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Restructuring Task Force Reports

  The Kentucky Special Task Force on Electricity Restructuring this summer received its first interim report. The report was prepared by the task force’s consultant, Resource Data International of Boulder, Colorado, and by the staff of the Kentucky Legislative Research Council. The analysis will be used for discussion, and probably debate, in the next few months as the task force considers what policies to recommend on the issue of electric utility restructuring. One concluding comment in the report is worth special emphasis: “Much uncertainty exists about what could influence future prices and how the deregulated market will unfold. For these reasons, the results of this analysis are intended only as a policy guide and not as a confident prediction about what future electricity prices in Kentucky will be.” Here are other excerpts from that report:

  In 1996, New Hampshire, California, and Rhode Island passed laws permitting retail competition. Since then, 20 states have taken steps to allow consumers to choose their electric supplier.

Unlike the higher-cost states that were among the first to restructure, Kentucky currently enjoys some of the lowest-cost power in the nation.

  The Kentucky Public Service Commission sets rates for the five investor-owned utilities in Kentucky as well as 22 cooperatives.
The Tennessee Valley Authority sets rates for the five distribution cooperatives in TVA’s territory.

  If the restructured electricity market is open to competition, the price of electricity will not be determined under (the current) rate of return regime. Rather, price will be determined by the supply of and demand for electricity.

Deregulated rates

  This analysis indicates that in the short run the marginal cost of electricity in a restructured market will be lower than electricity prices determined under regulation. In the long run, however, prices determined by regulation will be the same as or slightly lower than the deregulated rate. This is because there currently is excess capacity in the market. By 2002, demand growth will have absorbed all excess capacity and prices will rise to a level that is high enough to support new gas-fired power plant additions.

  By 2009 the forecast regulated rates in Kentucky are slightly lower than the forecast deregulated rate.

Urban-rural differences?

  Distribution costs can be higher in rural areas because many more miles of lines must be built than need to be built in an urban area to serve the same number of customers. While it is true that distribution rates can be higher in rural areas, those rates will not differ in a regulated or a deregulated market.

  One additional issue is whether competitive power suppliers will compete to equal degrees in urban and rural markets. If an equal degree of competition does not develop, it is possible that rural customers may pay a higher mark-up on the wholesale price of power. There is little evidence from competitive electricity markets that can be used to predict whether the level of competition will vary. Therefore, (the researchers) analyzed the level of competition as a function of the economics of the retail supply business.

  Based on the economics, it does not appear likely that there will be differences in costs (of competing for customers) between urban and rural areas. The cost of calling people at home to market electricity supplies does not differ if the customer is in an urban or rural area.

Key findings and uncertainties

  Under most scenarios the average regulated rate in Kentucky is expected to be very similar to the average deregulated rate.

  The analysis reveals two key findings. First, customers in Kentucky on average may see price reductions from electric restructuring, if excess capacity (that is, more supply than demand) exists in the market. Second, if excess capacity does not exist, it is likely that over the long term some Kentucky consumers will benefit and others will not.

  There are many issues that could affect electricity prices, which are not addressed in this analysis, such as market power, the impact of different pricing structures for transmission, possible changes in the cost of capital, and the imposition of transition costs, including stranded costs (the costs of power plants that are no longer
needed).

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