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Since the enactment of the Energy Policy Act of 1992, many electric industry stakeholders have turned their attention to retail wheeling: the sale of electricity to a retail customer by an entity other than the incumbent utility. The 1992 act specifically prohibited the Federal Energy Regulatory Commission from ordering retail wheeling. Nevertheless, as of April 2000, nearly half the states have moved forward with legislative and/or regulatory initiatives to restructure the electric industry and implement retail access. Generally, “retail restructuring” means that vertically integrated utilities are required to “unbundle” generation, transmission, distribution, and energy services and treat these as separate components. Transmission and distribution remain rate-regulated monopoly services, while generation service is sold at market-based rates. The theory (or hope) is that there will be enough sellers to produce competitive rates for all customer classes. In a competitive retail market, distribution entities are required to provide nondiscriminatory open access to all electricity providers, comparable to the service they provide their own generation affiliates. Down the road, competition may develop for other services, such as metering and billing. In some states, this already is happening. EMBRACING RETAIL COMPETITION There are a number of reasons why many states are embracing electric retail competition. Among those factors are: �pressure from the largest electricity consumers to lower energy costs; �pressure from the environmental community to find ways to reduce emissions and increase the use of electricity generated through “renewable” resources; �deregulation in other industries such as telecommunications, which sparked the idea that competition would lead to the development of new products and services; �technological innovations in the way in which electricity can be generated and delivered; and �federal restructuring at the wholesale level through the 1992 act, FERC’s Order No. 888 in 1995 (which mandates nondiscriminatory open access), and Order 2000 in 1999 (which paves the way for regional transmission organizations). It should come as no surprise that the states that moved first to implement retail electric competition generally are those where electric rates are the highest: among them, California, Pennsylvania, New York, and most New England states, except Vermont. Other “early bird” states where high prices were not an overriding factor were motivated, at least in part, by the perception that federal restructuring was imminent: i.e., they wanted to do it themselves before the feds did it to them. However, a number of states are not rushing to embrace retail choice. Many low-cost states — where electric rates are below the national average (currently about 8.3 cents per kilowatt hour (kWh) for residential service, according to 1998 data from the U.S. Energy Information Administration) — are taking a “go slow” approach, for fear that retail competition actually would raise costs for residential and rural customers. In December 1998, public utility commissioners from 23 states formed the “Low Cost Electricity States Initiative” to oppose a federal mandate for retail access. The group represents states in which electric rates are on average a penny per kWh lower than the national average. As it stands now, 22 states and the District of Columbia have enacted legislation providing for retail electric competition. In Michigan and New York, retail choice is proceeding pursuant to regulatory initiatives. (In Michigan, this process is “voluntary” for the state’s major investor-owned utilities, since the Michigan state Supreme Court ruled that the state public service commission did not have the authority to order retail wheeling absent legislation.) Another 20 states have regulatory and/or legislative processes underway to study the issue. In a handful of states — Tennessee, Kentucky, the Dakotas, and Idaho — there is little restructuring-related activity to date. STATE RESTRUCTURING ISSUES State electric restructuring initiatives address a number of concerns, ranging from stranded cost recovery, to consumer protection and education, to mandates for environmentally preferable generation. What follows is a summary of the major restructuring-related issues. Of course, this list is not exhaustive, and every state addresses these issues differently and has not dealt with every topic. Stranded Costs. Utilities have invested in generation assets such as plants, qualifying facility contracts, and power purchase contracts in anticipation of future needs. These are costs that could be “unrecoverable” in a competitive environment. States are allowing utilities to recover their prudent, verifiable, and unmitigatable stranded costs through a nonbypassable competitive transition charge, a surcharge on distribution rates, over varying periods of time. Some states also are permitting utilities to “securitize” all or some portion of their stranded costs. Opt In/Out. Many states are permitting electric cooperatives and, in some cases, municipal electric systems, to opt into or out of retail choice, upon a vote of their members or duly elected governing bodies. In other states, such as Maryland and Delaware, the cooperatives will be implementing retail choice on a slightly later timetable than the investor-owned utilities in those states. Market Power. The advent of first wholesale and now retail competition is