Structural Changes and Restructuring
By Craven Crowell
State regulation has been one of the electric industrys most essential underpinningsthat is until now. In an emerging energy market in which traditional borders, responsibilities and prerogatives have become blurred and uncertain, what role should state utility regulation play?
Craven Crowell, chairman of the Tennessee Valley Authority (TVA), believes that state regulation of the electric industry is an artifact of an earlier and less complex era, and should be relegated to the history books, in favor of uniform federal regulation. President Clinton appointed Crowell to a nine-year term as TVA chairman in 1993. In that position, Crowell oversees the activities of the TVA, the nations largest electricity producer, a federal corporation established in 1933.
On May 20, 1996, Crowell presented his provocative views about state utility regulation to the Transmission & Distribution World Deregulation Conference in Washington, D.C. His remarks about deregulation are reprinted in this Forum in the belief that they provide a valuable perspective in the ongoing debate about the newly competitive electric industry and its future.
Our industry is experiencing rapid changechange that will occur with or without sound policy decisions. The new variables, like retail wheeling and futures contracts, are shaking our old ideas about the industry. Some utilities are embracing change by restructuring to compete in the new energy marketplace.
Others are running from change by attempting to cling to the status quo. Customers, meanwhile, are demanding broader services at the lowest possible cost. I believe this is a moment of great opportunity for the energy industry.
Tennessee Valley Authority (TVA) is the nations largest, single producer of electric power. Our power system is entirely self-supporting and receives no federal funds. Last year we sold 134 billion kilowatt-hours of electricity for revenues of $5.4 billion. Through 160 local power distributors, we provide electricity for more than 7 million people in an 80,000-square-mile service area covering parts of seven states.
At TVA, we have taken our preparations for deregulation seriously. After years of cost-cutting and efficiency measures, we are ranked among the dozen lowest-cost power producers of the nations top 100 utilities. We have gone nine consecutive years without a rate increase, and we are on track to extend that record for another year after this one. We have ended our nuclear-construction program and capped our debt. Like many others, we are implementing strategic plans to meet the rigors of competition.
Were prepared for change, and we view change as an opportunity. We will enter new businesses, new markets, and new alliances with private businesses. But for our industry as a whole to take advantage of this opportunity, we all must think as creatively about how tomorrows energy industry will be regulated as we do about how well compete in it.
Regulation Model Needed
We must establish a new model for regulation of the energy industry and reinvent government regulatory authorities. We need to do this to ensure that we encourage competition while protecting certain fundamental principles.
Regulatory Compact No Longer Makes Sense
Regulatory Scheme Reacts Inefficiently to Industry Changes
Jurisdictional battles between state regulatory commissions and the Federal Energy Regulatory Commission (FERC) create uncertainty and confusion in the capital markets.
They also result in inconsistent energy policy across the country. We need a new regulatory structure as soon as possible to be able to seize the opportunities of deregulation. The full benefits of a competitive energy marketplace can be realized only when a coherent national regulatory structure is in place.
Model for a New Industry: Competition and Fundamental Principles
From the Public Utility Regulatory Policies Act and the National Energy Policy Act of 1992, to the growing number of state wheeling proposals, to FERCs mega-NOPR ruling, the policy trend has been to encourage efficiency. We share as a common goal the desire to lower power costsits good for everyone. Lower electric costs are the engine for industrial development and national productivity.
In fact, IOUs in the United States have never been exposed to total competition. The traditional regulatory compact has always prohibited competition and guaranteed IOUs a rate of
return. Even now, some state governments are moving to protect utilities in their states.
The problem we face is how to strip away inefficient layers of regulation while leaving intact the regulation necessary to promote competition and protect public interests.
market competition must be balanced by a regulatory system that:
State PUCs are inappropriate regulators for the future energy marketplace.
It also covered all walks of the industry: investor-owned, publicly owned, as well as non-utility generators, and it has been instrumental in creating one of the most reliable utility grids in the world. Reliability must be maintained in the future. Reliability is not efficiently maintained at the state level.
The piecemeal introduction of retail wheeling on a state-by-state basis may result in customers purchasing lower-cost, higher-polluting power from across state lines. Energy-conservation programs could fall victim to a utilitys need to cut prices to survive. National standards are needed to promote conservation and protect the environment.
Rural communities are always concerned that they will be left in the dust under free-market competition. FERCs mega-NOPR ruling [FERC Order 888] effectively establishes the principal of universal access in the wholesale market. Who will establish this principal in the retail market?
Equitable universal access is not effectively guaranteed by state regulators. Today, it seems, citizens of a few states may get complete retail access. Citizens of other states will get limited access. Many citizens will get none.
Anticipating a marketplace of nationwide wheeling, many utilities are planning to scale back these programs. After all, why would you need to have factories in your backyard, when you can sell to industries anywhere? This is a shortsighted view, and it would be an unfortunate byproduct of unrestrained competition.
Comprehensive re-regulation should include incentives to maintain economic-development programsthat will fuel national growth. Each of these issuesreliability, conservation, equitable universal access, and economic developmentmust be addressed at the same time that increasing competition sparks innovation and efficiency.
Our service area is regulated by our own three-member board. This board, appointed by the President and approved by the Senate, sets the rates for ail of our territory. TVA is also regulated indirectly by Congress, which controls the amount of debt financing available to us.
Is Ready for Competition
TVA did this without regulatory prodding. In the 70s, TVA led the nation with its aggressive demand-side-management programs, insulating 8 million homes in the [Tennessee] Valley, and dramatically decreasing energy consumption. Today TVA continues to serve as a model of regional resource management studied by experts from all over the world.
That vision is as true today as it was in 1933. Over the years, TVAs economic-development efforts have changed with the times, from building roads and bridges, to attracting large industries. Recently, we refocused our efforts on small business investment and job creation.
For example, by investing in business incubator projects in the past two years, TVA has helped create 300 new companies and 3,000 new jobs in the small-business market. Weve also adopted a policy of leveraging TVA loans with funds from other sources. Since 1994, TVAs economic-development loan fund has made commitments totaling $26.4 million.
Those loans will be used to leverage a total of $880 million from other public and private sources. Those projects will help communities secure more than 5,500 new jobs, and create some 340-million kilowatt-hours of new load for TVA.
The most efficient way to achieve these goals is not in a piecemeal, state-by-state fashion. State PUCs are obsolete. The airline and banking industries were suc-cessfuUy deregulated. Fortunately, the regulatory pow-ers of the Federal Aviation Administration and the Federal Reserve were not divided among 50 independent regulatory bodies. Comprehensive federal regulation is needed.
Perhaps it could take the form of six, independent regional bodies. They could be empowered in jurisdictions that cross state lines, and they could have the broad power necessary for them to be effective stewards of both the industry and the public.
At the very least, every jurisdictional dispute between state regulators and the FERC should be resolved in favor of federal regulators. As FERC has done with wholesale wheeling, national standards must govern the fundamental regulatory structure of our industry.
That structure must promote competition and protect fundamental principles.
Craven Crowell is Chairman of the Tennessee Valley Authority
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