Report of The Electrical Deregulation
and Customer Choice Task Force

Presented to the
Utah State Legislature


November 18, 1998





TABLE OF CONTENTS
 

Executive Summary

  1. General Background
    1. Task Force Overview 1
    2. Electric Power Industry Overview 2
  1. Task Force Report on Electric Restructuring Issues
    1. Introduction 5
    2. Major Issues Studied 5
      1. Aggregation 5
      2. Consumer Issues 6
      3. Electric Power Marketers 7
      4. Environmental Issues 8
      5. Market Power 9
      6. Municipalities 10
      7. Rural Electric Cooperatives 11
      8. Taxation Implications 12
      9. Transition Costs (including "stranded costs") 13
10. Unbundling 14
 
  1. Where Do We Go From Here?
Recommendation for Further Study 15
 

Appendices

Maps

Regional Pricing Chart

Glossary of Electric Terms

HB 313 (1997 General Session)

HJR 7 (1998 General Session)

Index of Task Force Meetings by Subject Matter
 

EXECUTIVE SUMMARY

The Electrical Restructuring and Customer Choice Task Force concludes that consideration of a comprehensive electrical restructuring plan during the 1999 General Session is premature. Consideration of a restructuring plan should be deferred until conditions are appropriate. However, further study of the issue and monitoring of restructuring efforts at the federal level and in other states will position Utah to implement restructuring when it is in the best interest of the state. The following briefly summarizes the task force's report of its study. For a more detailed discussion of the issues, see the body of the report.

I. GENERAL BACKGROUND

This 12-member task force studied the possibility of restructuring Utah's electric industry, i.e. replacing comprehensive regulation of monopoly electric suppliers with retail competition. During its two-year study, the task force met over twenty times, often in four-hour meetings. The task force focused on deregulation of the generation component of electric power, the industry being generally divided into generation, transmission, and distribution; and examined how restructuring would impact the various types of utilities and consumers. The task force considered whether Utah, as a state with low cost electricity, would benefit from retail competition; and whether the restructuring efforts by the federal government or other states required immediate action.
 

II. TASK FORCE REPORT ON ELECTRIC RESTRUCTURING ISSUES

In examining restructuring , the task force studied multiple interrelated issues and reached specific conclusions or recommendations regarding these issues. The task force believes that resolution of many of these issues is critical to implementing a restructuring plan.
 

Aggregation (or combining of customers to create greater purchasing power)

  • Aggregation can be an effective way to enhance competition and provide potential savings to consumers.
  • Whether or not municipalities have the exclusive right to serve as aggregators of their citizens should be examined.
  • Geographic aggregation could help address risks that profitable customers will be skimmed while individual customers with weaker bargaining power will not be offered electrical services at reasonable prices. However, geographic aggregation may also limit customer choices.
  • State government should examine what benefits it may realize from aggregating its purchase of electrical power.


Consumer Issues

  • Customers in Utah, especially residential and small business customers, are at risk in a competitive market unless adequate consumer protections are established and until effective competition is demonstrated.
  • Any consumer protection plan established should include consideration of options such as: establishing a standard offer; selecting a default provider with an obligation to serve consumers; authorizing an agency to oversee and enforce laws protecting against unfair business practices; establishing consumer education programs; requiring adequate generation capacity, maintenance, and transmission and distribution systems to ensure reliable service; providing for aggregation of economically challenged consumers; regulating service providers to ensure both technical and financial reliability; regulating marketing practices to protect against invasions of privacy; and providing purchasing options, including "green" power.


Electric Power Marketers (electric suppliers that often purchase the power on the open market and sell to consumers)

  • Under a restructuring plan, the Legislature should direct the Public Service Commission to draft potential rules that would address the licensing and regulation of power marketers.

  •  
Environmental Issues
  • Environmental issues to consider in connection with an electrical restructuring plan include: funding for demand side management programs; consumer disclosure in the sale of "green" power; incentives for the use of renewable energy; the cost/benefit of establishing portfolio standards or requiring the sale of "green" power when balancing the cost of power with the benefits to the environment; systems benefits charges; and improving renewable generation methods.


Market Power

  • If the Legislature elects to restructure the electrical industry, adequate protections should be established to prevent a dominant firm from exercising market power.
  • The presence of a viable independent system operator (ISO) is essential to the effectiveness of any restructuring plan. An ISO controls transmission facilities and makes them equally available to any firm with generation facilities, thus preventing any firm from controlling access to transmission facilities. A regional or larger ISO may be more effective than a state-specific ISO. Adequate transmission facilities are also necessary.
  • The Public Service Commission should be given guidelines and authority to mitigate the market power of electrical providers.
  • Strategies to address market power include requiring PacifiCorp to create subsidiaries or to divest some of its generation assets.
  • Studies to assess the effectiveness of mitigation strategies should be considered prior to restructuring.


