EXECUTIVE SUMMARY
The United States spends about $300 billion annually for electric power; wholesale purchases total about $90 billion and the retail purchases, by the end-users, account for more than $200 billion. For the past 65 years, this industry has been highly regulated as to price. However, efforts are now underway by state and federal regulatory agencies and legislators to introduce competition. These efforts will likely transform the way power is purchased and sold by industry and individual consumers. Factors cited as contributing to the moves toward competition include technology advances leading to lower generating costs; a more competitive global market; the failure of regulation to produce uniform and reasonable electric power rates across the United States (currently, rates range from 14 cents per kilowatt hour on Long Island to 4 cents per kilowatt hour in the Pacific Northwest); and pressure on legislative bodies from consumers and industries to provide relief from high electric power costs, which have been cited as a factor in corporate decisions to relocate factories and jobs from high cost to lower cost areas.
In the traditional vertically integrated electric industry structure, generation, transmission, aggregation, and distribution of electricity were all provided by local utilities with exclusive retail service territories. However, the electric transmission system in reality is an integrated interstate network owned by individual, state-regulated utilities. Electric power rates are established and regulated by the Federal Energy Regulatory Commission (FERC) in combination with the 50 states and the District of Columbia. FERC regulates the price of interstate electricity transmission and access to interstate transmission services, and has authority over certain mergers and acquisitions; FERC regulates prices to wholesale users of electricity, not end-users. The 50 states and the District of Columbia, regulate local utilities and set rates for electricity purchased by end-users.
There is a widely held view that the generation of electricity can be competitive; that an entity other than a utility company, a so-called independent power producer or nonutility generator, can build a power
plant and generate power efficiently. Historically, however, the transmission and distribution of electricity has been considered a natural monopoly: in any region there is only one owner and operator of the wires carrying power to industry and households, and that owner and operator is usually the utility company which also owns substantial power generating assets. Thus, while consumers could, in theory, buy power from nonlocal generators, there was little opportunity to transport or ''wheel" the power to the desired destinations because the utilities were reluctant to grant their competitors access to the transmission and distribution systems.
The Energy Policy Act of 1992 opened wholesale generation markets to competition, so that a wholesale buyer may purchase electricity from any generator, not just the local utility. (The Energy Policy Act specifically forbids FERC from ordering retail wheeling.) In April 1996, the Federal Energy Regulatory Commission issued Orders 888 and 889 requiring all public utilities to file tariffs providing nondiscriminatory access to all wholesale users for a defined set of transmission services, by July 1996; adopted comparability standards and functional unbundling to help guard against discrimination; announced procedures for sharing information; and established a schedule for implementation, among other actions. FERC has estimated that this action could save electricity consumers $3-5 billion per year as less expensive regional power becomes available to any customer on the national power grid.
While wholesale competition is being implemented, state utility commissions across the nation are moving to establish open retail markets for power consumers in an effort to lower costs and eliminate the wide disparities of cost that now exist within and between states. While it is not clear that the states have the authority to order retail wheeling, and the issue may be decided in the courts, most states are moving ahead with proposals for retail competition. California's plan appears to be the farthest advanced; it is scheduled to go into effect January 1, 1998.
The federal government is the largest consumer of electricity in the United States, spending several billion dollars per year to power its military installations, office buildings, and other facilities. Potentially, the federal government could save millions of dollars per year through competitive procurement of electricity. However, federal agencies, which are classified as retail, not wholesale, consumers of electricity, are currently barred from buying electricity competitively by section 8093 of the 1988 Defense Appropriations Act.
Issues and Considerations
The Federal Facilities Council convened a conference of legal, regulatory, procurement, and industry experts from the public and private sectors and academia to identify the emerging issues in the electric competition debate, including risks and opportunities for federal facility operators. Each speaker provided factual information and was asked to express his personal opinion and perspective on the direction of the debate. The speakers were not asked to come to any consensus on the issues or recommendations for federal facility operators. However, several key issues and considerations did emerge from the individual presentations that are included in this report, as follows:
Jurisdictional issues. As noted above, FERC and the states have different authorities and responsibilities for regulating the electric industry. The states' authority to order retail wheeling has been questioned, and some speakers noted that the issue will likely be litigated. To date, the states appear to be moving forward on varying schedules with varying proposals for retail wheeling. How, or if, the two levels of government will work together as joint regulators to make the industry more efficient overall is an issue which remains to be resolved.
