It's confusing, complex, and it could drastically change how much companies pay to power their plants or buildings.
It is utility deregulation, and unless your company is powered by a wood-burning stove or dilithium crystals, you will probably come face to face with it sometime in the next five years.
So what exactly is utility deregulation? Other industries, including airlines and telecommunications, have undergone deregulation, but utility deregulation is a little different.
To understand the changes, you must understand how electricity gets to a consumer.
Electricity systems are divided into three parts, called generation, transmission and distribution.
Generation is the process of turning fuel (coal, gas, nuclear) or other forms of energy (water or solar) into electrical energy.
The transmission stage moves the electricity in bulk quantities from the power plant to a buyer, like the utility you buy your power from.
Distribution delivers power from the bulk purchaser to the customer.
Generation, which accounts for the majority of the electricity cost, is the only part of the system that is being deregulated.
What this all means is that expanding companies can face dramatically different power options -- and prices -- depending on the state where they locate their new facility.
In one state they may be able to purchase power from only one utility. Or, in a deregulated state, they may be able to buy electricity from a company located several states away. Each scenario must be evaluated in terms of what is best for the individual company.
Deregulation puzzle
| DEREGULATION VOCABULARY 101
Electricity systems are divided into three parts, called generation, transmission and distribution.
Gen*er*a*tion
Generation is the process of turning fuel (coal, gas, nuclear) or other forms of energy (water or solar) into electrical energy.
Trans*mis*sion
The transmission stage moves the electricity in bulk quantities from the power plant to a buyer, like the utility you buy your power from.
Dis*tri*bu*tion
Distribution delivers power from the bulk purchaser to the customer. |
The degree to which states are deregulated, or are being deregulated, varies greatly.
California, as of March 31 of this year, became a deregulated state. Others, like Montana, Nevada, Oklahoma, Illinois and Pennsylvania, have enacted legislation and have some level of deregulation.
A few states, including Florida and South Dakota, have no significant legislation pending on deregulation, according to the U.S. Department of Energy.
Even though deregulation hasn't hit Florida yet, it still is affecting the state's utilities.
"We have established a key accounts section," said Tracy Danese, director of Economic Development for the Jacksonville Authority, a municipal electric company. "It's a group of 15 to 20 account executives that are concentrating on our largest industrial users.
"We're preparing for it as if it were a fact, and if it happens soon we're ready. Even if it doesn't come quickly, we will be a better company for acting in this way."
In New Jersey, Morristown-based GPU Inc.
has signed agreements to sell off its remaining fossil-fueled and hydroelectric generating assets in order to focus on transmis-
sion and distribution.
Deregulation Nation
Status of Utility Deregulation in all 50 States |
| State | Status as of 10/1/98 |
| Alabama | Commission Investigation ongoing |
| Alaska | Commission Investigation ongoing
|
| Arizona | Legislation enacted
|
| Arkansas | Commission Investigation ongoing
|
| California | Legislation enacted
|
| Colorado | Commission investigation ongoing
|
| Connecticut | Legislation enacted
|
| Delaware | Commission investigation ongoing
|
| Florida | No significant activity
|
| Georgia | Commission investigation ongoing
|
| Hawaii | Commission investigation ongoing
|
| Idaho | Commission investigation ongoing
|
| Illinois | Legislation enacted
|
| Indiana | Commission investigation ongoing
|
| Iowa | Commission investigation ongoing
|
| Kansas | Commission investigation ongoing
|
| Kentucky | Commission investigation ongoing
|
| Louisiana | Commission investigation ongoing
|
| Maine | Legislation enacted
|
| Maryland | Regulatory order issued
|
| Massachusetts | Legislation enacted
|
| Michigan | Regulatory order issued
|
| Minnesota | Commission investigation ongoing
|
| Mississippi | Commission investigation ongoing
|
| Missouri | Commission investigation ongoing
|
| Montana | Legislation enacted
|
| Nebraska | Commission investigation ongoing
|
| Nevada | Legislation enacted
|
| New Hampshire | Legislation enacted
|
| New Jersey | Regulatory order issued
|
| New Mexico | Commission investigation ongoing
|
| New York | Regulatory order issued
|
| North Carolina | Commission investigation ongoing
|
| North Dakota | Commission investigation ongoing
|
| Ohio | Legislation/orders pending
|
| Oklahoma | Legislation enacted
|
| Oregon | Commission investigation ongoing
|
| Pennsylvania | Legislation enacted
|
| Rhode Island | Legislation enacted
|
| South Carolina | Commission investigation ongoing
|
| South Dakota | No significant activity
|
| Tennessee | Commission investigation ongoing
|
| Texas | Commission investigation ongoing
|
| Utah | Commission investigation ongoing
|
| Vermont | Regulatory order issued
|
| Virginia | Legislation enacted
|
| Washington | Commission investigation ongoing
|
| West Virginia | Commission investigation ongoing
|
| Wisconsin | Commission investigation ongoing
|
| Wyoming | Commission investigation ongoing
|
| District of Columbia | Commission investigation ongoing
|
|
Source: U.S. Department of Energy, Energy Information Administration | |
"As the nature of the power business undergoes radical change, we must modify the way we do business," said Fred D. Hafer, chairman, president and CEO. "With this transaction, GPU has taken a major strategic step to exit the generation business and focus on the expansion of our core business -- the transmission and distribution of electricity.
