A Beginner's Guide to the Politics of Power

Essential Concepts in the Restructing of Electrical Utilities Made Understandable

By Jason H. Barrett, John Dobra, Ph.D.
  • Wednesday, June 3, 1998

Executive Summary 

The deregulation of electrical utilities is coming. Nevada's legislature is likely to address this issue in some fashion during the 1997 session, and return to it in the 1999 session. Many legislators voiced concerns that Nevada will be left behind: several neighboring states, including California and Oregon, have already begun the deregulation process.

Electrical utilities are for the most part large, vertically-integrated producers who generate, transmit and distribute power to customers for a single, "bundled" price. Electricity producers also operate under a "regulatory compact" with state public utility commissions (PUCs). 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 buzz word 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 carrier independent from the local telephone company.

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 non-relevant political agendas, like 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 components are: 1) Generation - the production of electricity, 2) Transmission - the moving of electricity from one place to another, and 3) 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 likely remain heavily regulated.

Another important issue is "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 deregulation, 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 competition to Nevada may require additional investment in transmission infrastructure before the full benefits of deregulation can be realized.

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