Municipalities

  • The Legislature should not challenge municipalities' assertion of constitutional authority to provide electrical power within their borders. Market forces and customer desires would likely be adequate to determine whether or not, and if so, to what extent municipalities participate in competition.
  • The Legislature should allow municipalities to participate voluntarily in competition if a restructuring plan is developed.
  • If a statewide restructuring plan includes municipalities, the issue of municipalities' autonomy to provide electric services within their borders will likely be tested and will need to be resolved by either agreement, constitutional amendment, or court ruling.
  • The question of whether municipalities should be able to compete outside their boundaries will need to be addressed.


Rural Electric Cooperatives

  • Rural electric cooperatives should be allowed to participate voluntarily in competition under any restructuring legislation.
  • If cooperatives opt into competition, issues related to transition costs, if any, of cooperatives should be addressed.

  •  
Taxation Implications
  • The issue of taxation should be examined as part of the development of a restructuring plan including: whether restructuring should be revenue neutral; revenue implications for state and local governments; the impact of potential property tax changes on rural counties; and the state's ability to collect taxes (nexus).

  •  
Transition Costs (electric utility costs, sometimes called stranded costs, that would have been recovered under regulation that are not recoverable under market pricing)
  • Determination of the amount of transition costs, if any, should not be made by modeling but should be based on empirical evidence because of the uncertainty in making assumptions.
  • Absent an agreement by all parties on how to account for transition costs, the Public Service Commission, because of the their expertise and access to essential data, should be given authority to address transition costs in accordance with a restructuring plan adopted by the Legislature.
  • Transition costs, if any exist, should be viewed as a "net" amount with benefits of competition offsetting any losses that may occur as a result of competitive pricing.
  • Transition costs, if any, should be considered not only for PacifiCorp but also for consumer-owned utilities.
  • If recovery of transition costs is provided, the mechanisms employed should not unduly burden competitive pricing. For example, the recovery period should be of a fixed duration so that adjustments to reflect true transition costs do not continue indefinitely and interfere with competition.
III. WHERE DO WE GO FROM HERE? RECOMMENDATION FOR FURTHER STUDY

The electrical industry in the world, nation, and the western region will continue to change. The degree of change and the impact of those changes on Utah are uncertain. The Legislature must remain informed on changes in the electrical industry, assess the impacts of those changes, and be ready to take appropriate action at the appropriate time. Therefore, the Legislature should: (1) continue to explore possible electrical restructuring in and its effects on Utah; (2) remain informed about developments in electrical restructuring on the federal level and in other states; and (3) continue to monitor closely other states that have implemented an electrical restructuring plan to learn from their experience. To accomplish these three objectives, the task force recommends that the Legislature enact legislation during the 1999 General Session to reauthorize the task force for an additional two years. We propose that the task force meet at least twice each year and report at least annually to the Public Utilities and Technology Interim Committee.
 
 

I. GENERAL BACKGROUND
 

A. TASK FORCE OVERVIEW

Creation and Structure of the Task Force

The Electrical Deregulation and Customer Choice Task Force was created by H.B. 313 (1997 General Session) sponsored by Representative Christine R. Fox-Finlinson. The bill directed the task force to study and make recommendations on numerous issues relating to the concept of replacing comprehensive regulation of monopoly electric suppliers with retail competition. In addition to creating and directing the task force, H.B. 313 froze PacifiCorp's rates at January 31, 1997 levels until May 4, 1998, and forbade the Public Service Commission from issuing an order or holding any hearings during the rate freeze period regarding an increase or decrease in PacifiCorp's January 31, 1997 rate levels.
 

The task force consists of 12 members, five from the Senate and seven from the House of Representatives. Task force membership and staff are as follows:
 

Senate Members House Members
Leonard M. Blackham (co-chair) Beverly Ann Evans (co-chair during late 1997* and 1998)
Lorin V. Jones Christine R. Fox-Finlinson (co-chair during 1997*)
Eddie "Ed" P. Mayne Ralph Becker
Millie M. Peterson Judy Ann Buffmire
Michael G. Waddoups Kevin S. Garn
J. Brent Haymond
David Ure
Task Force Staff
Brian Allred, Research Analyst (1997-98) Beverlee Lecheminant, Secretary (1997-98)
Mark Andrews, Research Analyst (1997) Wendy Bangerter, Secretary (1997)
Robert Rees, Associate General Counsel (1997-98) Jared Faerber, Law Clerk (1998)
Patricia Owen, Associate General Counsel (1997-98) Jennifer Wall, Law Clerk (1997)

* Representative Fox-Finlinson resigned as co-chair on November 3, 1997. Representative Evans was then appointed co-chair.

Representative Fox-Finlinson resigned from the Legislature on October 1, 1998.

Task Force Activities

During its two years of activities, the task force met over twenty times. Thirteen of the meetings were held during 1997, each meeting lasting approximately four hours. During the 1997 meetings, the task force heard numerous presentations from individuals and organizations involved or interested in the electric utility industry. As required by H.B. 313, the task force presented an interim report at the November 1997 meetings of the Business, Labor, and Economic Development and Public Utilities and Technology Interim Committees. During the 1998 General Session, the task force recommended and the Legislature passed H.J.R.7, Resolution on Restructuring of Electrical Industry. Although the resolution expressed general support for restructuring of the electrical industry, it detailed a plan for further study before restructuring was pursued.
 

