Competition in Nevada’s Power Markets
- Tuesday, May 6, 1997
Like it or not, deregulation of America’s electrical utilities is coming. Closer to home, Nevada’s government will probably address electricity deregulation during the current legislative session.
It remains to be seen whether our lawmakers will actually try to deal with this issue now, or attempt to put it off by commissioning further studies. Either way, electricity deregulation will almost certainly resurface in the next (1999) session.
In a way, the legislature’s apparent hesitation to act is ironic: many state assemblymen and senators have already voiced concern that Nevada will be left behind in a deregulated world. Several neighboring states, including California and Oregon, have already begun to move toward competitive power markets.
In defense of Nevada legislators, it is true that the electricity industry is highly technical and complicated, and that any plans for deregulating this industry must consider many factors. The following is background information on the key issues involved in this debate.
Electrical utilities are for the most part large, vertically-integrated producers who generate, transmit and distribute power to customers for a single, "bundled" price.
Electrical utilities also operate under a "regulatory compact" with state public utility commissions (PUCs) or public service commissions (PSCs). Under a regulatory compact, a utility agrees to serve all customers in its service area and limit its profit to a fixed rate of return. In return, the state PUC grants the utility a geographic monopoly to protect it from competition, and a guarantee that it will remain profitable as long as its decisions are approved by state regulators.
The most significant element of electricity deregulation is the idea of "wheeling." Wheeling, loosely defined, is the purchase of electricity from one utility, which is then transmitted (or "wheeled") to the buyer through the transmission and distribution systems owned by another utility. Wheeling is often used as a buzzword for retail competition, and a parallel can be drawn between wheeling power from a distant producer through the local utility and choosing a long-distance telephone carrier independent from the local telephone company.
What Went Wrong
Industry analysts claim current regulatory policies, most importantly cost-based pricing models, have encouraged waste in the electricity industry — waste that customers are forced to pay for.
Furthermore, critics claim that power buyers are trapped into supporting ideological political agendas, such as so-called "green power" and rate subsidies for older consumers. Deregulation and free-market competition is thought to be the only realistic way to remove unwanted baggage from the existing system.
In order for wheeling to work, the three elements of electricity service must be separated, or "unbundled," into individual components. These cost components are: generation (the production of electricity), transmission (the moving of electricity from one place to another) and distribution (the dispersal of power to end users). Current proposals would remove many of the restrictions placed upon generation, although transmission and distribution functions would remain heavily regulated.
Another important issue in the deregulation debate is what to do with "stranded costs." These costs represent unfavorable power purchase contracts or outdated and inefficient equipment which would have to be written off or expensed down to market value under a competitive environment. These costs could theoretically make a utility uncompetitive and drive it out of business. Utilities want to be able to recover these costs in full because regulators originally approved them. Consumer groups feel that they represent bad choices, and customers should not get the bill. Many states considering de-regulation have decided to allow at least partial recovery of these costs.
Nevada is in good shape for the coming of electrical market competition, although there are differences between the north and the south of the state. The north will likely feel little adverse impact from competition, because Sierra Pacific Power Company has historically done a good job of controlling costs. Nevada Power Company in the south, however, has allowed cross-subsidy of consumer classes and has had difficulty reacting to growth in their service area, meaning that adjustments to competition there will be harsher. On the whole, the coming of electrical competition to Nevada may require additional investment in transmission infrastructure before the full benefits of deregulation can be realized.