Electrical Deregulation and Customer Choice Task Force
Members Present:
Sen. Leonard M. Blackham, Chair
Rep. Christine R. Fox, Chair
Sen. Lorin V. Jones
Sen. Millie M. Peterson
Sen. Michael G. Waddoups
Rep. Judy Ann Buffmire
Rep. Ralph Becker
Rep. Beverly Ann Evans
Rep. Kevin S. Garn
Rep. J. Brent Haymond
Rep. David Ure
Members Excused:
Sen. Eddie "Ed" P. Mayne
Staff Present:
Mark Andrews,
Research Analyst
Patricia Owen,
Associate General Counsel
Wendy Bangerter
Legislative Secretary
Note: Copies of information distributed during the meeting are on file in the Office of Legislative Research and General Counsel
1. Welcome - Approval of Minutes of May 28, 1997
Sen. Blackham called the meeting to order at 9:15 a.m.
MOTION: Representative Garn moved to approve the minutes of May 28, 1997. The motion passed unanimously.
2. Overview of Electrical Industry Restructuring Issues
Matthew Brown, Senior Policy Specialist, National Conference of State Legislatures (NCSL), stated three principles that Utah should consider as it studies deregulation:
* Look on simple solutions and proposals with skepticism.
* Look at Utah's needs.
* Consider the whole picture together.
Mr. Brown observed that the following elements have made restructuring an issue:
* The development of new technologies which allow new facilities to produce power much more cheaply than old plants.
* Overcapacity in the electric market.
* The availability of cheap alternatives such as gas.
* The beginnings of a national movement toward restructuring.
Mr. Brown stated that the reasons for considering restructuring are price and the ability for customers to choose their own providers. He explained the need for utility restructuring and the status of some surrounding states. He reviewed the change in utility pricing over the years. He described retail wheeling and wholesale wheeling, and stated that 90% of stranded costs are associated with retail wheeling. He stated that the decisions for retail wheeling lie with the Legislature.
He reviewed the federal restructuring problems and posed the question: What is the federal government going to do, and what will they mandate? Although federal proposals would be mandates to the states, they are expected to include grandfathering provisions as well. He explained two of the main federal bills related to restructuring.
3. Restructuring Proposals in Other States
Laura Hagg Nelson, policy associate, NCSL, explained that there are seven states that have enacted utility restructuring legislation. She reviewed Oklahoma's and Maine's approaches specifically. She also highlighted what Kentucky is considering because they are considered a low-cost state like Utah. She reviewed issues such as market power, stranded benefits, consumer protection, divestiture, and tax advantages and explained how Maine and Oklahoma are approaching these issues.
4. Federal Restructuring Proposals
Discussed under Item 2.
5. Federal Regulation of the Electrical Industry and Impact on Utah
Karen Tomcala, Legal Advisor to Commissioner Hoecker, Federal Energy Regulatory Commission (FERC), stated that competition in the electric industry has become an issue of national priority. She explained the purpose of FERC. She discussed Order No. 888 and explained the requirements it establishes. She addressed how states should respond to competition. She emphasized that there has not been a firm definition of "independent system operator" even though this term is being used to address a myriad of problems. She stated that Commissioner Hoecker is dedicated to not regulating competition from a federal level.
Ms. Tomcala suggested that the following practical considerations suggest that states should take some action with respect to competition in the electric industry:
* Competition is coming. Those who fail to act may lose economic opportunities.
* Pressure is increasing for federal action. The more action taken by the states, the less likely Congress is to mandate how and when markets must be opened to competition.
* State action allows states to customize their restructuring and the possibility of being grandfathered into federal legislation.
Ms. Tomcala also summarized findings from studies that demonstrate reasons for adopting competition:
* Deregulation lowers prices and grants some level of benefit to all classes of customers.
* Deregulation aligns service quality with customer desires.
* Competition leads to cost-reducing and quality-enhancing innovations and results in real, not merely redistributed, benefits.
* The lower the barriers to customer choice, the greater the benefits customers will receive.
* Competitive markets evolve over substantial periods (even 10 years) in response to consumer needs.
A written copy of Ms. Tomcala's remarks was distributed to the committee.
At 11:05 a.m., Chair Blackham called for a break. The committee reconvened at 11:35 a.m.
6. Restructuring in Selected States
Montana Alan Davis, Energy Policy Advisor for the Montana Department of Environmental Quality, gave a short overview of why and how Montana decided to pursue restructuring. Montana is considered a low-cost state. Mr. Davis handed out a summary of Montana's legislative actions. He emphasized that if states act responsibly, Congress will not feel they have to act. He stated that deregulation for Montana was about giving customers a choice. He related the following based on Montana's experience:
* There are ways for customers to get around the traditional restrictions on retail competition.
* It is not a question of whether competition will take place, but when.
* The state must determine whether it will control its own destiny in regards to competition.
* Montana was able to come up with a bill with which almost everyone agreed.
* Industrial customers are happy to pay their fair share of stranded costs.
Mr. Davis made the following observations:
* If Utah has stranded costs then it is not a low-cost state.
* Utah cannot throw a fence around itself and be isolated from other states.
* "Why would you not afford the citizens the opportunity to choose when the choices are there?"
* Restructuring is not about shifting costs from big customers to little customers.
* The state doesn't have to solve every problem to move to competition _ it just needs to establish a framework.
Mr. Davis gave the following advice:
* Do not start from scratch. Rely on the work of other states _ they have all dealt with the same issues.
* Don't study restructuring _ just do it.
* There are solutions to all of the problems.
* Determine whether there will be a sharing of stranded costs between ratepayers and shareholders. Focus on the policy issue and not the details.
* Deal with cooperatives.
* Separate distribution and generation.
* Protect ratepayers.
* Protect low income persons.
* Competition is here.
Mr. Davis emphasized that Utah has three choices:
(1) let the system go, let it break, and then try to fix it;
(2) do nothing and let the federal government dictate what will be done; or
(3) allow an orderly transition to competition and customer choice.
Texas Judy Walsh, Commissioner, Texas Public Utilities Commission, reviewed the status of restructuring in Texas. She reviewed her handout explaining excess costs over market (stranded costs) and how declining costs and regulatory lag create a situation where stranded costs may be recovered by holding utility rates constant. She encouraged Utah to make a policy call about whether utility companies are going to be allowed to collect 100% of stranded costs.
Ms. Walsh discussed securitization of stranded costs and observed that it gives a utility a large amount of cash that can be used against it's competitors. She also discussed market power. She observed that one generation utility in a single market may not be enough and indicated that there should be about five. She further observed that distribution and generation should be unbundled. She discussed Texas' use of a market power index.
California John Rozsa, Consultant to the California Senate Energy, Utilities and Communications Committee, reviewed his handout on market power mitigation and stranded cost recovery. He cited seven measures that California took regarding regulation activities. He discussed market power, the independent system operator, the power exchange, stranded cost recovery, and municipal utilities. He said that a deregulated market is coming, there will be many competitors, and the public needs to be educated to be prepared for this.
Mr. Rozsa, Ms Walsh, and Mr. Davis answered questions from the committee.
7. Alternatives for Utah
Mr. Brown stated that he would be willing to return to Utah and address the committee as this issue is being studied.
8. Other Business
None.
9. Adjourn
Senator Jones moved to adjourn the meeting. The motion passed unanimously.
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