The task force held eight three-hour meetings during 1998. Four of those meetings centered on reports presented by the Public Service Commission on unbundling of electricity related services, consumer protection issues, market power issues, and transition costs.
 

B. ELECTRIC POWER INDUSTRY OVERVIEW

The following overview of the electric power industry may be helpful in reviewing this report and understanding the restructuring debate.
 

Background and Structure of the Electrical Industry
 

Electricity is a unique commodity. Electricity is unique in that: it cannot be stored; demand for it varies by time of day and season; and its flow cannot be controlled to match contracts.
 

The electrical industry consists of multiple functions. The electric industry can generally be divided into three functions.

This separation of functions is critical because the debate concerning restructuring currently focuses primarily on allowing competitive retail pricing as to generation. In general, transmission and distribution would continue to be regulated on some level.

Electricity is generally provided by one of three basic types of utilities. As out lined in the table below, the three basic types of utilities operate in Utah: (1) investor-owned utilities; (2) municipal and other government-owned utilities; and (3) rural electric cooperatives. In addition, Western Area Power Administration sells wholesale and retail power in Utah from federally owned generation; and Strawberry Water User's Association, an Electric Service District, sells retail power in Utah.
 
 
 

Investor Owned Utilities 

(Number in Utah - 1)

Municipal Utilities

(Number in Utah - 45)

Rural Electric Cooperatives

(Number in Utah - 9)

PacifiCorp (a.k.a. Utah Power and Light) Utah Associated Municipal Power Systems (UAMPS)

37 Members (e.g. Bountiful, Holden, Logan)

Utah Municipal Power Agency(UMPA)

6 Members (i.e., Levan, Manti, Nephi, Provo, Salem, Spanish Fork)

Independents

Helper, Navajo Tribal Utility Authority

Utah Rural Electric Association

9 Members (e.g., GarKane Power Assoc., Moon Lake Electric Assoc.) 

Deseret Generation & Transmission

Owned by 6 Rural Electric Cooperatives

There are three basic categories of electric consumers.
 

  • Residential Private residences that consume energy primarily for space heating, water heating, air conditioning, lighting, refrigeration, cooking, and clothes drying (i.e., households, single and multifamily, including apartments, motor homes, etc.)

  •  
  • Commercial Small businesses generally not engaged in transportation or manufacturing (i.e., schools, military bases, hospitals, hotels, laundries, retail, services, religious and nonprofit entities, governments, etc.)
  • Industrial Large businesses or industries (i.e., manufacturing, mining, agriculture, universities, etc.)

Utah is a low-cost state in providing electricity. Although not one of the lowest states, Utah provides electricity at a low cost. The cost and how it compares to other states in the region depends in part on which customer is served. The following chart highlights prices in the western states as of 1997. A larger copy of this chart is also included in the Appendices.
 
 
 

Regulation of the Electrical Industry
  How a utility is regulated depends on the type of utility it is and on the part of the electrical process that is being regulated, i.e., generation, transmission, or distribution.
 
 
 

Investor- owned utilities are generally regulated on both a state and federal level. States generally regulate generation and distribution. In Utah, the investor- owned utility is regulated by the Public Service Commission (PSC). The Division of Public Utilities is the investigative staff of the PSC. It also advocates before the PSC on behalf of all consumers and promotes financial integrity of public utilities. The Committee of Consumer Services advocates before the PSC for residential, small business, and agricultural consumers. A key function of regulation is the setting of electricity rates based upon "prudent" costs plus a reasonable rate of return on investment. The Federal Energy Regulatory Commission governs the pricing of wholesale bulk power and transmission services. Under federal law, utilities must provide access to their transmission facilities at cost-based prices.
 

Municipal power providers are not currently regulated by the state. The state currently does not regulate municipal utilities. Instead, these utilities are regulated by the local governing body. For a discussion regarding constitutional issues raised by state involvement in municipal electric activities, see II.B.6., Municipal Issues, of this report.
 

Rates charged by rural electric cooperatives are generally not regulated by the state. By statute, rural electric cooperatives can set their own rates, with certain limitations. However, rural electric cooperatives are otherwise subject to state regulation.
 

Restructuring Activity in Other States and on the Federal level
 

Nearly every state has examined whether to allow retail competition in the electric industry. Twelve states have passed detailed electric restructuring legislation (California, Connecticut, Illinois, Maine, Massachusetts, Montana, Nevada, New Hampshire, Oklahoma, Pennsylvania, Rhode Island, and Virginia.). In six states the utility commission has issued regulatory orders that restructure their electric industries (Arizona, Maryland, Michigan, New Jersey, New York, and Vermont ). The restructuring plans enacted by these states vary greatly. Some states allow competition to begin at a certain date, while others phase-in competition over a number of years. Some states explicitly direct how deregulation will occur, while others grant broad authority to state utility commissions to determine how deregulation will occur. In California and Massachusetts, voter-initiated measures appeared on the November ballot proposing to repeal at least part of the restructuring legislation. Both measures failed. A similar effort in Montana failed to gather sufficient signatures to make the ballot.

