a modest proposal for shaping a reasonable new world

R E S T R U U R i N G P E R S P E C T I: V E

A Modest Proposal for Shaping a Reasonable New World The elements of complex structural proposals should be analyzed to assess their effects on agreed policy objectives. In this way, the effects of any proposal can be considered holistically and systematically.

Barbara James

"Nothing is permanent but change."

--HerakMtos of Kos

"Prudence, indeed, will dictate that governments long established should not be changed for light or transient causes."

--Declaration of Independence

T he first commercial electric dam went into service in Wis-

consin in 1884, and the first sys-

tematic public utility law went

into effect ~n Wisconsin in 1907}

In 1931, Wisconsin's public utility

law was extensively revised to

control utility financial activities

and investment in plant. In 1975,

Wisconsin regulation was ex-

panded to include long-range ; planning and siting of both gen-

! eration and transmi~ion facilities.

Barbara James is chief counsel to the Electric Division of the Public Service Commission of Wisconsin. The views

expressed here are the author's own, and do not reflect any policy or

determination of the Public Service Commission.

In 1995, Wisconsin is seriously

considering revising its regulatory

structure to the point of disman- tling it altogether. The rationale

for fundamental change is based

on the ideas that electricity is a

commodity like any other ~ and that regulation is an inferior sub-

stitute for competition. 3 This view is supported by those who believe

they stand to gain from deregula-

tion, and by those who believe

that it is inevitable. Many of the

latter fear that they will be left be-

hind looking stupid if they fail to endorse it. But, in fact, legislators

and regulators still have the op-

portunity to choose whether and

how much to change the regulatory structure. 4 Below I advocate

a systematic approach to making

these choices.

I. Why We Regulate Electric Utilities

The notion of market-provided

electricity is hardly new, having

been exactly the condition of the

industry before regulation was adopted. Some aspects of that con-

dition impelled state legislatures

to impose rate regulation and the

obligation to serve on the industry The legislatures followed

these mandates up with regulation of financial transactions, in-

vestment in plant, long-range

planning and site selection. They

also imposed requirements for protecting poor customers and promoting efficient use of power, s

Restrictions on the market were

adopted because it was believed

that electricity was too important

to social well-being to be treated

as a private commodity. Because

of its importance to society, includ- ing its enormous effects on the en-

vironment, private property and lives of citizens, electric service

was declared to be affected with the public interest. 6

If we are to establish any new regime in this business, we need to

examine our options to determine

whether any of these public con-

ceres has lost its validity, whether

any new concerns need to be ad-

dressed, and how each of the proposed changes will affect the bal-

ance among the interests which

have so far been protected or fur-

thered by the old regime. The proposal below is a simple structure

for making this examination sys-

tematically.

Step 1: Establish the Objectives of Regulation

The following list of statutory

objectives is derived from the Wis- consin statutes. Many of them are

common to most state jurisdic- tions, but the first step in any juris-

diction would be to establish the

March 1995 67

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particular current statutory mandates and policies that apply:

(1) Universal Service; (2) Nondiscriminatory Rates; (3) Reliable Service; (4) Minimal Environmental

Harm; (5) Long-Term Low Cost; (6) Efficient Use of Resources; (7) Protection of Security Hold-

ers; (8) Physical System Planned on

a Long-Term Basis; (9) Protection from Winter Cut-

off for Poor Customers; and (10) Safe Facilities.

Step 2: Abandon or Modify Existing Objectives

Some believe that a list like the one above is no longer relevant to the world as it is or ought to be. Some advocate abandoning some of these items as essential attrib- utes of the provision of electric service. In Wisconsin, for instance, some argue that care of the envi- ronment is not the proper business of an electric provider but should be the responsibility of a state environmental agency, and that care of the poor is the responsibility of taxpayers and charitable organizations, not electric utilities or their customers. It is also argued that the prohibition against discrimination impairs the working of the market to establish prices and that efficient use of resources should be a matter of customer choice.

