbundling with or without divestiture, and reduced regulation of generation. While this approach sounds good in theory, it could prove quite bad in practice. For instance, who will be responsible to see that electricity is actually delivered?

What obligation will local monopolies have to deliver electricity actually produced by separate, competing generating firms? Who will gain increased choice in their supply options? Will the benefits of increased competition be available to all customers, or will they be available only to big business?

Also, who will be able to negotiate a favorable rate? The largest customers will be able to secure the most favorable rates, but if their low rates will only mean higher rates for other, smaller customers, what will have been gained? What about pollution? If competition focuses only on lower prices for a select few, will society at large face increased pollution of air, land and water as a result?

Restructuring, while potentially promising, poses many questions which must be answered before it can be successfully implemented. Citizens must be aware of these developments within the electrical utility industry and the public policy issues they raise to assure the protection of their interests as consumers concerned about not only the price of electricity but the quality of the environment.

(c) Copyright 1996, Citizens Action Coalition of Indiana, Inc. All rights reserved. Permission to use or duplicate this article is granted as long as this copyright notice and appropriate credit is given.

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