The Economist

Electric deregulation to be hotly debated

Posted: Tuesday, January 05, 1999

Retail competition in the electric utility industry is an idea whose time may have come. As the 1999 Texas Legislature convenes, lawmakers placed the task of restructuring the state's electricity system high on the agenda.

Electricity deregulation is an issue unfamiliar to many Texans - and no wonder. Restructuring utilities differs somewhat from deregulation in industries such as telecommunications and trucking.

Understanding how electricity service actually is provided to customers may help explain the proposed changes.

Electricity systems have three essential components: generation, transmission and distribution.

Generation is the act of transforming different types of fuels into electrical energy. Coal, gas, nuclear fuels and moving water are examples of energy resources used to create electricity.

The process of transmission entails transporting bulk quantities of electricity from the plant where it was generated to a purchaser (utility company) that provides electric service.

The distribution stage is the process of delivering the electricity to the customer from the utility company (bulk buyer).

Generating electricity is main cost

The initial stage - generation - accounts for the majority of electricity costs. Generation also is the component of electricity systems that is subject to deregulation. It also is important to recognize that customer service - while not integral to the logistics of physically getting electricity to the users - is another (increasingly significant) factor in providing electricity, especially within a competitive, deregulated environment.

The Texas Legislature has considered restructuring the electric utility industry since the last session. A proposal from the governor was supported by the Public Utility Commission, investor-owned utilities and several key legislators. But the proposal came relatively late in the session and ran into opposition from the Electric Cooperatives of Texas and the Texas Retailers Association, among others. As a result, the measure did not reach the floor for a vote. A number of changes have occurred since then, and the environment for passing a bill in Texas has grown more positive.

While the merits of competition in the industry can be debated - I was among the detractors in 1997 - the advantages of moving forward may be more compelling today than are the potential drawbacks. Perhaps the most persuasive momentum is fueled by a shift in the perspective of the state's business leaders, who are witnessing firsthand the advantages accruing to states with deregulated utilities.

States considering restructuring plans

The majority of states already are in the process of considering or establishing plans for restructuring their electricity industries. Some states, notably California, Massachusetts and Pennsylvania, actively are offering customers a choice of electricity providers.

As of September 30, 1998, no entities were buying and selling wholesale power through the California Power Exchange and 36 retail electricity service providers. In Pennsylvania, almost two million people (about one-third of electricity users) are enrolled in the state's Electric Choice program.

In a telling political moment last November, voters in California and Massachusetts were given a chance via referenda to strike their restructuring programs. More than 7,004 of the voters in each state overwhelmingly elected to keep their retail competition plan - an impressive endorsement.

Deregulation brings lower prices, costs

The pros and cons of introducing competition to many industries, including telecommunications, airline travel, trucking and natural gas, prove to be fodder for ongoing debate. The same will be true with the electricity industry. When a stable, regulated environment is deregulated, disorder inevitably abounds before a balance is reached among new market entrants. But however painful the process, the consumer ultimately wins through lower-priced goods and services.

The long-distance telephone industry didn't arrive at its present state of competitiveness overnight. Fourteen years have elapsed since the AT&T breakup occurred. Similarly, competition within the electricity industry will take years to evolve and stabilize. But the momentum is building.

The restructuring of electricity systems will be an important debate to follow as the 76th Texas Legislature convenes.

Dr. M Ray Perryman is president and chief executive officer of The Perryman Group and business economist-in-residence at the Edwin L. Cox School of Business at Southern Methodist University.

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