The Challenges of Deregulation and the Role of Public Power
by Craven Crowell, Chairman
Thank you, Dr. Nuru-Holm, for that very kind introduction, and good afternoon ladies and gentlemen. It is indeed a great pleasure and an honor to be here. I'm grateful for this opportunity to discuss some of the significant issues surrounding deregulation with such a distinguished group. Thank you for inviting me.
I'm going to want to talk about the role of public utilities in the new, deregulated marketplace -- and I'll try to keep my remarks general -- but I'm most familiar, of course, with the Tennessee Valley Authority, so I hope you'll forgive me for spending a little time, later in this speech, talking specifically about TVA.
We've come together today to focus our attention on the central issue confronting electric utilities at the end of this century: deregulation -- the movement from government control to market control of electric power. This is an issue that will, eventually, affect all Americans. And it's an issue that will have a special relevance to people in the great industrial cities in the Northeast and the Midwest because -- no secret to you all -- electric power costs more here than it does in some other parts of the United States. Added to that, public power rates often differ from the power rates of the independent utilities -- as they do here in Cleveland. Deregulation should lower electricity costs across the US, but will it lower costs for everyone? Will it "level the playing field" on rates?
Reliability is another issue that concerns all Americans -- private electric customers, and corporate. And again, there are special concerns here in Cleveland and throughout the snow belt. There are, of course, a variety of reasons that electric power can fail, and weather is certainly one of them. So the question is, will deregulation increase or decrease the reliability of power here in Ohio?
And then there's the issue of "stranded costs." For those of you not familiar with the terminology in our industry, this refers to the investments energy providers -- especially public utilities -- have made over the years in energy generating equipment and facilities . . . long-term investments that power companies figured they'd be able to recover over time. When deregulation comes and customers are free to switch providers, who will absorb these stranded costs?
I don't have all of the answers to these questions, and I won't pretend to be a fortuneteller and predict how these issues will be resolved. But I do have some opinions . . . and a few educated guesses.
On rates, I think all of us hope, and expect, that deregulation will lower the cost of electricity in the United States. And I know we'd all like to see our own electricity costs go down. But I think it's reasonable to assume that costs will go down fastest where they are currently highest. In Kentucky, electricity costs 4 cents per kilowatt-hour. Here in Ohio, it averages about 6.4 cents. In New Hampshire, it's 12 cents. I think it's only reasonable to expect that rate relief will come first to New Hampshire, not to Kentucky. At the same time, I don't think deregulation should be viewed as a success if some parts of the nation are saddled with a rate increase as a way of lowering costs elsewhere. Deregulation should reduce costs, not raise them, whether you're in New England or the Tennessee Valley.
On reliability, I know that you folks here in Cleveland are understandably proud of the reliable service you get from both CPP and CEI. I think all of us hope that deregulation will increase competition among power providers to deliver the most reliable service . . . as well as the lowest costs.
And on stranded costs, I think basic fairness must apply. Utility companies that invested millions of dollars to build generating capacity to meet their customers' ever-growing demand for electricity shouldn't be left high and dry. I know this is a big issue for CPP here in Cleveland, and you can be sure it's a big issue for TVA. Our feeling is that deregulation should not give some utilities -- usually the independent providers -- an unfair advantage by penalizing utilities like TVA that had to invest heavily to meet "pre-dereg" demand. That wouldn't be right, and it's not fair.
As we consider all of these issues, the underlying concern for us at TVA -- and, I'm sure, for CPP -- will be the overall role of public power in the deregulated marketplace.
But before I stake a claim for public power in the deregulated future, I'd like to take just a moment to look back at our past.
I know many of you are probably familiar with the Tennessee Valley Authority, but for those of you who aren't, let me offer just a brief sketch of TVA's history -- or at least that part of our history that's relevant to the issues we're discussing today.
We are, of course, a public utility. 100% government owned. We're the largest generator of electricity in the United States. And we're also a major employer, with 13,200 employees.
We were created by the United States Congress in 1933, under the administration of President Franklin Roosevelt. FDR said that the Tennessee Valley Authority was to be "a corporation clothed with the power of government but possessed of the flexibility and initiative of a private enterprise." So you can see, from the start, that TVA had something of a dual identity -- public ownership and public responsibilities, but the expectation that the company was to be fast on its feet, nimble and flexible, like a private corporation.
TVA was created, you'll recall, at a time when our nation, and much of the world, faced enormous hardships. The "era of big government" may be over now in 1998, but it was just starting back in 1933 when FDR launched the New Deal . . . a collection of programs based on the idea that committed leadership -- and large-scale government works programs -- could conquer hardship and adversity, reclaim the land, rebuild the shattered economy, and restore hope.
These New Deal bureaucrats -- I guess that's what we'd call them today -- believed that a public corporation like TVA could save the poor and the destitute of the Tennessee Valley.
So TVA was not created principally to provide electric power to the Appalachian farmers who lived in the remote hills of the Tennessee Valley -- in fact, electric power was not even part of its original mission. TVA was created to rebuild a broken society. And that's exactly what it did.
Farmers needed to learn new methods of conservation so they could restore fertility to their barren farmland. Agricultural experts from TVA taught them.
The rivers, prone to flooding and hazardous to navigate, needed to be tamed so they could serve the people who lived in their valleys. Engineers from TVA tamed the rivers.
TVA trained tens of thousands of poor farmers and gave them new skills. They built huge hydroelectric dams and sent electric power lines into parts of America that had never seen an electric light or used an electric appliance.
And when electricity became a part of everyday life, experts from TVA helped teach energy conservation to the consumers of the power TVA produced.