The question of which public policy objectives are still valid is fundamental and must be answered explicitly--by whatever

means each jurisdiction uses for addressing issues of great public importance. In Wisconsin, the Public Service Commission has in- stituted a broad generic investiga- tion of these questions, and is actively seeking the broadest possible public participation in

the inquiry.

Step 3: Add New Objectives

In Wisconsin, the most consis- tently promoted new value sought to be added to the existing

In Wisconsin, some argue that care of the

poor is the responsibility of taxpayers and

charitable organizations, not electric utihties.

objectives is expressed as "competition." Competition is sometimes advanced as an end in itself, equivalent to the other objectives listed above. This seems illogical, 7

and probably is shorthand for the proponents' belief that competition is the best means to reduce electricity prices. Other new objectives being discussed include customer choice and flexibility

Step 4: Compare Each Proposal with Chosen Objectives

Rachel Carson once pointed out that there are no such things as

"side effects." Side effects are sim- ply a term for discounting un- wanted effects of an action. But, in the process of changing the structure of the electric industry, it is only prudent to attempt to predict as many of the probable effects of each of the various proposals as possible. It is particularly vital to assess the probable effects of the change on each of the selected policy objectives. If this is not done systematicall~ there is a serious likelihood that unintended conse- quences may overwhelm any benefit that is achieved by the change.

Let's assume that policy makers choose to add "customer choice" to the policy objectives set forth above, and to delete long-term planning and the winter protec-

tion of poor people. The list would then look like this:

(1) Universal Service; (2) Nondiscriminatory Rates; (3) Reliable Service; (4) Minimal Environmental

Harm; (5) Long-Term Low Cost; (6) Efficient Use of Resources; (7) Protection of Security Hold-

ers; (8) Customer Choice; and

(9) Safe Facilities. Assume we select retail wheel-

ing as a proposed structural change. The exercise is to review retail wheeling in the light of its potential effects on each of the objectives in the list. A simplified version of the outcome might look something like this:

1. Universal Service: Retail wheeling raises fundamental

68 The Electricity Journal

::: ::: U: : . I : N G : P E R S P E C V E

questions about the obligation to

serve. The obligation is founded

on granting the utility a monopoly within its service territory.

Retail wheeling withdraws this grant. Logic suggests that if the

customer does not have the obli-

gation to buy, the utility should

not have the obligation to serve. Once that obligation is erased,

there is no inherent reason why the utility should provide universal service. If universal service is

still desired, some specific provi-

sion would have to be made for it.

2. Nondiscriminatory Rates:

While retail wheeling is not in it-

self a rate proposal, the practical

ability to shop the power market in real time is not likely to be equi-

tably distributed among electric

customers. At least some of the

customers who actually can shop are likely to use that ability to se-

cure subsidized rates from their

existing supplier. Rates subsi-

dized by other customers are dis-

criminatory. Some exogenous pro-

vision for rate equity would probably have to be added to the

retail wheeling proposal. 3. Reliable Service: Under a re-

tail wheeling regime, serious tech-

nical questions as to the reliable

management of the grid have been raised and would have to be

answered. More analysis is

needed on this point.

4. Minimal Environmental

Harm: If retail wheeling becomes

widely practiced, the transmission grid may be used in a differ-

ent manner than it was planned and built for. It seems likely that

an inefficient and redundant pro-

liferation of transmission facilities

would result. The generation

plant will also be used in a man-

ner different from that planned

for, which may require construction and operation of more plant

than would be economically effi-

cient. These effects, if observed,

would create unnecessary environmental impact.

5. Long-Term Low Cost: Some market theorists believe that retail

wheeling is the only way to

achieve this goal. Others believe

Logic suggests that if the customer does not have the obligation to buy, the utility should not have the obligation to serve.

that the industry is still affected

by economies of scale and scope and that the probable result of ig-

noring its natural monopoly as-

pects would be ruinous competi-

tion. This means that prices would be low in the near term,

but not in the long term. It is also

possible that opening the grid to

wholesale wheeling may capture

the available efficiency cost bene-

fits and that retail wheeling will merely introduce inequity into the

distribution of those benefits. Since this item is probably the

most crucial assumed benefit of

retail wheeling, it is vital to estab-

lish which of these conflicting sce-

narios is most probable. Because the outcomes will not become ap-

parent until the distant future, direct analysis will be difficult, and

recent experience, such as the pri-

vatization of the British electric

system, may be of limited value.

