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. Beverly Ann Evans
Rep. Kevin S. Garn
Rep. J. Brent Haymond
Rep. David Ure
Members Absent:
Sen. Eddie "Ed" P. Mayne
Rep. Ralph Becker
Staff Present:
Mark Andrews,
Research Analyst
Patricia Owen,
Associate General Counsel
Beverlee LeCheminant
Legislative Secretary
Note: Copies of information distributed during the meeting are on file in the Office of Legislative Research and General Counsel
1. Welcome - Committee Business - Approval of Minutes of July 22, 1997
Sen. Blackham called the meeting to order at 8:50 a.m.
MOTION: Representative Buffmire moved to approve the minutes of July 22, 1997. The motion passed unanimously. Rep. Garn was absent for the vote.
2. Strandable Costs Recovery Mechanisms - Follow-up -
Mr. Roger Ball, Administrative Secretary, Committee of Consumer Services, presented an overview on the recovery of strandable costs. He provided task force members with hard copies of his slide presentation.
Ms. Betsy Wolf, Salt Lake Community Action Program (CAP), gave a brief overview dealing with the issues around the rate freeze. She told the task force that CAP believes that in order to have long-term positive benefits for Utahns in electric restructuring, any recovery method for stranded costs must be: fair and equitable; as accurate as possible; competitively neutral; and certain not to shift costs between customer classes. CAP believes that the proposal by PacifiCorp to freeze rates at current levels without a benchmark rate case or a fact finding determination of stranded costs would not meet these requirements. CAP urges the task force to find a solution based on fairness, a reasonable assessment of the facts, and a premise that all ratepayers should benefit from restructuring.
Ms. Clair Geddes, United We Stand, gave an overview of strandable costs recovery mechanisms. She provided task force members with printed copies of her slide presentation and some information from a newly formed coalition titled "Stop the Bailout." She urged the Legislature to proceed with great caution in electric restructuring or not at all as the reliability and low cost of electricity that people in Utah enjoy could be at great risk if it miscalculates.
Mr. Robert Reeder, Utah Industrial Energy Consumers, distributed a handout titled "Major Issues in Electrical Deregulation." He indicated that industrial energy consumers feel that the goals in the recovery of stranded costs are: 1) to motivate the utility to restructure; 2) an efficient, cost- effective recovery; 3) to minimize distortions of future decisions; 4) to minimize impact on customers; and 5) to minimize delays in implementation. He stated that there are three kinds of basic restructuring of stranded cost recovery tools: 1) a rate freeze or rate cap; 2) an access fee; and 3) an exit fee. He concluded by saying that industrial energy consumers feel that a freeze and a cap seem to be the best way to protect people in a sufficient method for recovering stranded costs.
Mr. Richard Anderson, Utah Electric Deregulation Group, said the task force needs to keep in mind that the recovery mechanism must be neutral when it comes to market outcomes, and the way it becomes neutral is to divorce it from the quantity demanded. He indicated that the access fee has a history of being the most efficient way of recovering those kinds of extra costs that could be tacked on to a market outcome. The second most efficient way would be a continuation of the rate freeze under some kind of time period, and the third way would be an exit fee.
3. Full and Fair Competition - Market Power Issues -
A. Mr. Mark Glick, Professor of Economics, University of Utah, gave a general overview of competition and market power concepts. He indicated that the simple definition of market power is the ability to raise price over cost which includes an average rate of return. He stated that economists believe there are at least three reasons why market power is undesirable: 1) it causes allocated inefficiency; 2) the monopolist makes more money and consumers pay higher prices; and 3) there will be more innovation under competition rather than a monopoly. Economists also say that to have effective competition, there needs to be at least three or four firms competing and those firms do not have to be in the market at present. He said that PacifiCorp's argument is that if price is raised above cost, other firms will import electricity into Utah and take its customers away. If PacifiCorp has a significant cost advantage and the cost advantage can never be duplicated by any other firm, PacifiCorp will have market power up to the amount of that cost advantage. The key issues the task force needs to look at regarding stranded costs are: 1) How long will it take competitors or entrants to match PacifiCorp's costs? 2) How much time is the Legislature willing to tolerate? and 3) If the Legislature regulates, what are the costs of continued regulation?
Mr. Glick then addressed the issue of vertical integration. He stated that vertical integration means that a single firm controls several stages of the production process. There is a good aspect
to vertical integration and a bad aspect and the task force will have to sort out which dominates
under restructuring. The good aspect is that vertical integration can often lower costs, but there's
also a possibility of some bad outcomes with regard to market power from vertical integration.
Mr. Glick indicated that the final issue is price discrimination, which means that a firm sets
one price for one set of consumers and another price for another set of consumers for the same
product. He stated that price discrimination is not a bad thing in itself, but can be bad if it allows
a firm to exercise market power against a vulnerable set of consumers. He indicated that price
discrimination will be one of the most difficult issues to sort out and make good public policy.
B. Panel Discussions on Selected Market Power Issues - The panel consisted of six members
including one representative from each of the following groups: 1) PacifiCorp (PC); 2) Public
Service Commission and the Division of Public Utilities (PSC/DPU); 3) Committee of Consumer
Services, United We Stand, and Salt Lake Community Action Program (CCS); 4) Utah Electric
Deregulation Group and Utah Industrial Energy Consumers IND); 5) Utah Associated Municipal
Power Systems and Utah Municipal Power Agency (MUN); and 6) Utah Rural Electric Association
REA).
I.
