Electric Utility Restructuring

A Policy Statement Adopted by the House of Delegates, North Carolina Council of Churches , October 28, 1998

Introduction – What is the issue?

North Carolina’s state government is engaged in a debate that is occurring nationwide: should we restructure our electric utilities? This is an extraordinarily complex issue which will affect the daily lives of many people across the state, yet is almost completely unknown outside the halls of the General Assembly.

Understanding this issue, even in the broadest of terms, requires a step backward to look at the big picture of electric power and how we receive it. Currently, electric utilities are monopolies. There is only a single company from whom you can purchase your power, and it controls the entire process of producing and providing electricity. The rates charged are controlled by the government, ensuring that the utilities earn a reasonable profit without taking advantage of their position to overcharge customers.

The work of electricity providers can be broken down into three basic categories. They “generate” power by burning coal, oil, or natural gas; running nuclear plants; or using dams. They “transmit” this power over high voltage lines from the point where it is generated to the distribution network. Finally, they “distribute” the power, transforming the high voltage electricity into usable voltages, allowing all customers to access it, and charging them based on their use.

Proponents of electric utility restructuring want to deregulate the generation part of that equation. In other words, you could purchase your power from whomever you want, but there would still only be a single system of getting that power to you. To help with your mental image, you might want to consider the break-up of AT&T in the ’80s: Although you still had a single local service provider that remained regulated, you could purchase long distance service from any one of a number of different outlets. The same would be true of electricity restructuring.

Interests – Who is involved?

The primary proponents of utility restructuring are large industrial and commercial users of electricity. These interests use massive amounts of electricity, and a small difference in the per unit cost of electricity can make a large difference in their profitability. These users will clearly benefit from competition, as service providers compete to acquire and keep these large accounts.

Additional proponents of utility restructuring are independent energy providers. These providers need not be located in North Carolina. Power can be provided from anywhere, using the national transmission and distribution system already in place. It costs more to send power long distances, but it can still be profitable if the cost to generate the power is significantly higher where it is being sold.

North Carolina’s electric market is dominated by a few organizations. Duke Power and Carolina Power & Light are the two largest “investor-owned” utilities. They are owned by stockholders, who are often drawn by the guaranteed rate of return offered as a result of governmental regulation of the marketplace.

ElectriCities is a utility made up of some of the medium-sized municipalities across the state. It is owned by those entities and provides the power for citizens living within them. Additionally, there are a number of “electric co-ops,” which are collections of non-urban users that band together to buy power on the wholesale market.

Finally, there is the public. Electricity is an integral part of the lives of most if not all North Carolinians. When we turn on the switch we expect the power to come on and stay on. Although most of us accept the fact we may lose power during a storm, we also fully expect it to be restored quickly. We also expect to pay a reasonable rate for our electricity. All of this is taken for granted.

Issues – What are the questions?

The primary issue complicating the debate on utility restructuring is determining who will pay for “stranded costs.” This term refers to investments that would not be competitive in an open market. In North Carolina, these stranded costs are related almost entirely to nuclear power plants built in the 1970s and are estimated to total $6-8 billion dollars.

Although nuclear plants can be operated at a lower cost per unit of electricity generated, they were extremely expensive to build, and debt service drives their costs skyward. In the current regulated market, power companies are permitted to recoup these expenses over a period of decades through the rates they are allowed to charge. But, in an unregulated market, companies with fewer stranded costs might be able to sell their electricity at a lower price than companies with higher stranded costs. This could give the low-stranded-cost companies an unfair advantage and price the others out of business.

The various utilities have varying amounts of stranded costs. CP&L is estimated to have about $1 billion, while Duke Power has very few, if any, stranded costs. On the other hand, ElectriCities has close to $6 billion in debt, most of which is stranded cost. Why the disparity? Most of CP&L’s debt comes from the Shearon Harris 1 plant (and the never-built Shearon Harris 2) outside of Raleigh. On the other hand, Duke Power managed to avoid stranded costs by selling the generating capacity (and the associated debt) of their major nuclear plants to ElectriCities in the early 1980s. The reasons behind this are complex but can be summarized: Duke needed money, the cities were looking for their own generating capacity, and they could issue tax-free bonds to finance their purchases. All estimates at the time pointed to skyrocketing oil and gas prices, and the deal seemed prudent to both parties and to state regulators.