"Although GPU is skilled in the generation business, we are too small of a player to compete successfully. We believe our focused strategy is right for our stockholders and for our customers."
GPU's transmission and distribution subsidiaries, known as GPU Energy, serve approximately half the land area of Pennsylvania and New Jersey.
Central and Southwest Services, a utility that serves parts of Oklahoma, Texas, Arkansas and Louisiana, is also planning for deregulation even though there are no guarantees when it will come to those four states.
Clay Hathaway, a project manager for Central and Southwest in Oklahoma, said the utility is working to lock up its best customers right now.
"In some cases, we're working to sign five-year contracts," Hathaway said. "But I'm not sure anyone should sign anything longer than a five-year contract given how much the industry could change in that time. It's a case of where you treat the business the right way now, and hopefully they will remember that if the time comes when they have a choice."
Another part of Central and Southwest's challenge is monitoring the legislative activity in each state it services and to stay competitive as rules change.
"That's the problem with deregulation right now," said Hathaway. "Each state is different. We have Louisiana, Arkansas and Texas all at different stages. We just have to keep on top of everything and be ready."
In Minnesota, the Legislature has formed an Electric Energy Task Force to study deregulation, but no timetable for passage of laws has been set.
Grania McKiernan, legislative representative in the government affairs division of the Minnesota Rural Electric Association, said most Minnesotans seem to be satisfied with their electricity rates right now.
"Our rates are comparatively low, although large industrial customers are always looking for ways to lower costs," McKiernan said. "There are positives and negatives to deregulation, depending upon how the law would be written."
Keeping customers informed
Utilities use a variety of methods to keep all their customers, and especially industrial users, informed about changes in deregulation.
Sierra Pacific Power Co., which serves areas in Nevada and California, features a Web site, at www.sierrapacific. com, with extensive information on utility deregulation.
The site lists ESPs, which are also known as electric service providers, available to customers in California. The page also lists phone numbers and contacts should questions arise about service.
For those who are totally unfamiliar with deregulation, the Web site's Frequently Asked Questions section is a good primer. It explains some basic terms in deregulation, and includes a flow chart of how energy gets from a power plant to a customer in both a regulated and deregulated state.
Pennsylvania also has a Web site to inform customers about choice. The site, www.electrichoice.com, lists suppliers for both industrial and residential customers. Another Web site, http://puc.paonline.com, explains the deregulation situation in the state. Pennsylvania residents may also call a 24-hour hotline for information on deregulation.
Stranded costs
One issue tying up deregulation in some states is stranded cost.
Stranded cost refers to expenditures made by utilities, usually in the form of nuclear power plants, that aren't efficient and still must be paid for by the utility.
Utilities have contended that they were forced to build the nuclear plants by state utility commissions that wanted to cut down on the use of fossil fuel-generated power.
| "We're preparing for it as
if it were a fact, and if it happens soon we're ready. Even if it
doesn't come quickly, we will
be a better company for
acting in this way."
-- Tracy Danese, director, Economic Development, Jacksonville Authority |
The utilities point out that the nuclear plants were approved -- and in some cases mandated -- by states under the regulated system.
Because of this, utilities with stranded costs would be at a competitive disadvantage in a fully competitive environment, since they would have extra costs in comparison with a non-stranded utility.
For Conectiv, a utility that serves parts of New Jersey, Maryland, Delaware and Virginia, stranded cost is also a huge issue.
"The biggest issue in New Jersey is stranded cost," said Richard Perniciaro, regional manager of Economic Development for Conectiv.
In New Jersey, Perniciaro said the Legislature and utilities are close to coming to an agreement on stranded costs.
| "We want to be able to have
a level playing field for deregulation. It's not fair for
an outsider to be able to come in without (facing the same)
restrictions placed on us."
