The big switch

Nation's Business, Sept, 1997 by James Worsham

Aside from comprehensive federal legislation that would mandate nationwide deregulation, several major hot-button issues are interwoven into the nationwide debate:

Stranded Costs: Many large utilities are concerned about how, in a deregulated market, they could repay mountainous debt incurred in building nuclear-power plants and stay competitive with companies that don't have similar costs. (See "Covering The `Stranded' Costs," on Page 20.)

Environmental Concerns: Competition will increase demand for the cheapest electricity, resulting in pressure to rely more on old coal-fired generating plants in the Midwest, many of which don't meet today's strict clean-air rules. The Clinton administration has adopted tighter clean-air regulations, but there's strong opposition on Capitol Hill and elsewhere. (See Dateline: Washington, on Page 10.)

Public Power. Congress must decide how -- or even whether -- a deregulated market would accommodate federal public-power authorities such as the Bonneville Power Administration, based in Portland, Ore., and the Tennessee Valley Authority, headquartered in Knoxville, as well as municipal power companies, all of which receive special tax treatment.

The electric industry began, of course, with Thomas Alva Edison, who invented the light bulb in 1879 and built the first power station three years later in New York City. The industry and its government overseers have burgeoned since.

Regulation dates back almost a century. Samuel Insull, a top assistant to Edison, convinced the electric industry -- faced with competition from municipal power systems -- that competition was bad for them. Instead, he argued, there should be monopolies, with exclusive service territories, regulated by the states.

In 1907, Wisconsin and New York became the first states to create public utility commissions. By 1921, all states except Delaware had them. Today, all states and the District of Columbia do.

In addition, the U.S. government exercises authority over the electric industry through the Federal Energy Regulatory Commission (FERC) which oversees most interstate transactions in oil, natural gas, and electricity, and the Nuclear Regulatory Commission, which licenses and regulates nuclear plants.

In 1996, the FERC allowed utilities and other power providers to sell electricity on a wholesale basis, at any price, outside their traditional service areas, setting the stage for the coming retail price competition.

While regulation has grown mightily since Insull's time, so has the industry. About 250 of the 3,200 utilities nationwide are investor-owned and provide almost 75 percent of aR the utility-generated electricity used in the United States.

There are about 2,000 state- and locally owned public power systems, which generate about 11 percent of utility-generated power. An additional 9 percent is generated by the 10 federal power systems, including the TVA in the Southeast and Bonneville in the Northwest, and 6 percent comes from rural electric cooperatives -- some of which generate their own power -- that serve about 30 million people.