There are three basic ways of paying for stranded costs. The first is simply to require that the companies absorb them, passing on the debt to their shareholders. While this is possible, it is unattractive for a few reasons. This method will punish the holders of CP&L stock and quite possibly lead to a serious decline for that company. Of more serious consequence is ElectriCities. The shareholders of that entity are municipalities, and it is not good public policy to allow fifty cities to default on their bonds or to go bankrupt.

The other two choices are closely related. The General Assembly can agree that the state will pay off some portion of the stranded costs. In other words, taxpayers will become responsible for these non-competitive investments. The final option is having ratepayers finance stranded costs. This is similar to the previous option, in that most individuals and corporations are both taxpayers and ratepayers. However, the ratepayer model is usually tied to electricity usage, in the form of a surcharge on the “per kilowatt” rate. This is the form adopted by most states that have restructured their electric utilities.

Impacts – What are the effects of utility restructuring?

Utility restructuring is certain to have an effect on price. As mentioned previously, large users expect that a deregulated marketplace will serve to decrease their costs. A possible consequence of this may be an attempt to recoup profits by charging residential and small commercial users higher rates. Additionally, there is concern that users in hard to reach areas will be charged higher rates because of the extra costs associated with providing them with power.

Restructuring could also have a significant impact on “universal service”. For most people in our society, electricity is now as much a necessity as are food and shelter. At least from the time of the New Deal, an important purpose for regulating electric utilities has been to guarantee that everyone, regardless of income or geographic location, has access. Current regulations require power companies to serve everyone on an equal basis, to restrict cut-offs during winter, and to endeavor to keep residential rates affordable. The fear is that a deregulated industry might engage in “cherry-picking,” with companies selling power only to more profitable customers. Those who could be hurt include people who live in remote places (where it is more expensive to provide service) and people in lower-income neighborhoods (where consumption per customer is lower and bills may not be paid as faithfully).

Environmental impacts are also associated with utility restructuring. Due to a provision of the Clean Air Act, older coal plants (primarily in the Midwest) do not have to meet current environmental standards. This cuts down on their operating costs, making them attractive in a competitive market. Due to declines in population growth and manufacturing near these plants, they have unused generating capacity available. Utility restructuring may provide an incentive for bringing them to full capacity, exacerbating their environmental impacts.

Additionally, there is concern that research and development for cleaner, more efficient power will be cut back in an attempt to cut short-term costs. Under the current regulated system, the guaranteed profit provides a comfortable margin, allowing utilities to invest in developing technologies that could provide a profit in the future. Without this guarantee, there has already been a discernible drop in research, although many technologies, including solar power, are closer to being mature in a competitive market.

Another impact of restructuring is a differentiated marketplace. In states that have adopted restructuring, customers have the option of selecting the type of power they wish to buy. Many people have shown that they will purchase environmentally sensitive power at a premium cost, if it is an option. This requires disclosure of the type of power generated in an easy to understand fashion. A potential dark side of a differentiated marketplace is in service levels. Although it has not been implemented anywhere, restructuring could lead to an agreement by the customer to be the first to lose power in the event of high demand. This could lead to serious consequences for low-income consumers who are forced to choose the least expensive rate and could suffer during the high demand days of summer.

An Issue for People of Faith

Electricity restructuring may, on first blush, seem to be an unusual issue to be taken up by people of faith. But, for at least three reasons, it is an important issue for us.

First, electricity restructuring raises a host of justice issues:

• whether rates for small consumers will rise so that power companies can compete for large consumers.
• whether universal service will be preserved.
• whether customers who are poor will be forced to accept reductions in service in return for affordable rates.
• whether deregulation will lead to higher costs, as it has in other industries.
• whether poor people’s electricity costs will rise, either in the short- or long-term.
• whether investors or customers or taxpayers will pay for stranded costs.
• whether all corporate entities will be treated fairly in determining a solution to the stranded costs issue.

