Press/Papers
UWUA POSITION PAPER: DEREGULATION and RESTRUCTURING OF THE ELECTRIC UTILITY INDUSTRY
Utility Workers Union of America, AFL-CIO
Position Paper
on
DEREGULATION AND RESTRUCTURING
OF THE
ELECTRIC UTILITY INDUSTRY
Federal and state policy makers are currently faced with the rapidly evolving issue of the restructuring and potential deregulation of the electric utility industry, a sector of the economy of huge importance through its sheer size and its impact on the daily life and livelihood of everyone. Large electricity consumers, frustrated by high rates, are calling for significant change in the industry. Coupled with cost pressures which are leading to significant "downsizing" by utilities, these developments have potential for dramatically impacting the cost, safety and reliability of America’s electric utility industry. If implemented properly, this restructuring and the introduction of added competition may benefit society. If, however, mistakes are made, the consequences are enormous, because of the tremendous importance of electricity to our industrial society and way of life.
One such potential mistake is to assume competition always lower prices. While a market will sometimes produce abundant supplies and low prices, it will also assuredly sometimes produce shortages and high prices. This is the standard business cycle. Although rarely discussed in these times of excess generating capacity, there is no reason to believe that the laws of supply and demand have been repealed.
The potential severity of future shortages and high prices is particularly acute in this industry. It takes several years to find a suitable site, design, fund, permit and build a generation facility. The inevitable, shortages and high prices will last for years before supply can be increased to meet demand.
Thus, the market will function like any other market, sometimes providing abundant supplies and low prices and sometimes suffering from shortages and high prices.
The Utility Workers Union of America (UWUA) represents 50,000 workers at 74 different electric utilities located throughout the United States. UWUA members have an enormous interest in the debate over electric utility industry reform, since their jobs and lives are at stake. At the same time, UWUA members are also consumers and citizens themselves, and they understand the importance to the economy of providing electricity at the lowest price reasonably possible in a safe and reliable fashion.
UWUA members support change in the electric utility industry if it will result in customer benefits. At the same time, UWUA members believe that certain fundamental principles must be followed in any reform of the industry, so that ultimately all consumers will benefit, and so that reliability and price stability of the U.S. electric system is preserved if we change from regulated monopolies to a more competitive system.
SUMMARY — THE BASIC PRINCIPLES OF ELECTRIC UTILITY REFORM
The following tenets must be adhered to in any restructuring of the electric industry
• Provide Benefits for All. The introduction of competition in the industry should proceed only upon a demonstration that all consumers will benefit, not just a few.
• Respect State Prerogatives. Electricity regulation, except that which is clearly of an interstate nature, has always been a subject of state and local control. That shouldn’t be changed, and it is especially inappropriate for the federal government to mandate the introduction of retail competition.
• Make Restructuring Policy a Legislative Matter. The deregulation and restructuring of the electric utility industry represent a significant action with respect to a huge, fundamental part of America’s economy. Fundamental policy changes must be the subject of legislative deliberation and action, with full public input. State Legislatures must become involved and act, and not leave these critical issues to non-elected officials or staff. Legislatures should ensure that any competition that is ordered is fair, complete and that the playing field is level. Once legislation is enacted, implementation should be the province of expert regulators at the State Commissions.
• No Rush to Judgment. Any transition to competition should proceed at a measured and deliberate pace. Numerous examples abound of the mistakes of implementing competitive change too quickly, the most obvious and relevant for the electric industry being PURPA implementation in California and New York’s misguided 6 cent law, actions which have badly harmed consumers.
• Protect Worker and Public Safety. Economic change must not compromise worker or public safety. Measures and appropriate regulation must remain in place to assure that pressures to cut costs in a competitive market do not adversely affect public and worker safety.
• Provide for Stranded Investments and Stranded Workers. If increased wholesale and retail competition is introduced, provision must be made during the transition to protect the workers and shareholders of utilities who have invested in justifiable reliance on the current regulatory system.
• Preserve Reliability. Although it is now largely taken for granted, the economic value of the reliability of America’s electric system should never be underestimated. The transition to competition must not go forward without assurances that the reliability of our electric system will be unimpaired.
• Preserve Environmental and Social Protections. Environmental and social programs that have been provided through the electric utility industry should be protected and provided for in any transition.
• Protect the Value of the Existing Investments in Generation. America’s utilities own and operate a significant number of nuclear and fossil-fueled power plants which can and should continue to provide electricity on a cost effective basis. Customers will receive no benefit if these plants are shut down and prices rise to pay for new plants. • Encourage Appropriate Corporate Structures. Existing utility companies need not be broken up or dismantled to insure that competition can exist and be fair. At the same time, combinations or mergers of utilities must be examined closely to assure that service will not be compromised nor undue market power created and exercised.
• Price Stability. It makes little sense to restructure the industry if customers are not going to receive benefits. Those benefits must be in two forms - high quality service and low prices. If the restructured industry is not going to produce lower prices, then we question the wisdom of undertaking the restructure.