In states that have restructured, litigation has often followed. Suits have been brought by consumer groups, investor-owned utilities, state attorneys general, and others opposing various aspects of restructuring plans. The suits involve multiple issues, the most common being the appropriate method and amount of recovery of transition costs.
 

Restructuring through federal legislation has been discussed. Several bills have been introduced in Congress that would restructure the electrical industry. In addition, the President has developed a restructuring plan. The congressional and presidential efforts have generally included a grand fathering or opt out provision for states. It does not appear that any of the proposals will become law in the near future.
 

II. TASK FORCE REPORT ON
ELECTRIC RESTRUCTURING ISSUES
 

A. INTRODUCTION

This report: discusses issues involved in a consideration of electrical restructuring; presents task force conclusions and recommendations; and summarizes the task force's overall recommendation for the need to watch and learn from restructuring efforts throughout the nation before Utah pursues restructuring of its electric industry. The issues specifically addressed by this report are presented alphabetically and include:
 

  1. Aggregation
  2. Consumer Issues
  3. Electric Power Marketers
  4. Environmental Issues
  5. Market Power
  6. Municipalities
  7. Rural Electric Cooperatives
  8. Taxation Implications
  9. Transition Costs
  10. Unbundling

  11.  
B. MAJOR ISSUES STUDIED
 

1. AGGREGATION

Description of Issue

Aggregation is the combining of customers' electricity needs to produce a load that is sufficient to attract more favorable rates than would be available to individual customers. Aggregation can be done by geographic boundaries, such as in a city; or by customers geographically disbursed but with some common interest, such as a group of retail establishments. Aggregators could take many forms, including electric power marketers, governments, associations, large industrial consumers, and churches, etc. Aggregation provides opportunities for customers to achieve potential savings but may also create the possibility of harming those customers who are not able to aggregate effectively.
 

Summary of Task Force Hearings

Specific discussion of aggregation took place in three task force meetings and the task force discussed aggregation issues directly or indirectly at several other meetings.
 

The task force heard testimony from utilities, regulators, state representatives, consumer advocates, municipal power providers, rural electric providers, potential association aggregators, and other interested parties.
 

The task force examined the role aggregation can play in a competitive electric market and the potential benefits of aggregating customers, e.g., the task force heard testimony on the experience of state government in aggregating its purchase of natural gas where the state has realized a ten-year net savings of about $4.73 million. Annual total state government expenditures for electricity are about $51.7 million. The task force was told that the state could achieve potential savings through the aggregation of state electricity loads. Also discussed was how rural areas face possible barriers to aggregation since consumers are more geographically disbursed.
 

Task Force Conclusions And Recommendations

  • Aggregation can be an effective way to enhance competition and provide potential savings to large and small residential, commercial, and industrial customers.
  • Whether municipalities have the exclusive right to serve as aggregators of their citizens should be examined as part of any restructuring effort. For further discussion of the municipalities assertion of exclusivity, see II.B.6., Municipalities, of this report.
  • Geographic aggregation is a tool that can help address the risk that economic customers will be skimmed while individual customers with weaker bargaining power will not be offered electrical services at reasonable prices. Geographic aggregation may also limit the choices available to customers.
  • State government should examine what benefits it may realize from aggregating its purchase of electrical power.

  •  
2. CONSUMER ISSUES
 

Description of Issue

One of the most fundamental issues in considering a move to retail competition is its anticipated impact on consumers. Indeed, the rationale for moving to competition is based on its promised benefits to consumers. It is generally agreed that moving to competition will not automatically result in the same degree of consumer protection that exists under regulation. There is disagreement, however, over whether consumer protections are needed only in the transition to competition until a fully functioning free market can adequately protect consumers, or whether ongoing permanent protections are needed to ensure the health, safety, and welfare of smaller consumers who lack the bargaining power to fully access market advantages.
 

Under regulation, the Public Service Commission has established standards of consumer protection such as: protection of low income, elderly, and medical emergency consumers; termination of service; collection practices; and dispute resolution. In a competitive market, absent consumer protection requirements, deregulated providers may not provide the same level of consumer protection if they are considered too costly. Additionally, problems such as deceptive advertising, slamming, and discriminatory business practices could arise. Public benefit programs that assist low-income consumers, encourage energy efficiency, and protect the environment are also at risk. Potential risks to these smaller consumers include higher prices, decreased reliability, and degraded customer service.

Summary of Task Force Hearings

The task force discussed consumer issues in four different meetings. One meeting was devoted almost exclusively to discussing consumer issues. During this meeting, the Public Service Commission (PSC) presented a report to the task force.
 

The task force also heard testimony from PacifiCorp, Committee of Consumer Services, consumer advocates, and others.
 

Presentations to the committee on specific consumer issues included: standard offer; obligation to serve and connect; dispute resolution; consumer education; universal service; safety and reliability; aggregation; and regulation of electric service providers. Many presenters emphasized the need to ensure that effective competition and adequate consumer protections were in place before a move to a competitive market.