accompanied by utilities scrambling to merge and combine, on the theory that only the biggest will survive. This raises significant concerns about horizontal and vertical market power. As utilities sell off or divest pieces of their formerly vertically integrated operations, many also are buying other utilities’ divested assets. This raises the specter of horizontal concentration of ownership of generation and/or transmission facilities; indeed, many analysts predict that there will be relatively few generation owners in the near future. States also are concerned about the market power inherent in the traditional vertically integrated utility. After all, an entity that controls transmission could also control which generation provider gets access and when. Many independent power producers and transmission-dependent utilities fear that allowing utilities to retain ownership and control of both generation and transmission creates an inevitable incentive for utilities to favor their own generation over others. Remedies for such perceived market power range from the behavioral, such as codes of conduct, to the structural, such as requiring divestiture or limiting generation ownership to a certain percentage in any given service area. For example, SB 7, the restructuring legislation passed in Texas last year, prohibits any generator from owning more than 20 percent of the installed capacity that can be sold within a region. Codes of Conduct. To mitigate the perceived inherent market power of incumbent utilities, states are adopting “codes of conduct” to cover such issues as protocols to govern the interactions between regulated utilities and their unregulated competitive affiliates; separation requirements that prohibit utilities and their affiliates from sharing employees and facilities; guidelines for allocating common costs between utilities and their affiliates; and limitations or outright bans on joint marketing and promotion activities by utilities and their affiliates, including restrictions on the common use of a utility name and logo. Universal Service. Under retail competition, unregulated competitive power suppliers are able to choose which markets they will enter, and even which segments of a particular market they will serve. In other words, there is no universal “obligation to serve” imposed on these suppliers, as it traditionally has been on utilities. Hence, retail competition could make it more difficult to ensure that every consumer has access to electric power at a reasonable price, particularly residential and small commercial customers, and customers in rural areas. The experience in those states where retail choice actually is underway, such as California and Pennsylvania, shows that only a very few competitive power suppliers are entering the residential market; the vast majority is seeking to serve only industrial and large commercial customers. Default Service Providers. In most states, those customers who either do not choose an alternate supplier, or for whom there is no competition, will receive “default” service from their incumbent utility. This default or “last resort” service will be provided at a “standard offer” rate, usually a cost-based rate at first. A few states are aggregating the incumbent utility’s default load and putting it out to bid. In other words, customers who choose not to choose would be allocated to whichever supplier supplies the winning bid to provide default service. While this practice is criticized as “government slamming,” proponents claim it is a tool to facilitating retail choice for residential customers. Consumer Protection. States are adopting financial and technical standards that alternative suppliers must meet to be licensed to sell in the state. Alternative suppliers also are subject to information disclosure requirements: price, terms and conditions of service, termination procedures, etc., all must be clearly disclosed to the consumer. In addition, states are implementing strong protections against “slamming” and “cramming” violations, as a result of hard and painful lessons learned from telecom. Environmental Issues. Many states are adopting renewable portfolio requirements, under which all competitive power suppliers must verify that their power supply portfolio contains a certain percentage of generation produced from renewable resources: solar, wind, hydro (in some but not all cases), and other resources. States also are requiring power suppliers to use a consumer information label — similar to a food product label — that contains information about the supplier’s generation mix. A few jurisdictions also require suppliers to report on the emissions characteristics of their generation portfolio. Finally, many states are imposing a distribution surcharge to fund energy efficiency and renewable research and development programs. Uniform Business Practices. Many power marketers and other vendors of competitive services are pushing the states to adopt uniform business practices for the retail electric market. Such practices would encompass the protocols for processing a customer switch of supplier; how customer usage data are transmitted from the utility to the alternative supplier; how billing and payments are processed; metering and load profiling requirements; and other mechanisms for implementing retail choice. The competitive suppliers contend that it is not profitable to market on a national basis, particularly to residential and small commercial customers, if they have to follow different