DISCUSSION I. Benefits for all Competition in the electricity industry has been spurred by pressure from large consumers. In many cases, this has led to special discounts or special rates being granted to such customers. A significant danger exists that competition could result in these large industrial, commercial, and agricultural customers, often multinational businesses, receiving lower rates, with the remaining customers -- small business, family farm and residential customers -- having higher rates as a result. Thus, it is critical that legislators and regulators examine any and all proposals for electricity reform to assure that all consumers will receive price benefits.
This need not mean that all consumers will benefit equally, nor that efforts should not be made to lower rates for large businesses. However, many studies show that small businesses are producing most of the job growth in our economy, while large businesses are reducing employment. It will be wrong to produce benefits for large corporations if small job-producing companies have to pay for these benefits. When special programs are created for selected customers, they must be above-board and open to public scrutiny, and the job-producing claims and records of the recipients must be closely inspected.
II. Respect State Prerogatives The regulation of the electricity markets has long been the subject of federal-state partnership, with states being responsible for local retail regulation. That should not change. States have the requisite local knowledge of the many complex factors which affect the provision of electricity within their borders. There is no federal "one size fits all" plan which can accommodate the diverse interests of the various states in restructuring the industry; some will want to experiment with different methods, some will go faster than others, and some will develop innovative ways to reach their goals. This is as it should be, and is consistent with the underlying nature of our federal system and the "new federalism" being espoused for other programs. In an era where most are calling for less federal intervention, it is ironic that large businesses would call for divesting the states of an area where they have traditionally exercised jurisdiction.
While the threat of jurisdictional confusion and overlap may cause some uncertainty in electricity regulation, that condition has been with us since the 1930's. To divest the states of power by making the federal government wholly responsible for electricity regulation is an unwanted response.
III. Restructuring Policy Is a Legislative Issue The electric utility industry is the most important industry in our economy. Its sheer size and huge capital investment qualify it as such, but even more important is the unique and vital nature of the product, which every consumer and business uses, and without which 20th Century society could not function. Electric power is simply too critical to our economy to change dramatically without significant legislative debate and decision by elected officials. Put simply, the State Legislatures should be answerable for the deregulation and restructuring of this industry and the sorting out of the priority of interests which must be established. The role for regulators is to implement those legislative policies once adopted.
IV. There’s no Need to Rush Too often, those who call for deliberation in considering massive change are labeled obstructionist. As noted above, the UWUA recognizes that competition may produce benefits. However, in implementing change, speed is not always desirable. In the 1960's and 1970's nuclear power was embraced by industry and government, and the rush to build large nuclear plants was never slowed down to consider the economic risks. After PURPA was enacted, some states went beyond what PURPA intended -- their haste has resulted in serious long term problems resulting from excessive high cost independent power purchases. The intent of the Act was perverted by profiteers who exploited gaping loopholes in its implementation. The brokers and middlemen are just waiting to do the same thing with direct access.
In spite of the problems of the present system, America enjoys electricity prices which are among the lowest in the world, so there is no short term competitive emergency which must be addressed on the national level. In fact, the risks of acting too hastily are greater. Legislators and policy makers should proceed with restructuring and deregulation, but should do so cautiously, learning as they go along, fixing mistakes before they become problems, and building upon demonstrated successes. Time will be the enemy of deregulation if action is taken too swiftly and any benefits of change are wiped out by policy errors.
V. Stranded Investments Should be Provided For American utilities and their employees have been partners to a compact whereby they were responsible for building and operating an integrated system to provide electricity on demand and in return were promised the opportunity to earn a reasonable return on their investments. If a transition occurs to a competitive system where that compact may no longer apply, those who invested in reliance on that compact are entitled to a return of their investments, which may otherwise be rendered worthless, or "stranded" by the change. Stranded assets are more than just facilities and capital - if facilities are rendered uncompetitive by the transition, the workers who invested their careers based on that fundamental regulatory compact are stranded as well.
Simply buying out those workers and those investors is not in and of itself an adequate solution (a paycheck without work is a poor substitute for productive, well-compensated work). The disposition of stranded cost payments is equally important to local economic stability and to society in general. If investors and companies simply take the dollars they receive from ratepayers and close down facilities or institute massive employee layoffs, workers, then competition will have failed, because the harm will outweigh any benefit from projected lower electric prices. Consideration should be given to linking recovery of stranded investment to commitments to combined operation and facility modernization. Any legislation developed must account for and adequately compensate the "sweat investment" of utility workers within the industry. Employees' life- long career service within the regulated structure has earned them equal consideration with all classes of utility investors. Deregulation or restructuring must be designed with the lessons learned from similar changes in the airline, trucking and recently, the telecommunications industries. The profit incentive that encourages wholesale downsizing must be removed from the process and replaced with rewards for companies designing employee retention and infraindustry retraining options.
Handled either as a component of the Stranded Investment plan or as a free-standing program, the stranded sweat investment of utility workers can be addressed by: strengthened collective bargaining guidelines; mandated severance and extended unemployment benefits similar to 13C protection in the transportation industry; dedicated retraining and job retention funding; and a priority hiring requirement for generating companies doing business with any federal, state or local governmental entities.