Task Force Conclusions And Recommendations

  • The task force believes that Utah customers of investor-owned utilities, rural cooperatives, and municipal power providers, especially residential and small business customers, may be at risk in a competitive market unless adequate consumer protections are established and until effective competition is demonstrated.
  • The task force recommends that in creating a consumer protection plan in conjunction with restructuring, the Legislature should, at a minimum, consider whether or not to:
- establish a standard offer to protect small consumers who are vulnerable to market fluctuations;

- designate a provider of last resort or other mechanism to ensure service to customers that might be neglected due to high costs (this requirement should be competitively neutral with cost recovery assured so that the provider is not financially burdened);

- authorize an agency to oversee and enforce laws that protect against deceptive advertising, price discrimination, and unfair business practices, such as slamming;

- establish consumer education programs regarding electricity service choices and deceptive marketing practices;

- establish electric universal service programs;

- provide measures to ensure safety of both consumers and workers in the electric power industry;

- require adequate generation capacity, maintenance, and transmission and distribution systems to ensure reliable service;

- provide for aggregation to facilitate consumers' development of bargaining power;

- regulate service providers to ensure that providers are technically and financially able to supply safe and reliable electrical service;

- include in regulation critical issues such as: reporting requirements; codes of conduct regarding connection, termination, and reconnection policies; customer information; and dispute resolution policies; but not create unnecessary barriers to the entry of new competitors;

- regulate marketing practices to protect against invasions of privacy; and

- provide purchasing options for consumers including "green" power.
 

3. ELECTRIC POWER MARKETERS

Description of Issue

Under the most general definition, electric power marketers buy and sell electric power. Marketers buy and sell in the wholesale market and are regulated by the Federal Energy Regulatory Commission (FERC). If a marketer acquires or owns facilities, rate regulation from these facilities would be governed by FERC or state law depending on the services provided. Under restructuring, these marketers could be allowed to buy power and resell it to a retail customer. Some electric power marketers own or are acquiring generation capability of their own while others simply purchase and resell power. The entry of electric power marketers in the retail market has the potential of enhancing competition by introducing additional competitors into the system. This competitive enhancement is contingent on the establishment of safeguards against unfair competition and appropriate rules of conduct.
 

Summary of Task Force Hearings

A specific presentation on electric power marketers was made to the task force at one of its meetings, and the task force discussed electric power marketer issues directly or indirectly at several other meetings.
 

The task force heard testimony from electric power marketing companies Illinova, Duke Energy, and Enron as well as others that may be impacted by the introduction of electric power marketers into the Utah retail market.
 

Electric power marketers outlined for the task force the competitive benefits, innovation, and customer choice enhancements offered by electric power marketers participation in retail competition. The task force was told that electric power marketers could help counteract the incumbency advantage held by an existing utility, thus strengthening competition. The task force discussed the potential concern over electric power marketers "cherry picking" the best customers such as large industrial consumers or aggregated groups while not offering service to uneconomic customers such as lower income, rural, or non-aggregated retail consumers. Another potential concern discussed by the task force was whether regulation was necessary to ensure that power markets can be relied upon to maintain adequate capacity and provide dependable electrical services. The discussion emphasized the need for appropriate regulation and rules of conduct for all providers of electrical power.
 

Task Force Conclusions And Recommendations

  • The Legislature should direct the PSC to draft potential rules, operative under retail competition, that would address the licensing and regulation of power marketers. The potential rules should, at a minimum, address: financial stability; capacity requirement; obligation to serve; service reliability; information disclosure requirements; dispute resolution; consumer privacy; marketing restrictions; disconnection procedures; and other customer protections.

  •  
4. ENVIRONMENTAL ISSUES

Description of Issue

Under regulation, electric utilities were able to recover the costs of most environmental programs through regulated rates. Therefore, moving to competitive market pricing may have a significant impact on how the electrical industry responds to environmental issues. One issue is which generation resources utilities will choose in the competitive market. This may include the development of renewable energy programs, e.g., wind, hydro, or solar, to address pollution concerns and the exhaustion of existing resources. Other issues include energy efficiency programs, also referred to as demand side management; and selling of "green power," which refers to purchasing power from suppliers that market power from environmentally friendly sources. Environmental goals can at times conflict with establishing renewable generation sources.

Summary of Task Force Hearings

The task force discussed environmental issues at three of its meetings. The task force heard comments from the Public Service Commission, PacifiCorp, the State Office of Energy and Resource Planning, environmental groups, a representative of the coal industry, and others.
 

Task Force Conclusions And Recommendations

  • The task force believes that the environmental implications of any restructuring plan could be significant. However, a full examination of what these implications are requires a more detailed understanding of what a specific restructuring plan involves. Therefore, environmental issues should be examined as part of the development of a restructuring plan. Potential issues that could be addressed include:
- funding for demand side management programs;

- consumer disclosure in the sale of "green" power;

- the need, if any, for incentives for use of renewable energy;

- the cost/benefit of establishing portfolio standards or requiring sale of "green" power when balancing the cost of power with the benefits to the environment;

- systems benefit charges; removal of market barriers that prevent sufficient investment in energy efficiency and renewable energy in the transition to a competitive industry; and

- ways to improve existing renewable generation methods to maximize its use in meeting peak demand.
 

