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Structural Changes and Restructuring

By Craven Crowell

August 1996
SourceBook, The Reddy Corporation International

State regulation has been one of the electric industry’s most essential underpinnings—that 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 nation’s 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.


S
tate regulatory bodies across the country are pursuing competition at different speeds, or, in some cases, not at all. The investor-owned utilities (IOUs) have splintered into factions on timing for competition and the proper jurisdiction for crafting the rules. Such confusion and dissent is natural in an industry undergoing fundamental transformation.

Our industry is experiencing rapid change—change 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 nation’s 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 nation’s 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.

We’re 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 tomorrow’s energy industry will be regulated as we do about how we’ll compete in it.

New Regulation Model Needed
Right now, uncertainty about deregulation is hampering the transition to a fully competitive marketplace.

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.

Traditional “Regulatory Compact” No Longer Makes Sense
The old model, of course, is the traditional regulatory compact. Under it, regulators grant a utility an exclusive franchise for a particular service area. In exchange for the franchise, the utility has an obligation to serve.
Today, the way we provide electricity is fundamentally different than 60 years ago. Yet we are regulating our industry in much the same way we did then. Our industry is marked by a crazy-quilt of state-regulatory schemes. Today, in our world of semi-continental transmission and distribution systems, reliability pools, and wholesale wheeling, the days of the natural monopoly are clearly over. Customers are gaining the freedom to choose suppliers. State-based regulation is woefully anachronistic and detrimental to consumers.
Many state public utility commissions (PUCs), instead of protecting ratepayers, are shielding utilities from beneficial competition. Some PUCs are opposing open, competitive markets that will provide consumers with market-based protection from monopoly pricing.

Current Regulatory Scheme Reacts Inefficiently to Industry Changes
It is now widely recognized that state-based regulation has resulted in a higher-than-necessary cost of power. This, in turn, has limited the nation’s potential for economic development and productivity growth.

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.

A New Model for a New Industry: Competition and Fundamental Principles
So, what would that structure do? The new regulatory model must foster innovation and efficiency through competition while protecting fundamental principles. Since the late 70’s, national energy policy has inched steadily toward competition.

From the Public Utility Regulatory Policies Act and the National Energy Policy Act of 1992, to the growing number of state wheeling proposals, to FERC’s mega-NOPR ruling, the policy trend has been to encourage efficiency. We share as a common goal the desire to lower power costs—it’s good for everyone. Lower electric costs are the engine for industrial development and national productivity.

Fundamentals
But free market competition must be balanced by the protection of fundamental principles. Our society has always recognized that the public interest in energy production is too important to leave to a com-pletely unregulated marketplace. It is ironic that some IOUs accuse TVA of unfair competition with the private sector.

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.

Free market competition must be balanced by a regulatory system that:

  • Maintains reliability,
  • Conserves resources and the environment,
  • Ensures equitable universal access, and
  • Promotes economic development.

State PUCs are inappropriate regulators for the future energy marketplace.

Reliability
Whom do you call when the lights go out? After the Northeastern grid failure in 1967, the electric utility industry—not the government—created the North American Electric Reliability Council. This encompassed the United States, Canada and Mexico.

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.

Conservation
Regulators must assure that resources are managed properly. Energy conservation and environmental protection are national concerns. And they, too, are poorly regulated on a state-by-state basis.

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 utility’s need to cut prices to survive. National standards are needed to promote conservation and protect the environment.

Equitable Universal Access
Universal access is perhaps the most complex issue in the transition to a free market. Each sector of the industry has its special concerns and problems. For example, retail and commercial customers fear that they lack the leverage to benefit from wheeling, the way industrial customers can.

Rural communities are always concerned that they will be left in the dust under free-market competition. FERC’s 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.

Economic Development
Electricity rates, if they are low, are an engine for economic development. In this sense, competition, in and of itself, will foster economic development. Utilities, however, have also traditionally used economic-development programs to attract customers to their service areas.

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 programs—that will fuel national growth. Each of these issues—reliability, conservation, equitable universal access, and economic development—must be addressed at the same time that increasing competition sparks innovation and efficiency.

The TVA Experience
The history and experience of TVA offer valuable lessons on how a new regulatory model might develop, and the issues we must address to get it to work. TVA is a useful example of regional utility regulation that promotes competition while protecting the public interest. TVA, of course, has always been unique.

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.

TVA Is Ready for Competition
TVA was born as a pioneer in regional development through rural electrification. Today, TVA is applying its creative energies to continually restructuring itself to be a successful competitor in an open market. TVA is positioning itself for competition by:

  • Reducing our workforce,
  • Increasing our productivity,
  • Aggressively refinancing our debt, and
  • Implementing aggressive strategic plans.
    Despite pressure from many comers, and a legacy of investment in costly generating facilities, TVA is keeping its eye on the ball—on fairness to its customers.

Reliability
TVA also provides one of the largest, most extensive and reliable systems in the nation. Serving customers in seven states, TVA’s transmission facilities are unparalleled. And we have been a key player on the grid in assuring reliability of service.

Conservation
At the same time, TVA was founded with a mission to assure conservation of resources. Starting in the ‘30s, TVA successfully replenished the ravaged farmlands and forests of the Tennessee Valley. As early as 1965, TVA required strip miners to reclaim and re-vegetate their properties, and since 1933, TVA has worked to maintain one of the nation’s cleanest river systems for commerce, flood control, recreation and power production.

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.

Equitable Universal Access
Another of TVA’s continuing cornerstone missions is that of serving rural communities. Through our 160 power distributors, TVA serves more than 7 million Americans. We will forge partnerships with these distributors to bring the benefits of competition to all classes of customer in our service area.

Economic Development
Along with its missions of bringing power to remote farms and reclaiming barren lands, TVA was charged with jump-starting the region’s economy. This sprung from the remarkable insight of TVA’s founders. In the words of David Lilienthal, TVA approached regional development as "a seamless web," in which actions in one area invariably affect the others.

That vision is as true today as it was in 1933. Over the years, TVA’s 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. We’ve also adopted a policy of leveraging TVA loans with funds from other sources. Since 1994, TVA’s 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.

Conclusion: Enlightened Regulation
Let’s face it, the electric utility industry in this country is not deregulating, it is re-regulating. Any industry as vital to the nation as energy will never be regulation free. Our challenge is to create a regulatory scheme that captures the benefits of the free market while protecting the public interest in energy generation, transmission and distribution.

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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