rules and meet different requirements in each state and for each utility. Many state regulators are sympathetic to this concern. It became apparent from the experiences of some early states, like California, that the need for coordination between utilities and suppliers, particularly in the area of electronic data interchange, is paramount to the success of retail access. However, the purchase and installation of new computer and other systems to accommodate retail choice could cost tens of millions of dollars for many utilities. Electric cooperatives are particularly concerned about incurring such costs, given that the costs will be spread among a much smaller customer base (the average distribution co-op serves 10,000 customers). In addition, there is the concern about “overbuilding” shared by all utilities: whether a retail choice market truly will develop, particularly for residential and small commercial customers, such that these significant investments in new systems are warranted. Metering and Billing. In addition to generation, a few states are experimenting to see if other services can be offered by nonutility providers, such as metering and billing. Some states are requiring utilities to “unbundle” metering and billing costs from overall distribution costs, as a prelude to introducing competition in these services. Distributed Generation. While not directly related to retail restructuring, many states appear to believe that distributed generation could be a solution to many electricity-related issues, ranging from pollution produced by power plants to excessive distribution costs to load management. States are beginning to adopt rules that prohibit utilities from imposing barriers to interconnection with onsite generation facilities, such as fuel cells or microturbines. In addition, many states have adopted net metering requirements, which allow customers with self-generation capabilities to sell their excess power back to the grid at their avoided retail cost. Maryland’s Electric Customer Choice and Competition Act was signed into law in April 1999. Although the act provides for a three-year phase-in of retail choice, the state’s four investor-owned utilities — Baltimore Gas & Electric, Pepco, Allegheny Power, and Conectiv — announced that they will offer customer choice all at once for all customers as of July 1, 2000. The act permits the state’s two cooperatives to follow a different schedule as long as all cooperative members have retail choice by July 2003. The Maryland legislation requires electric customer bills to be unbundled: that is, to show separately stated charges for transmission, distribution, and electric service; transition charges (to pay the utility’s unrecoverable stranded costs); universal service program charges; taxes; and other charges to be identified by the state Public Service Commission. The legislation also provides for competition in metering and billing. All customers will initially see a rate cut of about 6.5 to 7 percent; a rate cap will remain in effect for four to six years. Virginia’s Electric Utility Restructuring Act was signed into law in March 1999. The law establishes a two-year transition period, from Jan. 1, 2002, to Jan. 1, 2004, when all electric customers will have retail choice. The law directs the State Corporation Commission (SCC) to cap rates for a six-year period (Jan. 1, 2001, to Jan. 1, 2007), and allows utilities to use revenues received during that period to pay off stranded costs. Customers who switch to a power supplier other than the incumbent utility during this period are required to pay a “wires charge,” representing the difference between the utility’s capped unbundled rate for generation and the supplier’s market-based rate. The Virginia restructuring law gives the SCC the power to designate default service providers. The SCC may choose the incumbent utility or its affiliate to act as the default service provider in that utility’s service area. The law expressly provides that electric cooperatives are the default service providers for their members. In he District of Columbia, electric customers should have the ability to choose an electric power supplier by Jan. 1, 2002. The Retail Electric Competition and Consumer Protection Act, which was passed by the D.C. Council in December 1999, also requires the provision of competitive billing services by January 2002. Pepco is designated as the default service supplier through Jan. 1, 2005, and the D.C. Public Service Commission is directed to select an electricity supplier to provide default service after that date. The District’s restructuring law directs every power supplier licensed to do business in the city to report its power supply portfolio to the Public Service Commission every six months. By July 2003, the commission must report to the council on the feasibility of requiring licensed power suppliers to include a minimum percentage of energy from renewable resources, such as solar or wind, as part of their generation portfolios. Competition in electricity is still in its early stages, and it is too soon to determine whether the goals of new choices, lower prices, and better quality of service for consumers have been or will be achieved. But electric market participants already are making fundamental changes in how they do business. The next phone call that interrupts your dinner may be from a marketer selling not only long distance telephone service, but also electricity.

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