5. MARKET POWER

Description of Issue

A crucial and complex issue in the consideration of electrical restructuring is market power. Market power is the potential for a firm or group of firms to raise prices above competitive levels or to drive competitors out of or prevent competitors from entering the market. Vertical market power is market dominance that a firm exercises by extending its control in one or more segments of production (e.g., transmission, and distribution) to other segments of production (e.g., generation) Horizontal market power accrues to a firm or firms that control a large share of the market. Market power is an important consideration in the formation of an electrical restructuring plan because a firm's exercise of significant market power can eliminate the benefits that electrical restructuring is intended to provide.

One of the methods of mitigating market power is unbundling--the idea of separating generation, distribution, and transmission functions, coupled with the adoption of rules governing conduct between the functions and comparability of price terms and conditions for access. Unbundling may also include the separation of billing, metering, and other aspects of electrical service to allow consumers to purchase these services separately from different providers.
 

Another method of mitigating market power is the provision of an independent system operator (ISO). An ISO would assume control of transmission facilities and make them equally available to any firm with generation facilities, thus preventing any firm from controlling access to transmission facilities. When coupled with more efficient transmission pricing, an ISO can also expand the geographic scope of the market and thus reduce horizontal market power.
 

Summary of Task Force Hearings

The issues of market power and unbundling were discussed in six different task force meetings. Panel discussions were held with representatives from PacifiCorp, the Public Service Commission, the Division of Public Utilities, municipal power groups, industrial power users, and consumer groups. Industry experts and economists also addressed the task force regarding this important issue. In one task force meeting, the Public Service Commission presented its in-depth report and analysis of the market power issue. In another meeting, the Public Service Commission presented a report on unbundling.
 

The potential market power problem in Utah and options for mitigating market power were discussed. Some of these options include: required divestiture of generation plants; unbundling; price caps; and continued limited price regulation.
 

Task Force Conclusions And Recommendations

  • •Resolution of market power issues is critical to the effectiveness of any restructuring plan to be implemented in Utah.
  • •The task force recommends that if the Legislature elects to restructure the electrical industry, adequate protections should be established to prevent a dominant firm from exercising market power.
  • •The task force concludes that the presence of a viable ISO is essential to the effectiveness of any restructuring plan. It appears that a regional or larger ISO is more effective than an ISO limited to one state. In addition, it must be demonstrated that adequate transmission capabilities exist for wheeling electricity in and out of the state.
  • •The Public Service Commission should be given adequate guidelines and authority to mitigate the market power of electrical providers.
  • •The creation of subsidiaries and requiring PacifiCorp to divest some of its generation assets are strategies that should be considered to address market power.
  • The task force recommends that studies to assess the effectiveness of mitigation strategies be considered prior to initiating restructuring.

  •  
6. MUNICIPALITIES

Description of Issues

A principal issue for the Legislature with respect to including municipalities in an electrical restructuring plan is whether or not, and if so, to what extent, the Utah Constitution restricts the Legislature from requiring municipalities to participate in competition. Municipalities believe that Article XI, Section 5 of the Utah Constitution gives them the exclusive right and duty to provide electric service within their borders. Others argue that the constitutional provision on which municipalities rely does not apply to all cities but is limited in its application to charter cities. Other issues affecting municipalities include the effects of restructuring on municipalities' ability to finance electric service facilities through tax-free bonds and the potential recovery of transition costs for those municipalities that have chosen to provide electric service themselves.
 

Summary of Task Force Hearings

Specific presentations on municipal issues were made to the task force at four of its meetings, and the task force discussed municipal issues directly or indirectly at several other meetings.
 

The task force heard testimony from: Utah Associated Municipal Power Systems; Utah Municipal Power Agency; Utah League of Cities and Towns; and others.
 

The task force studied a variety of issues relating to municipalities including, in addition to those indicated under "Description of Issues" above: differences between municipal power providers and PacifiCorp and how those differences might affect a restructuring plan; and whether municipalities should be allowed to be the exclusive aggregator of loads within their boundaries.
 

Task Force Conclusions And Recommendations

  • Resolution of issues relating to municipalities is critical to the long-term effectiveness of any restructuring legislation.
  • The task force recommends that the Legislature not challenge municipalities' assertion of constitutional authority to provide electrical power within their borders. Market forces and customer desires would likely be adequate to determine whether or not, and if so, to what extent, municipalities participate in competition.
  • The task force recommends that the Legislature provide a mechanism within an electrical restructuring plan that allows municipalities to participate voluntarily in competition.
  • If legislation implements statewide restructuring, including municipalities, the issue of municipalities' autonomy to provide electric services within their borders will likely be tested and will need to be resolved by either agreement, constitutional amendment, or court ruling.
  • The question of whether municipalities should be able to compete outside their boundaries will need to be addressed.

