City of Oak Ridge Electric Department

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 At the Electric Department, we receive a lot of questions concerning deregulation of the Electric Industry. Although the City has not adopted any formal positions on deregulation, the following contains some thoughts from the Electrical Director on the subject. 

 Why was Electricity ever Regulated?

 The public depends on certain essential services to maintain our way of life. Because of this dependence, governments at all levels have instituted laws that regulate the way those services are delivered. The regulations are frequently intended to strike a balance between the need of the provider to survive and the need of the public to be protected from potential abuse by the companies providing the essential services.

 Regulation is especially important in monopolistic environments, where competitive forces cannot keep the market prices of a particular item under control.

 Electric power has traditionally been a monopolistic environment. The regulations establishing that monopoly have tried to balance the needs of the utility and the needs of the public. On one hand, the laws allow electric utilities to establish territories in which they had a legal right to be the only provider of electric power. Laws were also structured to insure that an electric utility was able to recover its costs through it rates. On the other hand, electric utilities have guaranteed "universal service" to the customers in its territories, and have agreed to a large number of restraints concerning product price and operating practices.

 In recent years, a continuing move toward "market restraint" of costs of essential services has combined with new technology to create utility deregulation. It is now possible to sell electricity from different sources to different customers over the same wire (and keep track of how much electricity was delivered to each customer). In the resulting open market, market forces will in theory take the place of regulation.

 The phrase "in theory" is used to indicate that in actual practice, the industry will not be De-regulated, but rather Re-regulated. When one sees the numerous laws proposed, and speculates on the administrative rules to follow, Re-regulation becomes apparent.

The Driving Forces

 Several forces have combined to drive the electric industry toward deregulation. The most important of these is the wide range of electric power costs across the country. Power costs vary by over a factor of three, depending on where the customer is located. There are several reasons for this, including fuel and technology used to produce power, fuel transportation costs, various environmental laws and concerns, past investments by the operating utilities, and cost of living. 

The disparities in power costs create economic incentives and disincentives for industries locating in various parts of the country. This is especially true in certain manufacturing areas, where the electric power cost of a process represents a very significant portion of the cost of operation. Moving the costs of power to a median cost will benefit those areas of the country where cost are high, and thus has significant political support from those areas of the country.

 Industrial users of electricity are also pushing heavily for deregulation. The cost of power generation can be thought of as having two components, the fixed cost and the fuel cost. Publicly owned utilities are constantly working to proportion these cost components equitably across their various customer groups (residential, commercial and industrial). One likely outcome of deregulation will be the transfer of fixed cost to the residential and small commercial customer (who because of the small return on investment are likely to remain captive customers). Once these cost are covered, larger commercial and industrial customers will be able to purchase power for the fuel cost plus a slight mark-up. This will save those companies money.

 Politics being what it is, politicians from across the country have adopted electric deregulation as an "apple-pie" issue. Market economies, competition and free trade, they say, are cornerstones of our way of life, and should always be supported. They have used terms in their bills like "the customer choice legislation." This is a very effective approach.

Deregulation will have several impacts. Economic impacts of deregulation on a particular customer will depend on that customer’s situation. If the customer is a large commercial or industrial customer, or if the customer is located in one of the high cost areas of the country, then deregulation will be of benefit. If the customer’s power cost is average, there shouldn’t be much difference, and if the customer is in a low-cost area of the country, power cost will probably go up.

Although looking into the future is always dangerous to one’s ego, the author would postulate other effects (Note that these are honest opinions, not a politically correct speech).

Regardless of the benefits or costs, however, the general thought in our industry’s circles is that deregulation is unstoppable. We have, as an industry, set out to prepare ourselves for a drastic change in the way we do business.

Frankly, this preparation work has caused us to examine our organizations closely with two overall objects in mind. First, costs must be reduced if we are to compete economically. Second, service must be improved in an effort to instill "brand loyalty" in our customers. These efforts, obviously, will produce immediate and positive results for the customer.

In the first part of this century, private power companies (termed IOU’s for Investor Owned Utilities) were not able to economically serve large portions of this country’s population. Because of this, various publicly owned utilities were established. During the depression, TVA was created to enhance the Tennessee Valley area (where the average income was 50% of the national average), by providing economic growth. TVA eventually became the largest supplier of electricity in the US.

As we approach the millennium, people are asking if public power is now obsolete. TVA has come under vicious attack, and the fundamental question seems not to be "is TVA performing its function in a economical, pro-customer manner," but rather "should there be a TVA." This leads inevitably to the question, "should there be public power?"

 I don’t know a concrete answer to that question. I do know that most of the rhetoric that you hear about tax support is not true, and I believe that the issues need to be addressed without vague appeals to the "American Way." Public power has consistently produced electric power at rates lower than market cost. We have set milestones in efficiency, safety and public service. We have paid the equivalent of taxes to our communities, our counties and our states. We have not supplemented our income through other forms of taxation. We have made investments of our owner’s money and they have benefited from those investments. We have been conducted our business in public. We have, in summary, served our owners.

I know that the question does not depend upon on real issues, or real economies, but on philosophy. Citizens of this country must decide what they believe is best for the country. Citizens should then try and ensure that their views are heard, and their opinions represented.

 We, in the meantime, will continue to do our part. As long as we believe that the maintenance of public power utilities benefit our owners, the citizens of the community, we will continue to fight for the rights of those citizens to own and operate their own utility systems.

 I am interested in any thoughts you have about what I have written here. If you wish to make a comment, please feel free to E-mail Jsuggs@cortn.org .

Jack L. Suggs

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