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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
Columnists
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
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.

That’s Deregulation With a Small ‘De-’

By Maryann Haggerty
Washington Post Staff Writer
Sunday, October 17, 1999; Page H06

Utility deregulation means a lot of things, but it doesn't mean an end to regulation. The reasons have to do with both politics and mechanics.

For most of this century, gas and electric companies have operated within a formal structure of state and national regulations, with rules known as tariffs governing everything from how and where power is produced to how much it sells for.

Now Maryland, Virginia and the District have joined the more than two dozen states that are in some stage of deregulating either gas or electricity or both. Customers in all three jurisdictions can now pick a gas producer. Next year, Maryland and Virginia customers will also have a choice of electricity producers. In the District, no decisions have been made yet about electricity deregulation.

Why deregulate, anyway?

"Many people said, 'It's a great system, why change it?'‚" said Eva S. Teig, a senior vice president at Virginia Power who was involved in the three years of meetings and public hearings that led up to last year's decision to deregulate electricity in the state. "But the world around us was changing and we did not want to be caught flat-footed."

Deregulation began a few years ago in California and New England. "It's a safe generalization to make, especially in the first states to implement it, that they're higher-cost states and they're under pressure from various folks to remedy that," said Norman Jenks of the Edison Electric Institute, an industry group. Big power users such as factories were the prime advocates of deregulation, sometimes threatening to move to lower-cost areas if they couldn't get a price break.

Then a sort of domino theory took hold. Moves in New England spurred on Pennsylvania. Maryland was then pushed to join in, which put pressure on Virginia.

"It's an economic development, competitive issue," Teig said. "If everyone around us is doing it, why not us?"

In comparatively tiny Washington, with few large industrial users and a pro-regulation tradition, electricity deregulation has not been a major issue, although both the Public Service Commission and the D.C. Council have it on their agendas.

States with comparatively low rates have seen no need to change, said Charlie Higley, research director at Public Citizen, a Ralph Nader-founded group that has been leery of deregulation because of the small benefits it sees going to residential customers. "There are a lot of states that have low-cost power, and they will only see the cost go up," he said.

In both Virginia and Maryland, deregulation was accompanied by years of hearings, round-table discussions and studies, studies, studies. That's because this is the kind of political action that just about everyone can be in favor of if it is done their way. For instance, unions have opposed deregulation, unless it comes with job security. Consumer advocates push for added protection for the poor. Utilities look at the numbers — set the formulas up one way and they're in favor; another way, they're against.

All this detail work matters because deregulation still leaves a lot of regulation in place.

Utilities have long been regarded as "natural monopolies" — businesses that require such huge upfront investments in equipment that competitors have no chance against established companies. Breaking them up a¼ la Teddy Roosevelt and the trustbusters of the Progressive Era wouldn't do any good, the theory goes, so governments chose to regulate them instead.

Then the mechanics come in. It makes sense to have just one set of electric wires and one set of gas lines running in front of your house — although that's not an immutable fact either.

But there's nothing physical that says the electricity running through the wires has to come from the power plant down the road — it can run to your house from anywhere in the country via the interconnected system of electric transmission wires. In a way that's similar but not quite the same, the gas that runs your stove can and does come from just about anywhere.

So for both electricity and gas, deregulation involves the producers, not the distributors.

"It has been pretty much concluded that the generation part of the electricity business is not a natural monopoly," said William T. Torgerson, senior vice president of external affairs and general counsel at Potomac Electric Power Co.

The theory behind deregulation is that if energy producers compete directly for your business — rather than selling their gas or electricity to the power company that sells it to you at government-set prices — then you will end up paying less.

This has proved simpler to do in the natural gas business, which has long been split into three parts. One set of companies produced the gas by tapping wells bored deep into the earth. The prices for their gas have been deregulated for years and it trades as a commodity. Other companies owned the big pipelines that brought it from Texas to Washington. And a third company — what you know as the gas company — bought that gas and piped it down your street. They also checked the meter, fixed leaks and sent you a bill. Since the producers are already competitive, allowing customers choice is in large part an accounting and marketing exercise.

It has been a bit more complicated in the electric business. There, utilities have each spent many millions to construct power plants, money they argue can never be recovered under deregulation. The amount of these "stranded costs" is unknown; estimates range as high as $200 billion, according to the Congressional Research Service. Deregulating the industry involves covering these costs somehow. In Virginia and Maryland, that has meant individually negotiated settlements between each utility and the regulators.

The regulatory role doesn't end there. "For the long and short term, the role of the regulators will be to continue to regulate the distribution company — the wires company — to make sure there's reliable service at affordable prices," said Robert S. Fleishman, vice president of corporate affairs and general counsel at Baltimore Gas and Electric Co.

Regulators also will license the power suppliers that enter the market, he said, and make sure that costs aren't shifted among the regulated and nonregulated parts of a utility.

There's a whole list of concerns that regulators and consumer advocates will have to keep their eye on as deregulation proceeds, according to Michael J. Travieso, Maryland's people's counsel, the official consumer advocate before the state's Public Service Commission.

His biggest concern, Travieso said, is making sure that competition produces lower, not higher, costs for small users because of the removal of "the protection of a rate-setting mechanism."

Additionally, he said, he's concerned about "the newly created possibilities for unscrupulous marketers and sellers and brokers to rip off customers."

"No one will allow the system to fall into disrepair," Travieso said. "The PSC remains obligated to be sure there will always be a provider."

© 1999 The Washington Post Company

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