6. Efficient Use of Resources: Re- tail wheeling, to the extent that it establishes an open market, may

promote some efficiency in the

use of generating resources. Since

it would imply a new use of a sys-

tem which was planned for other

uses, it may also create some inef- ficiencies. Both elements would

need further analysis. Retail wheeling, by itself, would not af-

fect conservation programs. It might impel utilities to increase

their efforts to achieve system effi-

ciencies such as loss reduction as

part of their efforts to reduce

prices for customers having a

choice of supplier.

7. Protection of Security Hold-

ers: Both shareholders and bond-

holders invested on the under-

standing that the income from a

captive market and a statutorily

reasonable return were the under-

lying security for their invest-

ments. To the extent that retail

wheeling destroys the captive

market, it greatly increases secu-

rity holders' risk. This fundamen-

tal change in the nature of utility

securities has particularly trou-

bling social implications, because many utility investors are not so-

phisticated market players but middle- and working-class people

who rely on the safety of utility se-

March 1995 69

curities to provide for their old age.

8. Customer Choice: Retail wheeling gives at least some customers a new choice which is not available now--that of directly changing their electric provider. Desirable customers may be given further choices in the in- ducements that are offered to them by competing providers. It is unclear whether the majority of Wisconsin ratepayers, or any ap-

preciable segment of them, want these choices. 8

9. Safe Facilities: Retail wheeling, by itself, does not affect the current safety regulations that pro- tect the public from unsafe facilities. Utilities that are cutting costs in order to be able to charge low prices to attract large retail customers may be induced to skimp on safety measures, however.

II. Analys is of Complex Structural Schemes

Once the elements of a complex structural proposal have been analyzed for their effects on the policy objectives decision makers have chosen, it is possible to assess the effects of the proposal as a whole in a systematic way. One popular paradigm includes retail wheeling and disaggregation of the utility into an unregulated

Table 1: Sample Matnx for Evaluating Multiple Changes

Objective Retail Wheeling Genco Transco Disco

1. Universal Service

2. No Discriminatory Rates

3. Reliable Service

Probably abolishes

Differential access creates discrimination

Reduces likelihood

No requirement to provide

Market pricing may discriminate among buyers

Not clear; Genco has no responsibility for it

May become common carrier

FERC-regulated rates, should be nondiscriminatory

Depends on how responsibility for planning and control is handled

May assume responsibility for core customers

Among core customers, may not be discriminatory

Depends on contract arrangements

4. Minimal Environmental Driven by $ prices, Harm not environmental costs

5. Long-term Low Cost Not likely to reduce costs; will redistribute them

Siting not coordinated with transmission, misestimates of market may create redundant plants

Unregulated competition may lower short-term costs. Long term effect is not clear.

Depends on how planning and construction are handled

Probably would not change environmental effect of distribution


Competing suppliers may drop prices near term. Long- term unclear. Also depends on treatment of any stranded investment

6. Efficient Use of Resources

Short-term price drop will discourage efficiency

No incentive to conserve; more likely to promote load


Depends on responsibilities and pricing structure

7. Protection of Security Holders

8. Customer Choice

9. Safe Facilities

Greatly increases risk; no monopoly of service territory

Choice of supplier for big customers; core customers may have fewer choices

No direct effect, unless wheelers are allowed to own private portions ot the grid, which may degrade safety

Greatly increases risk, may violate mortgage provisions

Does not directly affect choices

No direct effect

Transmission investment may gain in value

Does not directly affect choices


Investment base much smaller, risk depends on assignment of costs and responsibilities in the split-up

May introduce more customer services than integrated co. because more of business is customer service

No direct effect

70 The Electricity Journal

T a:::U G:: P :E R S IC ::::T

genera t ion c o m p a n > a t ransmis-

s ion c o m p a n y regu la ted b y FERC,

and local, u n r e g u l a t e d p r o v i d e r s

of c u s t o m e r service.