  •  
7. RURAL ELECTRIC COOPERATIVES

Description of Issue

Rural electric cooperatives are consumer-owned utilities developed as part of a federal initiative which provided financing to electrify rural America. Utah rural electric cooperatives further joined their efforts in creating Deseret Generation and Transmission (DG&T) which operates a large generation plant. Issues raised by incorporating rural electric cooperatives into a restructuring plan include: whether, because rural cooperatives began through federal legislation, there are limitations on the Legislature including them in a restructuring plan; whether transition costs for both individual cooperatives and for DG&T need to be addressed; whether practicalities of cooperatives will allow them to compete effectively; and whether rural consumers' needs will be adequately addressed under a restructuring plan.

Summary of Task Force Hearings

Specific presentations on rural electric cooperatives were made to the task force at three of its meetings, and the task force discussed rural electric cooperatives directly or indirectly at several other meetings.
 

The task force heard testimony from: Utah Rural Electric Association; DG&T; several rural electric cooperatives; and others.
 

The task force reviewed the history of DG&T and its past financing difficulties. The task force also studied other challenges faced by cooperatives that are unique to serving rural areas. In discussing whether or not, and if so, how to incorporate rural electric cooperatives into a restructuring plan, the task force examined how other states addressed the needs of cooperatives and whether transition costs of cooperatives need to be addressed.
 

Task Force Conclusions And Recommendations

  • Resolution of issues relating to rural electric cooperatives is critical to the long-term effectiveness of any restructuring legislation.
  • The task force recommends that rural electric cooperatives be allowed to participate voluntarily in competition under any restructuring legislation.
  • The task force recommends that if rural electric cooperatives opt in to competition, issues related to transition costs, if any, of these cooperatives should be addressed by the Legislature.

  •  
8. TAXATION IMPLICATIONS

Description of Issue

Electric industry restructuring could have a significant impact on state and local taxation. Some of the tax categories that could be affected include: gross receipts taxes; property taxes; and municipal sales and use energy taxes. Regulated utilities generally have a stable and predictable tax base that could become more undefined and variable in a deregulated environment. Taxation of out-of-state providers of electricity presents additional challenges in the assessment of taxes. Determination of stranded costs could have a significant impact on the property value of an electricity generator's power plant, which in turn would affect property tax assessments. Rural areas that are heavily reliant on property taxes could experience considerable decreases in their property tax revenue if generation assets decrease in value under restructuring.
 

Summary of Task Force Hearings

The task force discussed taxation issues at two of its meetings.
 

The task force heard testimony from the Utah State Tax Commission, the Utah Association of Counties, county government representatives, academics, and others. Presenters outlined potential impacts on state and local taxing authorities.

Task Force Conclusions And Recommendations

  • The task force believes that the tax implications of any restructuring plan could be significant. However, a full examination of what the tax implications may be requires a more detailed understanding of what a specific restructuring plan involves. Therefore, the issue of taxation should be examined as part of the development of a restructuring plan. Potential issues to be addressed include: whether restructuring should be revenue neutral; the revenue implications for state and local governments, including the impact of potential property tax changes on rural counties; and the state's ability to collect taxes (nexus).

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9. TRANSITION COSTS

Description of Issue

Transition costs, sometimes called "stranded costs," include costs and investments that are not recoverable under electrical restructuring because of market pricing and changes in consumer base but that would have been recovered under a regulated environment. A utility with "negative" transition costs would be able to recover more of its costs and investment under competition than under traditional regulation. Issues raised by transition costs include: if transition costs exist, how should Utah determine the amount of the costs; if the state provides for recovery of transition costs, what mechanism for recovery should be used; and should recovery occur for consumer-owned utilities to the same extent as allowed for investor-owned utilities.

Summary of Task Force Hearings

The task force discussed the issue of transition costs at eight of its meetings. In several of those meetings, transition costs was the primary topic.
 

The task force heard testimony from: PacifiCorp; Public Utilities Commission; Division of Public Utilities; Committee of Consumer Services; representatives of electrical consumers including industrial, commercial, and residential; Utah Municipal Power Agency; Utah Associated Municipal Power Systems; Rural Electric Association; power marketers; general public; and others.
 

Although the task force studied many issues related to transition costs, the majority of its time was focused on how to determine the amount, if any, of transition costs. Estimates of transition costs for PacifiCorp ranged from $1.7 billion to negative amounts varying from -$.5 billion to as low as -$2.23 billion. These estimates were generally developed through modeling. Key assumptions made in the modeling that led to the differences in the estimates include: market price; price of gas; and timing of transition to market pricing. Municipal power associations did not provide a specific dollar amount for their transition costs but advised the task force that their total exposure exceeded $450 million. Rural electric cooperatives provided an estimate of between $184.8 million and -$88.4 million for transition costs for Deseret Generation and Transmission, but also indicated that individual cooperatives may have transition costs.
 

