Competition Is Watchword At Conference of Utilities

Deregulation forces in electric industry could mean boon to consumer

AT this week's annual meeting of electric utilities, the big topic of conversation in convention halls was competition: Can an industry used to a regulated monopoly emerge into a system in which consumers choose their power company?

``Competition is here to stay,'' economist Alfred Kahn told members of the Edison Electric Institute, the industry group. The forces of deregulation confronting this industry are part of a worldwide trend away from centrally planned industry, he said. This could mean lower rates and more choice for consumers.

It also could mean rougher times for utilities, which are accustomed to luring investors with slow and steady hikes in dividends, based on regulator-controlled profit margins.

``Some of you may end up like the airlines,'' Mr. Kahn warned, referring to a deregulated industry in which price wars have put red ink at the bottom of many company balance sheets. Other utilities, he said, ``may like it.''

Wholesale competition

Already, electric utilities face competition at the wholesale level. The 1992 Energy Policy Act enabled nationwide expansion by nonutility power producers, which sell electricity over utility-maintained grids if their generating costs are lower than the local utility.

Now many states are looking at allowing ``retail wheeling'' (selling power directly to commercial and residential customers) by independent power companies over utility transmission lines. In California, the utility commission recently proposed phasing in retail competition, with residential customers getting a choice of service by 2002. Competing outside companies would reimburse utilities for the costs of maintaining the power grid.

The competitive pressure ``will cause us to do a better job,'' says Thomas Page, chairman and chief executive officer of San Diego Gas & Electric Company. Highlighting a concern shared by many utilities, he adds that the playing field must be level. ``We don't want one [type of provider] having an advantage over another.''

A regulatory challenge

Achieving that crucial goal poses a complex regulatory challenge. For example, Mr. Page points to various requirements that utilities often face - such as subsidies for low-income customers and for conservation investments by customers - that are not borne by their unregulated competition. ``You [have got to] be careful where you attach these extra costs,'' he told the Monitor after testifying in hearings Tuesday before the California Public Utilities Commission.

Moreover, many utilities are saddled with unexpectedly costly nuclear plants, adding to what the firms call their ``stranded investments.'' Under deregulation under Prime Minister Margaret Thatcher, the British government eased the transition by taking on much of this financial burden, absorbing the difference between nuclear plants' book and market values, Kahn says.

The number of independent power producers, by contrast, has risen since the 1970s with cheaper, smaller generation sources, such as natural gas turbines, fuel cells, and cogeneration. They now account for about one-half of all new generating capacity added each year. Between 1980 and 1992, they expanded their share of total United States generating capacity from 2.7 percent to 7 percent. The independent production is produced on-site for big industrial customers or sold by contract to utilities, with geographic freedom expanded under the 1992 legislation.

Charles Bayless, CEO of Arizona's Tucson Electric Power Company, says he supports retail wheeling ``so long as it's confined to California.'' The company is just over the California border and has excess capacity to sell.

San Diego Gas & Electric buys half the power it provides to its roughly 3 million customers. Page says in the past decade this strategy has paid off handsomely, with electricity rates falling from 50 percent above state average to 10 percent below.

If retail wheeling is enacted, Page says his plan will be to mark down the value of the company's nuclear plant and to repackage several fossil-fuel plants into a subsidiary that would compete to supply power alongside independents and neighboring utilities. ``If we do the kind of job that I think we should,'' then consumers will be getting good enough prices that they would have little reason to seek service from another provider, he says.

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