Existing state-by-state utility regulation and pressure to keep rates down could leave the nation dangerously short of electricity, according to an unpublished Department of Energy study.
The report, prepared for the president's Cabinet council on energy, proposes changes in utility regulation, including more regional decision-making, financial rewards for exceptional utility performance and setting rates to ensure future capacity, rather than limiting utilities to what is justified by costs plus a fair rate of return.
"While there is no crisis, no wolf at the door, there are unmistakable danger signs," according to the study, which was prepared under the auspices of Hunter Chiles, director of the Energy Department's office of policy, planning and analysis. Before coming to the DOE, Chiles was chief energy policy planner for Westinghouse Electric Corp., which builds power plants. Chiles' adviser on the report was Howard Perry, a career government official who also worked on utility issues during the Carter administration.
"Even with a cool summer and a recessionary economy in 1982, the industry had only about 15 percent more capacity than desirable from a need-for-power perspective, and much of this excess was in the form of uneconomic oil/gas-fired units," the study notes.
"The public (and, apparently, its servants, the rate regulators) seems to take electricity supply for granted," according to the report. "Given the long lead times for new capacity, the uncertainty of demand, the perceived value of electricity and the skepticism about investment in future supply, the 'best case' (high supply/low demand) appears unlikely," it predicts. "The 'worst case' may be equally improbable, but could have enormous political repercussions, should it occur."
The study, in its third draft, appears to be near release. Acting Secretary of Energy Donald Hodel comes into his new job already familiar with the issue because of his previous work at the Interior Department.
The recommendations include simplifying rate-making procedures by allowing classes of rate cases under the Federal Power Act to be resolved without federal regulatory intervention. One application might be to allow wholesale contracts where there is no disagreement between the parties to bypass review by the Federal Energy Regulatory Commission.
Another application might be to see if it is possible to set standards on certain types of issues that are frequently contended in rate cases.
Still another recommendation would broaden the ability of utilities and other parties to appeal rate decisons to lower level federal courts. Utilities are barred in many cases from appealing state regulatory decisions to federal courts except for the Supreme Court.
The study recommends a broader regional approach to sales of wholesale power among utilities in different states and allowing states to administer provisions of the Public Utility Holding Company Act relating to the formation of interstate generating companies. Thus, it would allow utilities to pool resources to form generating companies that would span more than one state with less federal regulation than now.
The study is likely to be met with favorable reaction from the utlities industry. An official of the Edison Electric Institute, which has been warning of capacity shortage, said that he had not seen the draft but that the recommendations, as described, sounded good.
"I don't have any problem with the general concept of telling states to think about the long-run consequences of rate decisions as long as you get them to focus on other alternatives to power plants," said Alan Miller of the National Resource Defense Counsel, an environmental group. "I do have a problem with a report that doesn't state the whole range of options and could be read as an endorsement of the Edison Electric Institute point of view that calls for more and more power plants," he said.