Determination and Measurement of the "Relevant Market"
Mr. Rick Anderson, IND, said the question of relevant market has to do with the transmission
sector of the industry and the reform that is ongoing in that transmission sector. He raised the
questions of "who can come in" and "who can bring power here to compete?" The question of a
relevant market is ultimately going to be determined by the reformers who are in the area of
transmission lines.
Mr. Richard Judd, MUN, suggested that the relevant market is a narrow scope because it is
a smaller market than what is being portrayed. He indicated that he believes that the relevant market
should be narrowly structured and that it is not a panacea that an ISO will solve all issues raised in
determining the relevant markets.
Mr. Steve Walton, PC, said with regard to the relevant market, the important thing to keep
in mind is how much import capability there is, which is how much capacity can come from the
outside and how much capacity for competition exists on the inside. PacifiCorp has been working
to produce the independent system operator because they believe it is necessary to break up the
vertical integration of the market. PacifiCorp also assumes that the distribution system will be
regulated by the Public Service Commission to guarantee that there is equal access to that market
and there is a code of conduct established.
Mr. Kurt Winterfeld, REA, said he disagrees with what he has heard about the definition and
determination measurement of a relevant market. The Department of Justice guidelines indicate that
the way to look at the market power issue is to begin by measuring the relevant market. After
establishing what the relevant market is, you look at whether a firm is able to exert market power
and the ways in which there may be a mitigation of that market power or other factors that bear on
that issue.
Mr. George Sterzinger, CCS, urged the task force to exercise prudence and caution in terms
of how it looks at market power and the kinds of problems it will overcome. He said it is important
to recognize three things: 1) electricity is a commodity unlike any others and is also a commodity
that isn't used by people directly, but for services; 2) the numbers the task force will be looking at
will be very complicated; and 3) customer choice and competition do not necessarily mean
deregulation, but can be used to reform regulation.
Ms. Becky Wilson, Division of Public Utilities said the purpose of defining and measuring
a relevant market is to examine the potential for market power in retail electricity markets in Utah.
She distributed a handout summarizing the determination and measurement of the relevant market.
Discussion and comment followed.
II. Competitiveness of the Market in Utah Under Restructuring
Mr. Bob Reeder, IND, said the question is "Will we have choice in Utah and, if so, at what
point, and when will that point come if we do have choice?" He pointed out three areas for
apprehension about whether or not we have choice or will have choice: 1) vertical market power;
2) horizontal concentration; and 3) load pockets.
Mr. Richard Judd, MUN, said he feels market power is an issue that needs to be addressed,
but without solving the market power problem, he doesn't believe there will be competitiveness.
Before Utah can have a competitive market, we need to be able to make sure the customers are aware
of what is being talked about and are not being bought off by someone.
Mr. Steve Walton, PC, stated that having only one producer in a location does not necessarily
mean that there is a market power problem. With regard to load pockets, there are no load pockets
in the state that are equivalent to load pockets that have been discussed extensively in California.
It is PacifiCorp's contention that there is adequate capacity under the FERC tariff that is currently
available and the market can be very competitive in the state.
Mr. Mike Peterson, REA, said that in looking at the competitiveness of the market in Utah
under restructuring, there has not been direct competition among Utah Power & Light, the
municipalities, and the coops. He indicated that the cooperatives feel they are at a disadvantage
when they are competing against other people who have more resources than the cooperatives do.
From that standpoint, as the cooperatives look at their service territories, they do not feel that there
will be a lot of competition for the rural farmer, but they hope to continue to have competitive
electric rates with the rest of the people in the state.
Mr. George Sterzinger, CCS, indicated that if the questions of market competitiveness are
looked at without looking at what conditions could result in a residual monopolist operating in the
Utah power market, it would be a great disservice to the consumers of electricity in the state.
Competition is not the same as deregulation. Competition can be introduced into the regulatory
structure and the regulatory structure can be used to encourage competition.
Mr. Artie Powell, DPU, said that although the Division has previously indicated its support
of effective competition, it believes there is inadequate information at this time upon which to draw
sound conclusions about electrical restructuring. He stated that the Division has two
recommendations: 1) work should proceed on developing potential scenarios describing the structure
of electric firms and markets for Utah; and 2) an independent consultant should be hired to simulate
Utah's position to ascertain relevant markets and the potential for market power. In addition,
positive steps will need to be taken to ensure that competition is allowed to develop and flourish in
Utah, and to establish a means to monitor the process.
Discussion and comment followed.
III. Methods for Mitigating Market Power
Because of time constraints, a panel discussion on the issue of methods for mitigating market
power was postponed. Mr. George Sterzinger, CCS, was requested to speak on this issue because
he may not be able to attend future meetings. He suggested using competition as the fringe element
within the regulatory structure in order to improve the ability of the regulatory agencies and
customers in Utah to find the lowest cost power. When looking at a completely deregulated market,
there are three frames of reference: 1) look at it from the customer's point of view; 2) note that the
rural, agricultural, and small business customers will often have the greatest need for the service at
any price; and 3) look at how the market will change over time. He urged the task force, as it looks
at the issue of market power and ways to mitigate it, to not loose sight of the fact that competition
can be introduced and customer choice can be introduced into a market in a way that does not require
full deregulation of the services. In some respects, the most effective way of mitigating the potential
market power from a completely deregulated market is to use competition and competitive choice
within the regulatory structure in ways that both protect competition, guarantee choice that
customers have the fringe of the market and to not allow the residual market to be abused as a result
of the deregulation.
6. Adjourn
MOTION: Sen. Waddoups moved to adjourn the meeting at 1:10 p.m. The motion passed unanimously. Reps. Garn and Ure were absent for the vote.
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