By the staid standards of electric utilities, William W. Berry is a maverick. The chairman of Dominion Resources Inc., which supplies 1.6 million customers with electricity through its Virginia Power subsidiary, Berry is one of the most forceful advocates of increased competition in the electric utility industry -- a view that puts him at odds with most other top utility executives.

Once strictly at the mercy of regulation by state public utility commissions, utilities have been dealing with creeping competition for the past decade, since Congress passed a law requiring utilities to buy power from independent generators. Many in the industry have railed against such competition, but Berry, 55, sees it as inevitable. Under his scenario, consumers would continue to buy power from their existing utility, but the utility would be able to choose the most cost-effective supplier from a number of options.

The issue, says Berry, is how to deregulate the industry so that entrepreneurs and utilities can compete while customers are charged reasonable rates. In an interview with Washington Post staff writer Elizabeth Tucker, Berry discussed his views. This is an edited transcript of that interview.

Why do you advocate competition among generators of electricity?

Well, I begin with the basic belief that a free market is the best way to achieve economic efficiency. We should have regulation only when the free market can't do the job.

Traditionally, we've said we must have regulation in the electric utility industry because an electric utility is a natural monopoly. That has been true for years. But I believe today ... that the generation of electricity is no longer a natural monopoly, and therefore we can rely on a free market ...

The approach that I've been advocating recently is not a revolutionary approach of completely restructuring the industry. It's a gradual, evolutionary approach to bring competition in only for new generating capacity, leaving the existing generating capacity and the rest of the industry right where it is.

When did you begin advocating competition in the utility industry?

I first started thinking and talking about the concept of introducing competition into the regulated utility business back in 1981. If I wasn't the first, I was at least lonesome in 1981.

Was anybody listening in 1981?

I can remember going to a meeting in New York in which I described the concept of competition in a room of about 60 people. The only people that agreed with me were a lawyer from the Environmental Defense Fund, a Ph.D. from the Massachusetts Institute of Technology and a regulator from New York State. I guess my reaction was, "If they agree with me, maybe I'm wrong." There wasn't any support for the concept within the industry at that time.

How come?

There were concerns about how the system would operate, technical issues about control of the flow of electricity and operation of the transmission system {and} concerns about whether states would be willing to give up their regulatory control over a major segment of the industry. So, there were a variety of legitimate concerns. Then there were some emotional ones.

What were they?

I think fear of the unknown is probably the biggest one. It is impossible to precisely describe what the industry will be like in a competitive environment, just like you couldn't describe in advance what the airline industry was going to look like after you deregulated it. ...

You have to depend, to some extent, on basic economic theory and gut feeling about the advantage of a competitive market. That's why the evolutionary approach is so important. ... You can make some sort of adjustment without having gone through the trauma of an immediate revolutionary move to competition.

What are the other utilities saying now?

Back in 1981 it was very lonesome, but it's not so lonesome today. There are a number of utilities that are working together to encourage changes in regulation at the federal level and the state level to allow a competitive marketplace to be created.

We're not alone by any means; these utilities are from all over the country, from California and the Southwest and New England.

Is the ultimate goal complete deregulation of the electric utility industry?

I think that's a legitimate, ultimate goal. But I think, in terms of the approach that I'm suggesting, it's decades away, not years away.

How would the restructured electric industry look?

Under the vision that I have today, gradually, new generation would be provided in a competitive market. ... So as you move out over the decades and as existing plants retire, utilities will gradually have less and less involvement in the generation of electricity and more commitment in the transmission and distribution of electricity.

At that end date ... but in the 21st century ... you might have an electric utility industry in which all of the generation is supplied in a competitive marketplace. ...

The system would look just like it does today. It's just that the ownership and the operation and the financing of some of those generating sources would be nonutility sources rather than the utility.

What were the forces that brought this idea to the forefront of the utility industry?

The collapse of the regulatory bargain ... The compact between utilities and regulators {that} utilities make prudent investments and they get reasonable but assured returns on those investments.

The problems that came up, particularly with the construction of recent nuclear plants with very, very high costs, led to regulators more and more saying, "If you make an investment and the results are good, you'll earn a modest utility return. But if you make an investment and the results are not good, you won't earn anything on it." That changes the risk/reward relationship. As a result, utilities are reluctant to make investments where, if they are successful, the best they can do is a modest return, and if it doesn't turn out well, then they are courting financial disaster.

That wasn't a problem until fairly recently because there was so much more generating capacity than we really needed; nobody worried about building. But now companies like Virginia Power need additional generating capacity, so you have to say, "Where is it going to come from if utilities are reluctant to invest because of the breakdown of this utility bargain and the upsetting of the risk-reward relationship?" ...

The other internal force involves the Public Utility Regulatory Policies Act of 1978. This act was designed to encourage conservation and alternative energy sources. One of the alternative energy sources that it encouraged was a new word in 1978, and that's cogeneration. Cogeneration is the generation of electricity in conjunction with some industrial operation that needs heat. ... Congress wanted to encourage that, so they required that utilities buy the power produced by cogenerators {big business customers who generate both electricity and heat for their own needs} at a price to be determined at a fairly complex administrative proceeding at the state level.

