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Electric Utilities Brace For New State Rules

Massachusetts is case study of effort to boost competition

NOW that most people are used to choosing their long-distance telephone carriers, they can start thinking about what it would be like to choose their power company.

There's a serious move afoot in the United States to unplug electric utilities from the monopoly status they have held since the 1930s.

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The idea is that customer choice would drive electricity rates down. The same idea led to deregulation of airlines, the trucking industry, and the phone companies.

Power companies in Massachusetts, for example, recently filed bulky deregulation plans at the request of the state Department of Public Utilities (DPU).

The process of public hearings and government-industry give and take is not unique to the Bay State.

Prodded by moves toward electric power deregulation at the federal level, states around the country are moving at various speeds to reform the way power is delivered to homes.

"There's no doubt at all" that deregulation can give individuals and businesses a price break on electricity, says Thomas May, chief executive officer of Boston Edison Company, the region's biggest utility.

But he then offers very a big "However, ...."

"This will involve a very complex change," Mr. May warns. "And when you are dealing with a commodity, and electricity is a commodity, you are dealing with a market mechanism. When markets are out of balance, prices spike up dramatically." The trick will be, he says, to move to a competitive market and maintain a pool of power that is adequate, competitive, and steady.

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If electric power is disrupted in any part of a large system, experts say, it is subject to rapid, sometimes destructive flows, unlike gas flowing in a pipeline, for example.

California is also moving on deregulation, and most states are at least considering it. Experts in Massachusetts say their state has moved further down the deregulation road than other states. The state is expected to decide later this year on how to implement deregulation.

As far back as 1978, federal law began to permit competition in the power industry at the wholesale level. Utilities were told to buy power from businesses that generated renewable power outside of the monopolistic utility sector, and states had to implement the law.

The law was one of several at the time that were geared to help the US recover from the oil-price shock of the early 1970s.

A small but influential private generating industry developed. The Energy Policy Act of 1992 increased the number of suppliers that could generate energy privately. Now there are a host of business interests that want to either sell or buy power on a strictly free-market basis.

For deregulation to reach the consumer, however, each state will have to revamp its control over its own power industry. This is where the debate and action is today.

New England already has a "power pool" system that can be a basis for building a new system for marketing power, May says. Technical mechanisms exist to measure flows of power in and out of the pool, regulate flows, and assign costs and prices.

He sees an analogy between a new power exchange, or pool, and the New York Stock Exchange, a private organization that is largely self-regulated though under the rules of the Securities and Exchange Commission. Many questions - such as who will be allowed in and who can import power from outside the region - need answering.

The power industry now has three main elements, all regulated: generation, long-distance transmission, and local distribution. Industry officials in Massachusetts assume that of the three, only generation will be deregulated. Long-distance, interstate transmission will still be regulated federally, and delivery of electricity to the home - by a local utility - would still be regulated by the state.

Existing utilities will probably become the local utility to deliver power, while competing with new corporate entities in the generation business.

Finally, a batch of middlemen may form - brokers, marketers, service companies - to buy and sell power as a retail product. They will be like the firms that buy and market phone time.

Not everyone agrees with May that the coming wave of competition means cheaper rates for everyone. Various consumer lobbying groups, such as the American Association of Retired Persons and business groups, are watching the process closely.

Boston Edison recommended in its filing with the DPU, which gave initial acceptance, that 1997 be a trial year in which customers could learn about coming changes. One important step will be to devise customer bills that show the cost of power separate from delivery charges.

Some key issues still to be worked out:

How to compensate regulated utilities for "stranded investments" when existing costly plants are quickly put out of business by more-efficient rivals.

Impact on communities that operate their own power plants.

What happens to special rates for low-income people and veterans.

Impact on the environment.

Coordination with other New England states.

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