Think about that. Long before conservation became fashionable, TVA was teaching people how to use less of what we make -- not exactly part of a standard commercial business plan, but part of what we see as our public responsibility.
Back in the '30s, TVA served the public good in thousands of ways and, most people would agree, helped break the stranglehold of the Great Depression. I like to think that TVA played a significant part in creating the modern economy of the United States and the prosperity we've enjoyed in the second half of this century.
But what about the next century? What will be the role of public utilities like TVA -- and CPP -- and public power companies in general in the deregulated 21st century?
Public power now supplies 24.4% of the kilowatt-hours consumed by individuals and industries in the US. Will we continue to supply a quarter of the nation's electricity under deregulation?
And what about rates? The political pressure to level the national rate structure will be enormous, as we discussed a few moments ago. What role should public utilities play in that debate?
As we wrestle with all of these questions, I believe the challenge for the public utilities will be to continue to embrace the dual identity Franklin Roosevelt envisioned sixty-five years ago. Public in fact, private in behavior -- solid and responsible, yet creative and competitive. In this way TVA, and public utilities like ours, will set a standard for public responsibility against which private companies can be measured . . . even as we continue to provide our core product -- wholesale electric power -- at competitive prices.
What will this mean in practice?
The key to measuring the success of deregulation will be, I think, the degree to which regulatory change benefits the public. But how will this benefit be measured? And what should we look out for?
I would suggest that one of the greatest services public utilities can provide in a deregulated marketplace is vision -- in this case, a vision that starts and ends with public responsibility, and a commitment to the public good.
Let me offer some examples of the vision of a public utility. As far back as 1933, when TVA was created, it was clear that the system of streams and rivers that feed the Tennessee River -- and the Tennessee River itself -- could be both friend and foe to the people in the Valley. TVA was charged with the responsibility of managing the river first as a natural resource . . . and second as a power resource.
In fulfilling this responsibility, our public utility has helped reclaim thousands of acres of farmland and stem the tide of seasonal flooding. Private utilities often count on other government agencies, like the Army Corps of Engineers, to handle land and river management . . . but in the Tennessee Valley, water resource management is the responsibility of TVA, a public utility.
Today, we have new concerns. It's no longer enough to produce economical power to run our machines and fuel our economy. We now know the impact that energy production has on our environment, and we know we must find new and better ways to protect the planet as we produce an ever-increasing supply of power. That's why TVA has taken the lead on nitrogen oxide emissions. We announced in August that we will dedicate more than $500 million over the next five years to the reduction of pollutants that cause ozone and smog from our coal-burning plants. 168,000 tons of nitrogen oxide emissions will be cut each year between now and 2003, dramatically improving local and regional air quality. This new strategy for controlling NOX emissions is, I think, further evidence of our commitment to being the energy industry's national leader in environmental stewardship.
Our vision also includes business development. TVA has helped hundreds of major industries in the Tennessee Valley grow and prosper. We've helped arrange loans for small businesses, we've helped locate industrial sites, and we've provided technical expertise to start-up companies and major corporations that have chosen to make the Valley their home.
But as the deregulation debate heats up in the months and years ahead, I'm sure that some will question whether TVA or any public utility should continue to manage such a broad portfolio of public service. "That was fine during the 1930s," some will argue, "but we're a long way from the Great Depression. We don't need a TVA for the 21st century."
I would argue, in fact, that we will need public utilities more than ever. With all of the uncertainties that attend deregulation, I believe public utilities will provide the benchmark by which all energy providers will be measured. Public utilities will continue to set the standards for service, reliability, environmental stewardship, research and development, and, yes, even cost efficiency.
And let me be clear about this very important point. Public responsibilities cannot -- and should not -- absolve public utilities of the requirement to operate efficiently and to compete fairly in the deregulated marketplace. At TVA, we're proud of the fact that our production costs are third lowest among the nation's top 50 utilities. And we're hard at work, every day, finding new ways to bring our costs down even lower.
But we must never forget, whether we're a public utility or an independent provider, that lower electricity costs are not the sole measure of the public good.
If energy companies degrade the environment to produce cheaper electricity, is that a net gain, or loss, for the people who use the power, and live on the land?
If a regional power company chooses to neglect its responsibilities to its local customers so as to make a bigger profit wheeling power to a distant market, is that a net benefit, or loss, for the nation as a whole?
These are difficult issues now, and they will become even more difficult in the deregulated future. Public utilities, which serve the interests of the people -- not just corporate shareholders -- will provide a benchmark by which the performance of all power companies will be measured. They will help to define "the public good" as it applies to energy production and distribution. And for this reason alone, they deserve their place in the deregulated marketplace of the next century.
In the end, deregulation should lower energy costs for our citizens and our industries, so it is our responsibility to work together -- public utilities and independent providers, industry executives and political leaders -- to try to achieve this goal. But based on what we know so far, I suggest we approach deregulation on the national level thoughtfully, and with careful deliberation. Above all, I would suggest that we measure the success of our efforts in more than just pennies and dollars saved. We should, I believe, measure our ultimate success against the higher standard of the public good.
And let me conclude by saying that I hope, as we advance down this path of deregulation, that all of us -- public utilities and independent providers -- will remember to balance our commitments to our various boards and shareholders with a commitment to the constituents who matter most . . . the publics we serve.
I look forward to working together in partnership with CPP, CEI, and all of the electric utilities in Ohio to meet the challenges outlined here today. I know, together, we can make deregulation work, and deliver on the promise of cleaner, cheaper, and more efficient power for all our customers.
Thank you all very much for your kind attention . . . and thank you to the City Club of Cleveland for inviting me here today. It's been a real pleasure. .
Craven Crowell is Chairman of the Tennessee Valley Authority
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