Deregulation Basics

What IS electric utility deregulation (or restructuring)?

Until the last few years electric utilities
in the United States were “regulated monopolies.” “Monopolies”
means that if you want electricity, there’s only one company to buy from in your
area. “Regulated” means a government agency sets the electric rates.
In Kentucky that agency is generally the Public Service Commission (exceptions
are utilities that receive electricity from the Tennessee Valley Authority, which
has its own set of rules, and municipal utilities, which answer to their own local
government).

Under deregulation, the law is changed so customers
can buy electricity from any utility competing for their business. The way it
actually works is that customers still receive their electricity from their local
utility, but they can choose who produces their electricity-very much the way
all your telephone service comes through your local phone company, but you choose
your long-distance provider.

Deregulation is a misleading term, because it
actually replaces one set of rules with another set of rules. “Restructuring”
more precisely describes how the industry is changed.

How does deregulation, or restructuring, happen?

Deregulation requires a state to change
its laws governing electric utilities, and 24 states have done so (deregulation
for TVA utilities would require a change in federal law).

Utilities were originally set up as monopolies
to avoid having several sets of power poles along every street. But that’s no
longer necessary for competition, because of rules that require utilities to
let other utilities use their lines for a fee-much the way AT&T and Sprint
can use the same phone line.

Why is deregulation being considered?

Several reasons:

• People like to have choices, and being able to shop among producers of electricity
  sounds better than having to buy from just the one utility in your area;
• Some experts believe that electric rates, service, and innovation would
  improve if utilities competed with each other;
• Deregulation has been promoted by some industries that feel they could cut
  their large electric bills if utilities across the nation were competing for
  their business;
• Deregulation has been advocated by states where electricity is expensive.
  They hope that competition among utilities across the country would lower
  costs in their state;
• Some people see a chance to make a lot of money from deregulation. For example,
  hundreds of marketing companies that don’t produce electricity themselves
  have been created to arrange sales between power plants and customers, and
  earn a profit in the process.

Sounds good. Why not deregulate?

There are reasons for caution as well:

• Electric service is relatively reasonably priced and is extremely reliable.
  That results from a complex system that could be upset with a leap into the
  unknown, as shown by the recent price increases and power shortages from California’s
  deregulation;
• Competition could produce benefits for the largest customers at the expense
  of smaller customers. Deregulation allows consumers to choose their utility,
  but utilities can also choose not to serve consumers they don’t want. For
  example, in Pennsylvania, which deregulated more than two years ago, consumer-members
  of electric cooperatives still can’t choose another electricity producer,
  because no one else wants to serve them.

What about deregulation in Kentucky?

A state task force has been studying the issue
for three years, and will make a recommendation to the legislature at the end
of this year. Kentucky’s electric cooperatives have their own restructuring
task force studying restructuring, and it will issue a report later this year
as well.

Few Kentucky legislators have expressed much
interest in deregulating utilities, probably because they don’t want to risk
raising Kentucky’s electric rates, which are among the lowest in the nation.

For more information you can use a computer
and the Internet to visit the Web site of the Kentucky Association of Electric
Cooperatives at www.kaec.org.

-Paul Wesslund