“… the best arrangement for utilizing market forces in electricity … would be the spontaneous, voluntary, indigenous, bottom-up approach for the development of market relationships rather than government mandates.”
“The proper aim of consumer groups and free market advocates should be not to force utilities to allow others to use their private property but to reduce the impediments to competition between existing and new suppliers.”
The prevailing goals sought by those seeking reform in the power market are mandated access and common carriage for state regulated utilities. However, that is not the best arrangement for utilizing market forces in electricity. Far better would be the spontaneous, voluntary, indigenous, bottom-up approach for the development of market relationships rather than government mandates.
The state of Georgia has a system that can be such a free, prosperous market. Ninety different utilities in the state share the high voltage system in common. There is active and vigorous competition for new customers with a connected load of 900 kilowatts or more in most of the territory. Just drop any minimum load requirements and allow the choice of serving utility to be perpetual instead of a one-time choice.
This sharing of transmission facilities has precedent with petroleum pipelines. Retail gasoline and diesel is very competitive, behind which are transport sharing arrangements for intrastate and interstate pipelines. It was in their common interest to avoid duplicate, single-owner pipelines. This came about without regulation in contrast to the interstate natural gas pipelines that developed under regulation.
The development of the Georgia transmission sharing system has a unique history and shows how the lack of government interference allows beneficial market relationships to develop. By the 1970s consortium of electric membership cooperatives and municipal electric systems already had partial ownership in certain generating plants with Georgia Power.
But Georgia Power began construction of a nuclear plant and soon ran into serious cost overruns. At that time the doctrine of “used and useful” was in effect for allowing capital recovery of new generating assets. Despite some efforts by the state regulatory agency to provide some relief, the utility faced bankruptcy. In a period when interest rates were high Georgia Power sought partnerships with the EMCs and Munies that had access to low-interest borrowing to bailout their problem. The potential partners had some transmission assets and demanded that all transmission be accessible for all the owners of a common system.
This was a negotiated, not mandated, solution to the various problems and the different interests of the parties. This agreement was not ordered by the state regulatory agency or by a legislative directive.
The sharing agreement happened in 1974 when the court-ordered breakup of AT&T included the common mandated carriage by non-owners of the AT&T and “Baby Bells” long distance systems. Unfortunately, this mandated carriage with recovery of stranded assets model was followed in wholesale electricity market.
In Georgia there are 47 municipal power systems. Long ago these utilities attracted cautious big power users by agreeing to allow them to switch to the big investor-owned utility if they found municipal service was unsatisfactory.
The 39 EMCs in the Georgia Power territory (there are three on TVA) have also make the switch option available to large new customers. In fact, a number of customers have indeed exercised this option. The Georgia Public Service Commission in recent years has declared, at Georgia Power’s urging, that such contract provisions are not allowed. However, the court case law which trumps the PSC has yet to be overturned.
Georgia municipalities, like Georgia Power, have a strategy of going long on power generation in hopes of selling extra generation off-system. The wholesale group for municipals has successfully sold their share of current very costly Vogtle nuclear capacity under construction to other utilities in Florida and Alabama for 20 years. This relieves them of collecting capital recovery for the nuclear plant and thereby can offer lower bids for competitive new customers.
Georgia Power, meanwhile, adopted a strategy of building more generation than they needed to sell into the wholesale market. The strategy included building cheaper combined-cycle gas-fired plants in their unregulated sister company, while building risky nuclear capacity under almost certain cost-recovery state regulation. However, the wholesale power market is turning to hourly-priced commodity exchanges, and the long run demand does not look good for Georgia Power who must now try to recover unneeded capacity cost from captive domestic customers.
Meanwhile the EMCs adopted a strategy of being short on capacity and being net buyers from the wholesale market. Unlike the high customer density of the munies and of Georgia Power, the EMCs still have room for growth and are gaining far more new customers than the land-locked, flat-growth competitors. EMCs buy from various wholesale suppliers. Individual EMCs are acting like marketers by, in effect, giving their customers access to the wholesale market, which does not tolerate any nuclear surcharges. The EMCs can beat Georgia Power in competitive situations.
The enabling legislation for transmission sharing and serving customers in other distributor’s territories was sponsored by the utilities themselves. It weakens the exclusive franchisee policies in force throughout the rest of the country. This is a demonstration of what could be the polices of the future.
The proper aim of consumer groups and free market advocates should be not to force utilities to allow others to use their private property but to reduce the impediments to competition between existing and new suppliers. Franchisee territories should be completely abolished, and all customers should have the right to pick and change their electric utility. The government action needed is only to get out of the way and let a freed-up market develop. Abolish state and federal utility regulation along with the enabling legislation. Then, going forward. the best utility public policy is no public policy.
Some may worry about the old utility false warning concerning duplicate wiring all over the place. But it is in the mutual interest of the parties to share facilities, including the last mile distribution wiring.
Let’s say a stubborn utility starts losing customers in a subdivision to a neighboring utility with better rates and policies. At first the aggressor will expand its wiring into the incumbent’s territory. The incumbent soon realizes stranded wiring is being created and realizes they can at least get some recovery by selling what would otherwise be abandoned wiring. Or they can agree to sharing as a means of getting partial revenue instead of nothing.
In Georgia the mere fact that customer choice and utility switching exist, even as limited as it is, has a huge impact on the utility behavior and regulatory policies. Because such options exist, utilities try to treat customers like, well, customers.
That’s a good thing–and a potential benefit to survive the ratebase swelling from projects like Plant Vogtle #3 and #4 and the “green” energy overreach.
———————
Clarkson is founder and president of Resource Supply Management. For subscription to his newsletters, contact him at jclarkson@rsmenergy.com.