Timing. While FERC is moving ahead with competition for wholesale buyers of electricity, it is not clear how quickly the states will proceed with retail wheeling. Given the complexity of the issues involved, the process is not likely to be a smooth one and the amount of time it will take is open for discussion. Most speakers felt that retail wheeling is inevitable. Several speakers thought that retail wheeling would come about in the next few years and warned of the need to begin planning now for that eventuality. Another speaker, however, cited the experience of regulatory reform in the telecommunications industry, which began in 1959 and is still not finished.
Stranded investments or stranded costs. In the traditional regulated environment, utilities were obliged to serve their customers. To do so, utilities needed to build enough power generation capacity to serve current and forecast demands for electricity. Because utilities made investments in facilities for that purpose, they expected to recover the costs through future
billings. Competition in power generation will render some of these facilities uneconomic and the investments will potentially be "stranded," or unrecoverable. Analysts estimate the total costs of potentially stranded investments at between $75 and $200 billion. How, or whether, utilities should be reimbursed for these investments, which were made in good faith, is a major unresolved issue in the electric competition debate. If the utilities are to be reimbursed, in whole or part, who should pay and how? Based on the presentations, the manner in which this issue is resolved, or not resolved, will be one of the most significant factors in determining how quickly and how smoothly competition is implemented.
Special purpose programs. In a traditional regulated environment, state utility commissions often required utility companies to provide special purpose programs, such as research and development, demand-side management, rate assistance to low income households, energy efficiency audits, renewable energy, and the like. In a competitive market, it is not clear how or whether such programs would be paid for or what the impacts will be if such programs were curtailed.
Reliability and universal service. Utilities have been required to provide for a reliable transmission network that is accessible to all customers. With the introduction of competition and the emergence of new entities, it is unclear what the impacts may be on the reliability of the system and access by customers. For example, if a customer chooses to buy electricity from a nonlocal generator, what responsibility will the local utility, which owns the wires across which the electricity is transmitted, have to the customer?
Industry restructuring and customer choice. How the electric industry will be restructured is not yet clear, but the way in which it is done will influence customer choice. Speakers from California, New York, and Pennsylvania described several models that may result from competition. Elements of the model for California, for example, include an independent system operator for transmission and distribution, a competitive wholesale power pool or power exchange, and customer choice of options. These options range from choosing a "bundled," full service, flat rate from a local utility, under which a customer would observe little or no change in electric services except in the way his or her bill is structured, to options for real-
time rates that would encourage customers to shift their usage to lower cost periods to reduce their electric bills.
Barriers to energy efficiency. The Energy Policy Act of 1992 and a series of Presidential executive orders have established the goal of reducing energy consumption about 30 percent below the 1985 consumption by the year 2005. The Federal Energy Management Program (FEMP), which has the task of leading the energy efficiency effort, estimates that since 1985 energy efficiency measures have saved the government $9 billion. However, there are institutional, policy, procurement, information, and funding barriers to implementing even more energy efficiency measures. FEMP is seeking to overcome these barriers through working groups and collaboratives, and by offering technical assistance, information and training to federal agencies.
Competitive procurement of electricity for federal facilities. As noted above, federal agencies are currently prohibited from procuring electricity competitively by section 8093 of the 1988 Defense Appropriations Act. However, this law is under review, and several agencies are studying the potential impacts of a change in the law including undesired societal consequences.
Several speakers expressed the opinion that significant savings could result if the law is changed to allow competitive procurement. Other speakers were not confident that the agencies currently have the resources or training to procure electricity effectively in a competitive environment, but felt the agencies should begin to plan strategically for such an eventuality. Because of the volume of electricity procured by the federal government, agencies are important customers to local utilities. Several speakers suggested that agencies use this leverage to negotiate lower rates with local utilities, which fear losing federal customers in a competitive environment. It was also noted that significant cost savings can be realized through existing energy management programs, separate and apart from electric competition. Lastly, concern was expressed that the agencies not lose sight of their primary objectives of providing mission support, quality of life, and a productive working environment in the effort to reduce electric power costs.
