Deregulation: "Wheeling" Over Rural Customers

Preston Quesenberry

Vol. 18, No. 3-4, 1996 pp. 24-26

The proposed deregulation of electric utilities is emerging as yet another obstacle to rural electric cooperatives becoming a progressive force in their communities. Currently, electric co-ops at least have the potential to address a wide variety of social needs in their service areas: economic development, democratic involvement, environmental protection, energy conservation, and affordable service for all customers (including low-income or hard-to-serve customers). But in the competitive, laissez faire environment created by deregulation, this host of concerns could very likely fall victim to the sole priority of generating power at the cheapest cost for what commercial utilities consider their most attractive customers--large industrial users and high-density service areas. Even worse, deregulation could threaten the very existence of cooperatives by re-moving all barriers to multi-state mergers and corporate takeovers in the utility industry.

At the core of the policy debate over the deregulation of electric utilities is the concept of "retail wheeling." In a retail wheeling system, electric customers would no longer be required to buy power from their local utilities. Rather, the customer could buy electricity from a host of competing suppliers who would be given the right to "wheel" their power across the transmission lines of local utilities.

The large industries that are spearheading an aggressive campaign on the federal and state levels to secure retail wheeling rights claim the ability to shop around for the lowest electricity rates will save their businesses billions of dollars. But those lobbying against retail wheeling--citizens' and consumers groups, environmental organizations, electric industry labor unions, and the trade associations for cooperative, municipal, and investor-owned utilities--think big business's savings will be made at the public's expense.

"Industries want to be divorced from what they see as weird social programs that have been tacked onto the electric bill," explains Greg Wortham, counsel for the co-ops' trade and lobbying organization, the National Rural Electric Cooperative Association (NRECA). "These include renewable--solar or geothermal--energy use, programs to make sure that the elderly or poor who can't pay their bills still can get some electricity to live, taxes to pay for the new trees that have to replace those knocked down for electric lines, taxes relating to staving off green-house effects, and others. Industries don't want to pay for these things. They want to be able to buy power at or near the cost of generation from independent power producers who have no local obligations or ties to local communities. But the states and their citizens have made certain decisions that these programs are important, and the cost of them is either going to have to be thrown somewhere else or simply done away with."

Costs of a "Free Market"

Nor do industries want to share in the costs of providing power to residents in remote or low-density population areas, Wortham argues. Although the large industrial proponents of retail wheeling champion competition and the free market as bringing benefits to all, Wortham contends that the free market's benefits will be distributed unevenly--to the marked disadvantage of rural populations. That's why the co-ops were started, he explains.

"By 1935, the free market had given us these huge monopolies that chose not to give any electricity to ninety percent of the farms in the country," Wortham says. "That's when Congress decided they had to enact the Rural Electrification Act to make up for that market failure."

The basic premise of the co-ops established under REA, Wortham says, was and continues to be for "all of the consumers in the co-op area to pool their resources so it becomes not unduly burdensome on any one customer to be served, so that everyone can be served." Wortham worries, however, that this cooperative model might not continue to work in a retail wheeling environment.

A co-op territory depends on "everybody pitching in," he says, and if the "most attractive loads--those that use the most power and pay their bills the best--can be picked up by other suppliers and taken out, then only the worst customers are left." According to Wortham, this "cherry picking" results in a situation where it "becomes cheaper and cheaper for the most attractive customers and more and more expensive for the `worst' customers."

"It's a vicious spiral," Wortham continues, "The co-op left serving the worst customers gets more and more uncompetitive, and it and its community become less and


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attractive to other business or residential development. Even if a factory can move to a rural area and get its power from another supplier, its workers are still going to have to live in an area with the highest electric rates."

Wortham points out that deregulation has resulted in similarly uneven service in other industries. Airline deregulation, for example, has resulted in low airfares to high traffic destinations and much higher fares or even the complete loss of service to lower traffic destinations.

In addition to avoiding the costs of guaranteeing power to residents in remote areas, industries also want to avoid the "stranded costs" of utilities--primarily the nuclear and coal plants which utilities invested in during the 1970s that produce power at above market rates. The U.S. electric industry has about $135 billion in outstanding bills on these investments, which consumer groups fear will be passed on to the remaining residential customers once the big industries get power elsewhere. Indeed, Texas Perspectives, Inc., an Austin, Texas, economic analysis and public policy consulting firm has conducted a study of the potential economic impacts of retail wheeling in Louisiana which projects just how much of these stranded costs could be passed on to residents. According to their report, retail wheeling would lead to a 52 percent increase in the price of power for Louisiana residents and small businesses between 1996 and 2007, while large commercial rates and industrial rates would decrease 1.6 and 3.7 percent, respectively, over the same time period.

Monopoly Games

Another concern the NRECA and others have about deregulation is that it will intensify the mergers and takeovers already being proposed in the electric industry throughout most parts of the country (although the expected buyouts have not been as prevalent in the Southern states thus far). Deregulation would entail repealing key sections of the Public Utility Holding Company Act


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(PUHCA) of 1935. which limited the ability of multi-state firms to buy or sell energy businesses and split up the massive conglomerates that controlled most of the nation's generation and transmission at the time. The repeal of the barriers imposed by the PUHCA combined with the more competitive environment of retail wheeling will doubtless lead to more utilities merging with one another. In addition, electric utilities unregulated by the statutes of PUHCA will be more attractive acquisitions for corporate conglomerates outside the electric industry.

The current system set up by the PUHCA--in which privately-owned utilities regulated by state utility commissions have a government-sanctioned monopoly to generate, transport, and sell electricity in a limited area--was already changed significantly by the 1992 Energy Policy Act (EPAct). The EPAct allowed for wheeling on the wholesale level. Wholesale wheeling means that distribution or retail companies (that is, traditional utilities) are authorized to buy directly from competing generators but still have a local franchise over retail customers. Wholesale wheeling has encouraged the growth of the independent power producers (producers free of any obligations to serve any particular community) which are now so vigorously lobbying for retail wheeling.

Although it authorized wholesale wheeling, the EPAct specifically banned the Federal Energy Regulatory Commission from ordering retail wheeling. However, California, Illinois, Massachusetts, and New Hampshire are all in the process of changing state laws to allow for retail wheeling, even though it's not entirely certain they have the authority to do so. Other states such as North Carolina, Florida, Maryland, and New Mexico have looked into retail wheeling and decided it is not in the state's best interest.

However, U.S. Rep. Dan Schaefer (R-Col.), chair of the Energy and Power Subcommittee of the House Commerce Committee, introduced a bill in July which would order all states to open their electricity market to retail competition by December of the year 2000. For now, NRECA counsel Wortham predicts the bill will not get one subcommittee vote. Schaefer himself has admitted his legislation is not likely to be enacted this year, but anticipates that it will be a top priority in 1997.