Task Force Conclusions And Recommendations

  • Resolution of issues related to transition costs is critical to the long-term effectiveness of any restructuring legislation.
  • The task force recommends that the determination of the amount of transition costs, if any, should not be made by modeling but should be based on empirical evidence because of the uncertainty in making assumptions.
  • Absent an agreement by all parties on how to account for transition costs, the task force recommends that the Public Service Commission, because of the their expertise and access to essential data, be given authority to address transition costs in accordance with a restructuring plan adopted by the Legislature.
  • The task force recommends that transition costs, if any, should be viewed as a "net" amount with benefits of competition offsetting any losses that may occur as a result of competitive pricing.
  • The task force recommends that recovery of transition costs, if any exist, should be considered not only for PacifiCorp but also for consumer-owned utilities.
  • The task force recommends that if the Legislature elects to provide recovery of transition costs, the mechanisms employed should not unduly burden competitive pricing. For example, the recovery period should be of a fixed duration so that adjustments to reflect true transition costs do not continue indefinitely and interfere with competition.

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10. UNBUNDLING

Description of Issue

Under current regulation, Utah electricity customers purchase retail electricity as a single bundled product. Electric utilities generate or purchase power, transport the power via transmission lines, and distribute it to the end user. They charge the customer a single regulated price based on the average cost across all three stages of utility operations: generation, transmission, and distribution.
 

Restructuring the electricity industry requires unbundling. The decision to allow market forces rather than regulation, to determine the price of electricity generation can only be implemented if the costs of generation are separated from the costs of transmission and distribution. In short, "unbundling" refers to the process of identifying and pricing each distinct component of electricity service within what historically has been a single, bundled product. Its purpose is to separate products whose prices can be market-determined from those products which remain monopoly services and whose prices, therefore, must continue to be determined through a regulatory process.
 

On the surface, unbundling appears to be a rather straightforward exercise. However, unbundling is highly technical with numerous economic, legal, and institutional complexities.
 

Summary of Task Force Hearings

The issue of unbundling was discussed in detail in at least one task force meeting. As part of the detailed discussion, the Public Service Commission presented an in-depth report. Panel participants included representatives from: PacifiCorp, Committee of Consumer Services, Utah Rural Electric Association, and Utah Electric Deregulation Group.
 

Task Force Conclusions and Recommendations

  • The task force recommends that unbundling occur prior to the beginning of retail competition.
  • The task force recommends that the Public Service Commission be given the authority to initiate and oversee unbundling proceedings at the appropriate time.
III. WHERE DO WE GO FROM HERE? RECOMMENDATION FOR FURTHER STUDY

Electrical restructuring is not a single issue but many interrelated and extremely complex issues. Many of the approximately 70 hours of Task Force meetings during 1997 and 1998 were devoted to presentations and testimony designed to educate and inform Task Force members on the many difficult issues involved in considering a possible electrical restructuring plan for Utah.
 

While some states have already implemented electrical restructuring, there appears to be a general trend toward being more deliberate and less hasty to restructure, particularly among states that enjoy low-cost electrical service. As one of those low-cost states, Utah is in a good position to defer implementation of a restructuring plan while decision makers continue their study of the complex issues and monitor other states that have restructured to learn and benefit from their experience. Moreover, congressional action in the area of electrical restructuring, which at one time appeared imminent, now appears unlikely in the near future.
 

Accordingly, the task force believes that considering a comprehensive electrical restructuring plan during the 1999 General Session would be premature. However, the task force acknowledges that the electrical industry in the world, nation, and western region will continue to change. The degree of change and the impact of those changes on Utah are uncertain. The Legislature must remain informed on changes in the electrical industry, assess the impacts of those changes, and be ready to take appropriate action at the appropriate time. While generally favoring competition in the electrical industry in Utah, the task force concludes that further study of the issues, together with watching and learning from the experience of other states, would be beneficial in formulating any restructuring plan to be adopted in Utah. In the meantime, the Public Service Commission should be allowed to continue to regulate providers of electric service as it has done in the past.
 

In summary, the task force recommends that the future approach to electrical restructuring in Utah should be as follows:
 

1. The Legislature should:

a. continue to explore possible electrical restructuring in and its effects on Utah;

b. remain informed about developments in electrical restructuring on the federal level and in other states; and

c. continue to monitor closely other states that have implemented an electrical restructuring plan to learn from their experience.
 

2. The Legislature should enact legislation during the 1999 General Session to reauthorize the task force for an additional two years.

a. The task force will study the items listed under Paragraph 1.

b. The task force would meet at least twice each year but can meet quarterly, as needed. If necessary, the chairs of the task force could ask for approval by Legislative Management to meet more often.

c. The Legislature should authorize and direct the Public Service Commission to study electrical restructuring, keep abreast of developments on the federal level and in other states, work with the task force, and report as directed to the task force.

d. In addition, the task force can draw on other public and private resources as part of its study.

e. The task force will report at least annually to the Public Utilities and Technology Interim Committee.
 

3. The Legislature should repeal Section 54-7-12.3, which was enacted in 1997 through H.B. 313 and is now obsolete. Section 54-7-12.3 directs the task force to study certain matters and imposes a rate freeze that has expired.
 

APPENDICES

  • Maps

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  • Regional Pricing Chart

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  • Glossary of Electric Terms

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  • HB 313 (1997 General Session)

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  • HJR 7 (1998 General Session)

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  • Index of Task Force Meetings by Subject Matter