For more information
Call 1-800-351-0222
Call 1-800-351-0222
UTILITY INDUSTRY REGULATION.
Term Paper ID:25687
Get This Paper Free! or
Essay Subject:
History, purposes, effectiveness, elasticity of supply & demand, arguments for & effects of deregulation.... More...
6 Pages / 1350 Words
7 sources, 9 Citations,
MLA Format
$24.00
More Papers on This Topic
Paper Abstract:
History, purposes, effectiveness, elasticity of supply & demand, arguments for & effects of deregulation.
Paper Introduction:
Introduction
Utilities in the United States have been regulated monopolies for decades. Overseen by state-run Public Utility Commissions (PUC), these power companies provided electricity, water and oil/gas to consumers at both the residential and commercial level, and all aspects of the utility, from acquisition through distribution, were regulated. In spring 1998, California deregulated its electric utility and other states are in the process of doing the same. This research considers the history of regulation in the utility industry, the arguments for deregulation, and the effects that deregulation is expected to have on various groups in society.
Background of Regulation
Historically, the Federal Energy Regulatory Commission (FERC) regulated corporate
Text of the Paper:
The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper.
The federal government is likely to be required todetermine its role in the new utility environment, and it is unlikely thatutilities will operate completely without federal oversight. This research considers the history ofregulation in the utility industry, the arguments for deregulation, and theeffects that deregulation is expected to have on various groups in society. In another development, the Sacramento Municipal Utility District(SMUD) is threatening to sue Southern California Edison over twoelectricity contracts which went into effect in 199 and 1994, and whichexpire at the end of 1999. Theelectric industry is the last major American industry to remain regulatedwhile telecommunications, trucking and airlines (once also thought to bevital to the national interest and therefore prime candidates forregulation) have been deregulated. SMUD holds that it can purchase the 2 to 4 megawatts ofelectricity per month for approximately 5 percent less than the contractwith Edison. "Requiring Transmission Access by Electric Utilities." Antitrust Law Journal (Win 1996): 291-3 2.Goyal, Ajay. Public Utility Economics and Finance. "States Plug In to Deregulation." Nation's Business (Apr 1998): 6. In this calculation, "rate"is the rate of return allowed to the utility while "base" is the totalinvestment on which the return is calculated. Edison, on the other hand, maintains that thecontracts do not specify how the electricity will be generated. Overseen by state-run Public Utility Commissions (PUC), thesepower companies provided electricity, water and oil/gas to consumers atboth the residential and commercial level, and all aspects of the utility,from acquisition through distribution, were regulated. While advocates ofderegulation tout this as an example of how prices for consumers will fall(those in Canada and Texas in this instance), critics disagree. FERC also coordinates agreements (powerpools) and the rates and terms of transmission contracts. It is not clear whetherderegulation will provide the cost benefits that its supporters havepromised (although a mandatory ten percent rate cut went into effect inJanuary in California). The Public Utility Regulatory Policies Act of 1978(PURPA) created a new class of preferred power producers, the QualifiedFacilities (QFs) and provided a serious challenge to the idea that onlyMVIUs were suitable for providing electricity to consumers (). Edison, for its part, was acting under the rules of the statePublic Utilities Commission, which required that investor-owned utilitiesdevelop a voluntary plan to divest a minimum of 5 percent of their naturalgas-fired electric power plants. This was deemed necessary in order tospread out the ownership of power plants and create enough participants inthe market to facilitate real competition (Graebner 1 ). Because of this inelasticity of demand, regulators came to viewthemselves as working to protect the public interest against the predatorypricing techniques of the utility industry. If there were not regulation,electric companies would charge exorbitant prices in order to maximizetheir own profits. Wholesale bidding for kilowatt hours from suppliersas far away as Canada and Texas began shortly after the market (which hasno trading floor) opened for business in April. This provided lower capital,operating and maintenance unit costs. In California, there is a "virtual exchange," modeled after the NasdaqStock Market trading system, which permits deregulated electric power to betraded as a commodity. Residential and commercial customersbenefited from these economies of scale and the developments lent supportto the idea that monopolistic, vertically integrated utilities (MVIUs) werethe most efficient way to provide energy to the nation (Goyal 27). Englewood Cliffs, NJ: Prentice-Hall."Utilities Seek Approval of Nation's First Comprehensive Electric Restructuring Proposals to Bring Benefits of Competition to California Consumers." PR Newswire (Apr 29, 1996): 429LAM 65.Worsham, James. Issues such as existing contracts willneed to be resolved as states move to deregulate electricity, but thelessons provided by California should serve as a model for other states. Under deregulation in California, the Independent System Operator(ISO) and the Power Exchange (the market described above) work together toprovide power to customers. This is notthe case even in other industries, such as the airline industry, wheremassive deregulation has occurred. Theexchange sets only wholesale prices, not