Second, as people of faith, we have a responsibility to help care for God’s earth. Electricity restructuring has the potential for great harm to the environment by focusing attention on short-term financial issues while ignoring long-term matters. But it also offers promise for good if, for example, businesses which want to sell electricity in North Carolina were required to meet certain environmental standards as a condition of doing business here.

Third, our churches are all consumers of electricity. Any change in costs, availability, or reliability could have a direct impact on the ministry of our churches.

Recommendations

We are not convinced that electricity restructuring would be good for people in our state. Therefore, we neither support nor oppose the general concept of restructuring. However, if restructuring is to take place, we support the following principles, which are intended to insure fair treatment for all and to protect God’s earth for ourselves and future generations.

Principle 1 – All customers must be guaranteed safe, reliable, affordable electric service at the lowest long-term cost to society and the environment.

Consumer Protection

• Public oversight of the electric transmission, distribution, and generation systems must continue to insure safe, reliable, and environmentally sound electric service.
• Strong consumer protection must be implemented to prevent deceptive marketing and discriminatory practices and to insure affordable service for all customers.
• In addition to price, information about the energy source mix and the pollution produced per unit must be provided in a standardized format, to permit customers to make an informed choice of their electricity provider.
• Consumer guarantees of service must continue regardless of a consumer’s income or location. This includes shutoff protection and other programs to meet the special needs of low-income customers.

Environmental and Societal Protection

• Electric service at the lowest long term cost to society and the environment means more than providing the lowest per unit price for electricity.
• Societal and environmental costs and savings caused by the electric utility industry should be included in the price of electricity whenever possible. These costs include air and water pollution; health care costs caused by the production, transportation, and combustion of fuels; expenditures on national defense to protect foreign fuel sources; and the loss of income and jobs in North Carolina for fuels and electricity bought from outside the state.
• Power companies which are permitted to sell electricity in North Carolina should be required to make reinvestments in the communities in which they have customers.

Principle 2 – Benefits and costs of restructuring must be spread fairly to all customers.

All Consumers Share Benefits
All customers should have a reasonable likelihood of lower utility bills from restructuring. Costs of restructuring, especially “stranded costs,” should be allocated fairly to all customers and investors only after a complete and open debate about what qualifies as costs of restructuring. This must include a discussion of who is responsible for the cost and whether ratepayers, utility investors, or taxpayers separately or together should pay for them.

Fair Access and Rates
Rates for residential and small commercial customers must not be used to subsidize rates for large users. Small customers should be able to band together to purchase power and better participate in the competitive market.

Principle 3 – Restructuring must improve the environment and move North Carolina on a sustainable energy path.

Environmental Quality

• Environmental quality must be improved by restructuring.
• Restructuring must not allow older, more polluting power plants that operate at less than current environmental standards to sell electricity in North Carolina.
• There must be continued public regulation of the siting of new generating plants, major dams, and major transmission lines.

Renewables and Efficiency

• The future health of our environment depends on society making a transition from a fossil fuel and nuclear powered economy to a more efficient, non-polluting, sustainable energy economy using solar, wind, hydro, hydrogen, biomass, and other renewable energy sources.
• In 1992, North Carolina’s Energy Policy Committee established a goal to have 20% of NC energy produced by renewable technologies by 2010, a goal that restructuring should help us to attain.

Tools to Provide Environmental and Low-Income Funds

• A “public benefit fund” could be created through a per unit charge on all electricity sold in North Carolina. These funds would be used to provide money for low-income assistance in North Carolina and to finance energy efficiency and renewable energy projects. Renewable and energy efficiency projects will create jobs and retain energy dollars in North Carolina by promoting local energy producing industries.
• A “renewable portfolio” standard would require all retailers of electricity in North Carolina to have a percentage of their electricity generated by renewable technologies. This would promote the commercialization of renewable energy technologies.

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