-- Earnie Lehman, director of rates,
Western Resources |
Western Resources, which services customers in Kansas, wants the issue of stranded costs addressed by the Legislature before deregulation occurs in the state.
Western completed building Wolf Creek Nuclear Generating Station in 1985 at a cost of $3 billion. The plant was originally priced at $525 million in 1977.
John E. Hayes Jr., chairman of the board and CEO for Western Resources, told a Kansas legislative task force on deregulation in 1997 that 50 percent of the cost increases in the construction of the plant came as a result of government-mandated changes for safety considerations.
| "Our rates are comparatively low, although
large industrial customers are always looking
for ways to lower costs. There are positives
and negatives to deregulation, depending upon how the law would be written."
-- Grania McKiernan, legislative representative,
Government Affairs Division, Minnesota Rural Electric Association |
Hayes told the task force that Wolf Creek was built only to comply with government guidelines mandating that a certain percent of power produced in the country comes from nuclear sources.
"It is important to not penalize such companies and their share owners for previous decisions, which conformed, in their entirety, to the then- prevailing rules, regulations and regulatory policies," said Hayes.
He also said that over 40 percent of Western Resources' shareholders are Kansas residents, many of whom rely on the dividend as part of their retirement income. He said these people invested because of the stability of utilities and it would be unfair to penalize them.
Taxation dilemma
Another issue Western Resources, and other utilities across the country want addressed is taxation.
In Wichita, Kan., for example, 21 percent of a customer's bill is some form of tax, according to Earnie Lehman, director of rates for Western Resources. Kansas has not passed any legislation regarding deregulation, but has formed a task force to study the issue.
Lehman said the tax burden on businesses is even greater, because they pay sales tax on electricity not directly used in production. For example, energy used in offices, even an office area of a manufacturing plant, is taxed.
"We want to be able to have a level playing field for deregulation," Lehman said. "It's not fair for an outsider to be able to come in without (facing the same) restrictions placed on us.
| "New Jersey has had higher rates than
some other states, so from an economic development perspective, deregulation is
good. How individual utilities fare is another
matter that has yet to be decided."
-- Richard Perniciaro, regional manager,
Economic Development, Conectiv |
"We also recognize that states and local governments are not going to want to lose that revenue, so something needs to be worked out to make things fair."
Like many other utilities, Western Resources is trying to prepare for deregulation without knowing exactly what the rules will be a few years from now.
The company has expanded heavily in the monitored security business with a company called Protection One. Also, Western has reduced its costs wherever possible.
"We have focused our attention on our key accounts and formed a business center for other business customers that are smaller," Lehman said. "We don't want to leave any of our business customers out. We want to keep them here."
Pilot program points the way
As one of the states with a pilot program, Pennsylvania gives a glimpse of what a deregulated market may look like. Under the program, a limited number of customers get to choose where to buy their electricity.
Sam McCullough is secretary of the Department of Community and Economic Development in Pennsylvania and has written an article on how the program has worked in his state.
McCullough, who lives in Reading, Pa., said his own home electric bill has dropped significantly. He also said that Westmoreland Distributing Co., located in Westmoreland County, saved between $400 and $500 a month. Another company, PPG Industries, has saved almost $400,000 in the pilot program, according to McCullough.
In Pennsylvania, all 5.2 million electric customers will have the ability to choose their providers by January of 2000.
According to McCullough, Keystone Powdered Metals located in Pennsylvania because of its position on deregulation.
Another company, Ultra-Poly Corp., a plastics manufacturer, also moved to Pennsylvania to take advantage of deregulation.
Ultra-Poly President Alan LaFiura said the company will save close to $1 million per year by being in Pennsylvania.
What the future holds
Every utility across the country wants to keep its customers -- especially industrial customers. What is unclear is how utilities will do that.
Without a clear set of rules in place around the country, business could get hairy for utilities, and more than likely, better for their customers.
Lehman said his utility is educating customers about what their future options may be.
"Western Resources is preparing for a competitive environment, and preparing to educate our public about the possibility of choice," he said. "It appears that industrial users will be the big winners, but no one knows to what extent."
Conectiv's Perniciaro also emphasized that the jury is still out.
"It's the same all over. No one knows for sure what everything will look like down the road," Perniciaro said. "New Jersey has had higher rates than some other states, so from an economic development perspective, deregulation is good. How individual utilities fare is another matter that has yet to be decided."
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