Disparity of Prices

The promise of competition stems in part from the greatly disparate prices paid by customers across the nation. Under traditional regulatory practice, every state commission have helped determine rates paid by customers for each utility in the state. The rates were based on the value of the equipment used to generate, transmit, and distribute electricity, plus the actual cost of variable expenses such as fuel, within the state. In some parts of the country, such as California and several New England states, rates have been high, partly because of the high cost of construction and fuel in general but also because of utilities' building of nuclear plants whose costs escalated due to delays and construction headaches. In other parts of the country, however, utilities employed relative cheap fuel that powered older and largely depreciated power plants.

Big Industrial Customers want Lower-cost Power

Industrial customers typically use large amounts of power, and their rates usually have been lower than for residential customers. Nevertheless, in California and New England, big industrial users paid more than 7 cents per kwh in 1995 on average. In Nevada, however, rates averaged between 5 and 7 cents per kwh. Meanwhile, some low cost states, such as those in the Pacific Northwest, which drew much power from flowing water rather than fossil fuel, and in states that had ready access to cheap coal, rates dropped to between 2.8 and 5 cents per kwh. Imagine how a California industrial customer, paying more than 7 cents per kwh would have liked to obtain power from a company just across the border in Oregon, where rates were half that rate! Yet, under regulation, California customers could not directly buy the Oregon power. No wonder large industrial users are among the most eager to see regulatory restraints lifted so they can have access to cheaper electricity around the country.

Other Parties Sought Competition Too

Other parties also see advantages in allowing competition between suppliers and between utilities and generators in various states. One such group includes the independent power producers, those generators empowered by the Public Utilites Regulatory Policy Act or by the Energy Policy Act who set up business outside the traditional utility system. They feel they could get better prices for their electricity if they had the opportunity to sell to a larger number of customers, both near and far.

And, under the right conditions, environmental and consumer groups also look forward to competition. Generators that use renewable resources or those the use natural gas--a fuel which burns more cleanly than coal or oil--would also have a larger potential market if traditional rate regulation were relaxed. Even residential customers could look forward to lower rates if they could attract low-cost providers to sell power to their service areas.

Opponents of Utility Competition

High-cost utility companies with "Stranded Assets"

Of course, not everyone likes the prospect of increased competition. A large number of regulated utilities, especially those in high-cost states, for example, fear the prospect of competition, largely because they still own expensive assets that will not allow them to sell electricity as cheaply as new entrants into the business. For example, a company that operates an expensive nuclear power plant would need to charge higher rates--to recover the costs--than would an exempt wholesale generator that buys an inexpensive gas turbine-generator and uses cheap natural gas.

According to these opponents of competition, regulated utilities would be holding "stranded costs" due to their purchase of assets (such as power plants and long-term contracts with independents) made in a formerly regulated environment, when they had an obligation to serve all customers. In a competitive business, that obligation would be waived, but the companies would still be responsible for paying off expensive power plants acquired earlier. If no compensation is made for these stranded costs, they argue, there could be no "level playing field" upon which all parties competed fairly.

Residential Consumers

At the same time, some consumer groups fear that competition would short-change the small residential customer. On one hand, the promise of competitors knocking on the doors (or calling on the phone at dinner time) and offering new rates has appeal. After all, a similar situation occurred when telecommunications services underwent deregulation, leading to generally lower long-distance telephone rates.

But in the electricity business, would there be enough electrons to go around to all users? Since there are just so many generating plants in the country, maybe the low-cost providers would compete primarily to obtain contracts with the largest and easiest-to-serve industrial customers. Individual residential customers use much less power than industrials, and they would have to be contacted individually, thus raising the cost of doing business with them. As a result, competition also raises the specter of residential rates increasing because all the cheap producers might sell their power to large users. Only the high-cost producers would remain to serve residential customers.