After assessing the effects of the

d isaggregated e lements of the p lan

on each of the objectives selected, a

second analysis of the effects of the

whole plan on the objectives

should be pe r fo rmed . A s imple ma-

trix like the one on page 79 makes a

useful starting poin t to insure that

all the bases get covered. The re-

marks in each cell can come f rom

results of analysis, or s imply iden-

tify quest ions that need to be an-

swered, d e p e n d i n g on the state of

the informat ion available. Even if

there are cells that contain unre-

solved quest ions rather than data,

the decision maker will at least

have gained informat ion about the

need for more analysis.

Eva lua t ing actual c o m p l e x pro-

posals for n e w regu la to ry reg imes

is obv ious ly m o r e taxing than

these s impl i f ied examples . The in-

teract ion of the par ts of a p roposa l

on one another , for instance,

w o u l d ne e d examina t ion . Cons id-

era t ions of jur isdic t ional au tho r i ty

w o u l d need to be looked at. Ob-

jectives w o u l d ha ve to be ac-

co rded a p p r o p r i a t e we igh t as

they are ba l anced against compe t -

ing objectives, a nd so on.

Set t ing each p roposa l ou t explic-

itly so that it is r e v i e w e d agains t

all the object ives shou ld r educe bi-

ases i n t r oduc e d by rhetor ic and

ideo logy and a l low a m o r e ra-

tional c o m p a r i s o n of the choices

available. S t range as it m a y seem,

this a p p e a r s to be a nove l and

p roba b ly radical idea. •

Endnotes:

1. Wisconsin shares this distinction with Massachusetts.

2. Those who hold this view fre- quently think of electric service as the "provision of electrons," as if electrons were little bits of some physical sub- stance. A more accurate under- standing of electricity and its physical properties finds this concept quaint, but misleading. What is being provided is more like a degree of agita- tion in an enormous interconnected resonating system. This looks a lot less like an ordinary commodity.

3. The argument goes: "Why rely on an inferior, onerous and bureaucratic

substitute? Why not establish a real market and let market efficiency determine the value of the commodity?" This approach acquired a certain patri- otic gleam when state socialism col- lapsed in the Soviet Union and the Berlin wall came down. But what the failures of Eastern European Commu- nism have to do with the provision of electric service by a productive ten- sion between private investors and government is unclear. Monopoly regulation is unlike any doctrinaire governmental theory, except possibly the Founders' federalist checks and balances.

4. This belief is not based on an under- estimate of the power of political agita-

tion and ambient noise. The self-fulfill- ing assumption that deregulation (or retail wheeling, or market-driven rates, or whatever form of change is being discussed) is inevitable may be true, having been made true by the people who are buying it, as well as by those who are selling it.

However, it also stifles rational discus- sion and thoughtful analysis. Any political movement that demands the suspension of disbelief should be sus- pect. It seems imprudent to give up a venerable system of government with- out a rational debate. Our system of regulation was adopted by some out- standingly thoughtful men to deal with issues that could prove seriously harmful to the public welfare.

5. Apparently, our forerunners found that a free market in electric service led to price discrimination, fraudulent bookkeeping, inadequate safety pre- cautions, securities fraud, duplicate facilities, imprudent investment in unnecessary plant, environmental deg- radation, inefficient use of electricity, bad resource choices, and failure to meet the electricity needs of poor people.

6. Calumet v. Chilton, 138 Wis 334, 1912.

7. "Objectives," as used here, means ends to be sought, furthered, or maximized, within a balance that includes other desired objectives. "Maximized competition" would be something like anarchy, or possibly war. In fact, the only arenas that I can think of in which competition is wholly unregulated are illegal markets like pluto- nium and drugs. It seems more sensible to view competition as a possible means to other ends, such as lower prices.

8. Wisconsin industrial customers en- joy lower electricity bills than indus- tries in surrounding areas today. Unlike industrial customers in higher- cost areas, they have not been actively pushing for retail wheeling. Residen- tial, farm and small commercial customers have not yet been asked for their preference.

March 1995 71

a modest proposal for shaping a reasonable new world

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