VI. Reliability of the Electric System Must be Preserved Great care must be taken in any restructuring of the industry to make certain that reliability is not impaired. The adverse consequences of mistaken action in deregulating the industry are huge. Businesses which cannot count on reliable electricity will shut down or relocate much more quickly than if rates are a little too high, or they will incur added cost through lost production and their own efforts to correct for a less reliable system. The concern here is not just outages, but subtle changes such as frequency variations that can adversely affect the operation of computers. A potential temptation will be created to cut costs by eliminating increments of maintenance or equipment. Society may not face the consequences of such decisions until just at the time the system is under the greatest strain--the coldest day of winter in upstate New York or the hottest day of summer in Phoenix.
Competition will place cost pressures on electricity providers, and key components of the system, such as the ability to restore service after natural disasters, could be among the first areas to suffer. Provision of an integrated system such as the maintenance of system reserves, spinning reserves etc. may be dramatically challenged in the transition to competition.
The tremendously costly consequences of system wide failures in an urban society have been amply demonstrated during the rare blackouts of the past 30 years. Any transition to competition must include programs and plans to preserve the elements of the current system which protect reliability. Quality of service requirements will need to be provided for and enforced.
VII. Price Stability Proponents of competition point to the "benefits of competition" as a justification for the industry restructure that they propose. The major benefit to which they point is "choice." It is axiomatic that, all other things being equal, customers will prefer having choices to not having them. However, if the "price" of choice is higher electric prices and lower quality of service, then the choice "benefit" will be no benefit at all. Any plan to restructure the industry must be accompanied by strong mechanisms to ensure that prices are stable and low in the new industry.
VIII. Worker and Public Safety Must be Protected The production, transmission and distribution of electricity has inherent risks, which regulation and trained workers have helped minimize in the past. The current system provides measures which protect workers and the public. Those protections must in no way be weakened in the future. Market competition could lead to cost pressures which threaten basic safety of workers and the public; continued regulation of these aspects must be provided for and provisions made for adequate funding.
The airline deregulation process has proceeded notwithstanding continued regulation of airline safety. At the same time, the dangers of inadequate funding for safety and regulatory systems can be seen in the frequent disruptions of travel due to faulty air traffic control computer systems. These difficulties underscore the basic need for adequately funded, rigorous regulation of all aspects of the safe provision of electricity.
IX. Environmental and Social Protection The electric utility industry has been in the forefront of insuring a clean environment and in providing for programs which benefit society. Again, as costs are cut in a more competitive environment, it will no doubt be argued that many of these programs are "too expensive" or can be provided for elsewhere in the market. In fact, they should and must be protected to the maximum extent possible. In addition, companies which are environmentally responsible should not be forced to pay a competitive penalty for being so. All participants in the market place need to share equally in the provision and funding of such activities.
- X. Recognize the Value of Existing Plants America’s electric utilities, with the active support and encouragement of regulators, have invested over $130 billion in nuclear power plants. Even more is invested in fossil plants. Whatever the wisdom of those investments in hindsight, they should not merely be thrown away as a result of competition. If these plants are precluded from competing simply because of the need to fully recover their capital costs, both investors and society will lose, to say nothing of the huge economic loss in taxes, jobs, and spinoff benefits to the many communities in which they are located.
It will be cheaper for ratepayers to continue to operate older plants, than to shut them down and build expensive new capacity, or not build, thereby creating a shortage and driving up prices. A challenge which must be met is to keep these existing plants functioning in a competitive environment, and mechanisms must be adopted in the transition to a more competitive system which will recognize the unique nature of these plants and their potential benefits. Plants should only operate when their operating costs are competitive. Every provision should be made so that if they are competitive, they remain operating and producing electricity rather than being decommissioned simply to build newer plants.
XI. Corporate Structures Some argue that the traditional vertically integrated utility structure is totally incompatible with a competitive system, and that therefore the only solution is to break up existing companies and sell off the pieces. While such proposals may delight investment bankers (at whose expense?), they are unnecessary to achieve competition. What will be necessary is adoption and implementation of policies, such as the establishment of Independent System Operators, to assure that control of one segment of the industry does not enhance market power in another. Mandated divestiture serves no one; other mechanisms, including increased antitrust scrutiny, can function well to assure that corporate relationships do not impede the operation of beneficial competition. At the same time, change in the industry will lead to increased pressures for combination and merger. Little attention is being given to the potential for abuse as big utilities get bigger. Enhanced scrutiny and tougher regulation of mergers to avoid the creation of behemoths which can exercise and abuse market power will be vital.
Conclusion
The electric utility industry has already dramatically changed in the last several years, and further transition and change will no doubt occur. The workers of this industry are, of course, challenged by this change but do not reject it if it occurs properly. The industry must change and be changed in a manner which will provide overall economic benefits for society. Adherence to the principles and positions outlined above can help assure that the transition in this industry benefits all, not just a few, and that the general health and welfare of the people is protected and enhanced.
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