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October 1999 Deregulation Series
Utilities Mull Marketing Strategies
What Role Will Regulators Play?
Who Will Protect the Poor?
More Options for Small Business
Pepco Will Auction Off Its Plants
Environmental Impact Uncertain
An Example of What to Expect
States Deregulate, Congress Debates
Cash Flow
Albert Crenshaw says its the same old song. Big business and large-volume users will benefit, while homeowners will likely lose out.

Investing in utilities used to be easy. Fred Barbash points to where the better investment bets can be found in a more complex, deregulated market.

Color of Money
With deregulation spelling the likelihood of more phone solicitations, commercial ads and legal fine print, Michelle Singletary is tense with anticipation.

You've Got the Power

By Martha M. Hamilton
Washington Post Staff Writer
Sunday, October 17, 1999; Page H01

A revolution is underway that might use as its rallying cry: "Power choices to the people — whether they want them or not!"

It's deregulation again. The movement to competition that layered on choices and complications in the airline and telecommunications industries is now headed to an electrical outlet near you.

Many Washington area consumers are already scratching their heads over how to choose a natural gas supplier. And soon they'll be able to choose among providers of electricity — adding new, and potentially unwanted, dimensions to a decision that had been as simple as turning on a light.

What's driving the change in the $300 billion utility industry is large commercial consumers that do care — industries, factories, school systems, retailers and others that spend huge amounts of money on energy. For them the savings add up. For instance, Hershey Geisinger Medical Center in Hershey, Pa., saved $80,000 in its first year of shopping in a deregulated market.

These are the customers that competitors in a deregulated market will rush to serve. Residential customers aren't where the big bucks are, but many states have required rate cuts for residential customers as the price of approving plans to allow competition.

Optimists also suggest that residential customers will benefit indirectly as cost savings from large industrial and commercial power consumers trickle down.

The theory behind this — as in most deregulatory efforts — is that competition will produce lower prices and new services that will benefit the economy in general. Historically, the utility landscape has been dominated by regional monopolies operating large power plants and setting their rates under the watchful eyes of state regulators. In return for providing universal services, utilities were guaranteed a rate of return set by negotiations with regulators.

Advocates of deregulation argue that it's possible to retain the consumer protections that the old system provided while also creating a competitive regime that will be more efficient and innovative.

Just the prospect of widespread competition is producing consumer savings, they argue. Measured in 1999 dollars, the average annual residential cost per kilowatt-hour dropped by nearly 20 percent in just the past nine years. Those savings have come about as old-line utilities trimmed staffs and looked for efficiencies to survive in the coming competitive environment.

It's not just consumers who are faced with tough choices as utility regulation comes undone. Utility companies themselves are scrambling to figure out how they can survive in the scrapping and consolidation expected to result from competition.

Some are jettisoning their power plants, either on their own or at the behest of regulators. Potomac Electric Power Co., for instance, hopes to auction off its power plants and survive by becoming a retailer of electric power, cable, telephone, Internet and other services. But Dominion Resources Inc. of Virginia is opting to remain a vertically integrated electricity and natural gas company — producing, transmitting and retailing both forms of energy.

Local utility companies are being merged into bigger companies; the lines between electric and gas utilities are being blurred, and major national and international players are beginning to emerge.

So far, 23 states — including Maryland and Virginia — have adopted electric utility deregulation, although it isn't fully underway in many of those states. In Maryland, businesses and households will be able to shop for power providers starting next July. In Virginia, customers around Richmond will be allowed to choose power providers starting in June if state regulators approve a pilot program that initially will cover 35,580 consumers in central Virginia but is designed to double in size and expand to include Northern Virginia six months later.

D.C. regulators are still deliberating on whether, how and when to open up markets for electric power. On the national level, the Clinton administration has put forward its own plan for deregulation, and work is underway on Capitol Hill on a bill that would address federal issues in deregulation, such as interstate commerce issues and the role of public power providers such as the Tennessee Valley Authority.

So what can consumers expect? First of all, electric providers' prices are not expected to vary dramatically. In markets where deregulation is already underway, competition often takes the form of offering new services or a specialty product.

The services include energy management. In some cases, a company may offer to reduce a customer's energy costs (even installing energy-saving equipment at no cost to the customer) in exchange for a percentage of the savings.

The most visible of the new products is probably "green power" — electricity that costs more but provides psychic reassurance for customers who prefer such renewable sources of power as wind, water and sun. But what's green? Hydropower doesn't send carbon or other emissions into the air, but it may result in the damming of wild and scenic rivers. And nuclear power burns clean but includes the risk of handling and disposing of radioactive products.

In fact, some environmentalists fear that competition in electric power markets will result in more power plants burning coal — because it's cheap — and producing more emissions.

For workers in an electric power industry where downsizing and reductions in force have become a regular feature, the downside of deregulation isn't hard to fathom. But for consumers, the most important question mark about the world ahead may be about reliability as we move from a highly regulated market to a more free-for-all model.

Critics have raised concerns that competition could drive companies to scrimp on measures important to the reliability of the system — such as maintaining transmission lines and providing backup operating capacity to avoid outages.

And earlier this month, Dave Nevius, vice president of the North American Electric Reliability Council, a nonprofit industry group whose job it is to monitor such things, seemed to reinforce some of those concerns.

Calling for a new electric reliability oversight system to supplement the current self-regulatory system, Nevius told a House Commerce subcommittee that his organization is "seeing a marked increase in the number and seriousness of violations of its reliability rules, yet there is no recourse under the current voluntary model to correct this behavior."

© 1999 The Washington Post Company

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