Initially, not much happened as a result of that law. But in the 1980s, particularly in the late '80s, the price of natural gas came down, and this made a lot of these cogeneration projects very, very attractive to entrepreneurs. So we began to see a very rapid growth in the amount of cogeneration that was being built and being offered to utilities.

But the system of pricing the power left a lot to be desired. There have been some bad experiences, particularly in Texas and California, where the price was set too high. You pay more than you need for the product and get more of it than you need. ... The utilities were required to take it, and ultimately their customers are going to be required to pay for it. ...

How would you solve that problem?

It seems to me that the logical thing to do is to ... let the market determine the price. My recommendation to the Federal Energy Regulatory Commission and to the Virginia State Corporation Commission is that we do away with this administered price for cogeneration. We simply have a competitive bidding process and let the market decide the price it will pay for the capacity, and that we only buy the capacity that we need.

Would you want to compete against entrepreneurs to build plants in your service territory?

It's my strong belief that Virginia Power should not compete with other suppliers of electricity in that free market. The reason for that is that Virginia Power is the entity that will determine who are the low bidders, who are the best suppliers, and it's not going to be believable to anybody that you take competitive bids and you evaluate those bids and Virginia Power is the winner. ... If you're going to have a free market, it has to be a fair market, and I think the only way to assure everybody that it's a fair market is not to have the utility that's evaluating the bid participate in the bidding process.

But would that ultimately mean that utilities would not have to build any new generating capacity because it could be supplied by other sources?

I think it could well involve a situation where a utility did not build any new generating capacity. There are going to be exceptions to that rule. There are going to be special cases where, for a variety of reasons, the best source of power may not be possible through the bidding process. Let me just offer a couple of possibilities of how that might happen.

One is the case where the utility has an existing plant, existing facilities, that would enable it to put in additional generating capacity at very, very low cost compared to a cogenerator, who has to build from scratch. That's the case we found ourselves in with the Chesterfield plant ... this past summer. We have an existing plan, an existing building, an existing source of water, an existing transmission system, and we are convinced and we were able to convince the Virginia {Public Utilities} Commission that we can build that additional generating capacity cheaper than anybody else because of the special circumstances.

It's interesting that you discuss that scenario, because you were just saying that in the long run it would probably make sense for utilities not to build their own generating facilities at all, and yet in this circumstance you want to go ahead and build.

That's because we're using an existing site, an existing building. Sooner or later, we and everybody else is going to run out of those special circumstances, and if we want to build a new plant, we'd have to go out and buy a piece of land and start from scratch just like a cogenerator would.

What percentage of your total power mix currently comes from independent producers of power and from cogenerators?

Right now, roughly 10 percent of our generation comes from cogenerators and power purchases from other utilities, with the bulk of that being purchased from other utilities. But as we look at our additional generating requirements over the next four to five years, about 75 percent would come from cogenerators or others.

What is the benefit of competition among power generators?

Well, I'm convinced that the No. 1 benefit and the overriding benefit is lower cost of electricity to customers. That's because I believe that a competitive market, a fair, open competitive market, leads to economic efficiency and therefore lower costs. And those costs would flow straight through to customers.

What's in it for Virginia Power?

Well, for Virginia Power, it's a way of getting the additional generating capacity that their customers need at a cost their customers can afford without risking their stockholders' money on a venture in which it's unlikely they'll be a winner.

Will service be reliable?

Reliability is an important issue and the problem is, I believe, a transitional one. When you consider bids from companies that have never built a generating plant before and never operated a generating plant before, you have to be concerned about whether they are really going to be able to deliver. ...

To begin with, they don't have that track record. ... We are looking as far into those firms as we can to determine what engineering and operating talent they have, but to a large extent we have to rely on the contract.

What guarantee do the customers of Virginia Power have that they will continue to have reliable service if such a company goes out of business?

We have the right under the contract to move in and operate the plant. That's sort of the worst case.

Will utilities still be obligated to supply customers with power?

No, that doesn't change. The utility has an obligation to supply electricity to any and every customer within its franchise service area. ... The difference here is that the obligation to serve would cease to be an obligation to build. We have an obligation to get the electricity to them, but that obligation doesn't say how that electricity happens to be produced. We are saying we can get that electricity in a competitive market and deliver it to our customers.

Should there also be competition at the retail level?

So far, we've been talking about competition at the generation level, which I think is clearly beneficial to rate payers and to companies and doesn't interfere with any of the relationships and obligations that have existed for a long time.

There are a few people who are advocating that we go far beyond that and say each individual electric customer -- house, office, factory -- should have the freedom to shop around for their electricity and buy it from whatever generating source they choose and their local electric utility would simply deliver it for them. ... I believe it will not result in economic efficiency, but will result in enormous transfers of wealth from one segment of the population to another.

Will congressional action be necessary to bring increased competition to the industry?

The competitive bidding for generation doesn't take any legislative action, and that's one of the reasons it's doable in the very near term. Congress doesn't want to take on this issue right now. If we do it in a gradual and evolutionary way, we can go to Congress in three or four years and say, "See how well it's working in this incremental approach? Now, it's time to expand the horizons.