retail, and only 25 percent of theaverage price of an electric bill comes from the retail cost of power. Introduction Utilities in the United States have been regulated monopolies fordecades. In spring 1998,California deregulated its electric utility and other states are in theprocess of doing the same. One of the cornerstones of regulation in the utility industry is theway in which utilities are permitted to bill for their products andservices. Rate base regulation was in force throughout the industry andprovided the revenue for most power utilities. At issue is approximately $45 million (Graebner 1 ). Together, these 16 statesrepresent more than 44 percent of the American population and are acting inan environment in which the federal government has not yet reached aconsensus on how to approach deregulation (Worsham 6). Effects of Deregulation The move toward deregulation was focused on making the electric powerindustry (estimated at $212 billion annually) more competitive. "Changing Electricity Market Jolts SMUD's Power Purchases." Sacramento Business Journal (Apr 3, 1998): 1 .Hamblen, Mark. The argument for maintaining regulation of utilities came from thefact that demand for electricity is relatively inelastic, meaning thatthere is a considerable amount of variance which can occur in the pricebefore there is an appreciable change in the quantity demanded byconsumers. Works CitedCopeland, David S. All such wholesale transactions were subject to this federalregulation even when all parties were located within the same state. "California Powers Up Nation's First Virtual Exchange for Utilities." Computerworld (Apr 6, 1998): 14.Howe, Keith M., and Eugene F. "Historical Events Pressure Changes in Industry." Electric Light and Power (Apr 1995): 27-29.Graebner, Lynn. SMUD maintains that the contracts call for theelectricity to be generated by gas-fired power plants and, since Edison isselling those plants as part of deregulation, SMUD now considers thecontracts null and void. Background of Regulation Historically, the Federal Energy Regulatory Commission (FERC)regulated corporate sales of power to municipalities and cooperatives forresale. Total investment can becalculated in several different ways: fair return on fair value, originalcost, investment cost, prudent investment cost and reproduction new cost.The rate base may be established by evaluating the asset side of thebalance sheet, or by using the liability side (cost of capital). From theirstandpoint, they have the right to produce the electricity using coal,hydroelectric power, nuclear or other sources and still be within the termsof the contracts. The Move Toward Deregulation During the 195 s and 196 s, technology and manufacturing advancementsenabled production of larger and more efficient electricity producingequipment such as turbines and boilers. In addition, the price elasticity of demand is larger in thelong-run than in the short-run, and this holds true for all types ofconsumers, including residential consumers as well as industrial andcommercial consumers. Rasmussen. During these early moves towardderegulation, there was some concern that the federal government might haveprevented states from controlling how utilities were, and were not,regulated. During April 1996, California announcedthat it would become the first state to recommend to FERC regulatorscomprehensive ways to implement a new competitive electric market structuredesigned to bring about lower prices and more choices to consumers. In the late 198 s and early 199 s, some US states began to restructuretheir electric power sectors. Price elasticity tends to be greater for industrialdemand over residential demand (Howe and Rasmussen 34). It is alsowithin the FERC's jurisdiction to order one utility to interconnect withanother or to sell bulk power to it (). Theremaining 75 percent comes from the transport of power to the customer.Nonetheless, the exchange must be viewed as a significant effect ofderegulation, and also one of the reasons that the deregulation was delayedwhile problems in the system were worked out (Hamblen 14). Outlook With 14 more states considering deregulation, it would appear that thelast regulatory holdout has been torn down. By the 197 s, rapid increases in energy prices revealed that somecompanies were overly dependent on oil or excessive fuel consumption.These companies saw their utility costs increase substantially as the priceof electricity rose. Thedifference between rate of return for a public utility and the rate base isthat the rate base is the after-tax earnings while the rate of return isthe rate allowed by the regulatory body (). TheFERC also regulated large volume, high-voltage bulk power sales bycorporate utilities to each other. Massachusetts and California have movedto a deregulated environment while an additional 14 states are set to beginderegulation in the next several years. ISO operates the network of powertransformers, lines and towers while the Power Exchange provides a forum inwhich electricity can be bought and sold (Worsham 6). In 1996, the Vermont Public Service Board commissioner went onrecord as being concerned about the decreasing influence of state authorityin a restructured environment. In addition, the industry itself has fought to maintainregulation since, although it places a limit on the profits earned by thecompanies, regulation also creates barriers for new competitors and thushelps companies maintain their market share and long-term profitability(Copeland 292). Theresults of that preliminary recommendation are what recently went intoeffect in California ("Utilities Seek..." 429LAM 65). It would then apply the savings to the cost of its powerprojects.
If this paper is not what you are looking for, you can search again:
or
We can write a Custom Essay just for you.
Browse Essays by Subject