Regulatory restructuring in the United States

Utilities Policy

Volumn 6, Issue 1, 1997, Pages 21-34

  Perl, Lewis J ^a  

^a NONE

Author keywords

Airlines; Competition; Deregulation; Electricity; Telecommunications

Indexed keywords

AIRLINE INDUSTRY; ELECTRICITY INDUSTRY; INDUSTRIAL POLICY; PUBLIC UTILITY; REGULATORY REFORM; TELECOMMUNICATIONS;

USA;

EID: 0030959809     PISSN: 09571787     EISSN: None     Source Type: Journal    
DOI: 10.1016/S0957-1787(96)00010-0     Document Type: Article

References (33)

1. According to a recent study by NRRI, 14 states had implemented price caps regulation by early 1995, and several more were formally considering price cap plans. Nearly all states are considering some form of alternative regulation. See Vivian Witkind Davis, Breaking Away from Franchises and Rate Cases: A Perspective on the Evolution of State Telecommunications Policy, The National Regulatory Research Institute, NRRI 95-06, February 1995.
2. See Alfred E. Kahn, The Economics of Regulation, MIT Press, Cambridge, MA, 1988, pp. xxxiv-xxxvii.
3. In 1983, prior to divestiture, 93.7% of the households in the US had telephone service. (Federal Communications Commission, Monitoring Report, CC Docket No. 87-339, January, 1992.) Productivity improvements have caused the real price of telephone services to consumers to fall steadily since the 1960s. From 1964 to 1972, the real price declined at an average of 2.4% per year. From 1972 to 1981, the real decline was even faster - 5.7% per year. It is worth noting that this latter period was one of increasing general inflation. (Robert W. Crandall, After the Breakup: US Telecommunications in a More Competitive Era, The Brookings Institution, 1989, pp. 127-128) Crandall points out that service quality was viewed as quite good in the late 1970s and one of the concerns with regard the breakup of AT&T was that this quality would decline. (Ibid., p.121)
4. In 1983, prior to divestiture, 93.7% of the households in the US had telephone service. (Federal Communications Commission, Monitoring Report, CC Docket No. 87-339, January, 1992.) Productivity improvements have caused the real price of telephone services to consumers to fall steadily since the 1960s. From 1964 to 1972, the real price declined at an average of 2.4% per year. From 1972 to 1981, the real decline was even faster - 5.7% per year. It is worth noting that this latter period was one of increasing general inflation. (Robert W. Crandall, After the Breakup: US Telecommunications in a More Competitive Era, The Brookings Institution, 1989, pp. 127-128) Crandall points out that service quality was viewed as quite good in the late 1970s and one of the concerns with regard the breakup of AT&T was that this quality would decline. (Ibid., p.121)
5. The impetus driving the move toward airline deregulation was the wide perception that prices would be significantly lower if the industry were deregulated, rather than concerns about the availability or safety of air travel under the existing industry structure. For a discussion of the move toward deregulation, see John R. Meyer, Clinton V. Oster, JR., Ivor P. Morgan, Benjamin A. Berman and Diane L. Strassmann, Airline Deregulation: The Early Experience, Auburn House Publishing Company, 1981.
6. For example, from 1978 through 1985, residential electricity prices grew at an average annual rate of 9% per year. Over the same period, home heating oil prices grew at an average annual rate of 30% per year. (Energy Information Administration, January 1992.)
7. Industrial electric rates in the US averaged 4.7 cents per kWh in 1994, the fifth lowest of the 17 countries for which OECD provides price comparisons. And countries which have lower prices, such as Canada, typically have ample supplies of low-cost hydro power. In Germany, for example, electric rates averaged 9.2 cents per kWh (in US dollars), in Italy 9.4 cents, and in the UK 6.8 cents per kWh. A similar pattern is seen in residential prices. (Organization for Economic Co-Operation and Development, International Energy Agency, Energy Prices and Taxes, First Quarter, 1995, 1995.
8. Kahn, op. cit., ref 2, Vol.II, pp. 5-9.
9. For a discussion of deregulation in the airline industry, see Steven Morrison, 'The Effects of Airline Deregulation in the United States,' The Keizai Bunseki, No. 143, Vol. III, January, 1996.
10. In the early 1900s there was competition in some cities. However, such competition eroded rapidly as Bell acquired these competing systems. In addition, the public was clearly unhappy with the inefficiencies resulting from this competition: "Competition resulted in duplication of investment, the necessity for the businessman maintaining two or more telephones, economic waste to the company, increased burden, and consequent continuous loss to the subscriber. The policy of the state was to eliminate as far as possible, duplication." (Richard H. K. Victor 'AT&T and the public good: regulation and competition in telecommunications, 1910-1987,' in Stephen P. Bradley and Jerry A. Hausman, eds Future Competition in Telecommunications, Harvard Business School Press, 1989.
11. Local service revenues in 1984 were $30.5 billion and toll revenues were $46.6 billion. (Federal Communications Commission, Statsitics of Communications Common Carriers, 1990, 1991, Tables 7.1, 7.3.)
12. For an overview of economy of scale studies, see Frank Kiss, Econometric Models of Telecommunications Firms: A Survey, Bell Communications Research, October 28, 1986.
13. Currently, with competition becoming increasingly viable in local markets, it seems less clear that vertical deintegration is a necessary prerequisite to effective competition in telecommunications markets.
14. The FCC and local regulators opposed the entry of new long-distance carriers until they were circumvented by MCI in court. AT&T argued, and the FCC apparently agreed, that allowing competitors to "cream-skim" would pose a threat to the goal of universal service. (MCI Telecommunications Corp. v. Federal Communications Commission, 561 F. 2d 365, DC Cir. 1977 cited in Robert W. Crandall and Kenneth Flamm, eds., Changing the Rules: Technological Change International Competition, and Regulation in Communications, The Brookings Institution, 1989, pp. 127-128.
15. For a description of the extent of this over building see Edward Kahn, 'Privatization and deregulation in the US electricity power sector', The Keizai Bunseki, Vol II, No. 142, December 1995.
16. The costs of new generation are based on the capital and operating costs of a gas-fired combined-cycle unit. Capital costs and non-fuel operating and maintenance costs, which are about 1.5 cents per kWh, are based on estimates made by EPRI (Electric Power Research Institute, 1993.) Fuel costs, which are about 2.5 cents per kWh, are based on the long-term forecast made by the Gas Research Institute. (Gas Research Institute, Baseline Projection Data Book, 1995 Edition.)
17. In the mid-1970s, Congressional hearings and economic studies, such as one done by the General Accounting Office in 1977 which showed that CAB regulation costs American passengers nearly $2 billion per year in excess costs, exerted great pressure on the CAB to move toward regulatory reform. Consumer groups such as Common Cause and Ralph Nader also lobbied heavily for reforms. In addition, airlines such as Pan Am began to support unrestricted route entry in the hope of using their excess capacity. (Source: Meyer et al., op. cit., ref 4.)
18. Robert Harris, 'Competition and public policies in telecommunications: a survey of US developments,' The Keizai Bunseki, No 141, Vol I, December, 1995.
19. AT&T presented voluminous evidence in court that protective devices would be needed to protect its equipment from customer premises equipment provided by its competitors. Even at the time this evidence was presented, however, there were people within AT&T who believed such devices were unnecessary. (Crandall et al., op. cit., ref 13).
20. Even in airlines there was substantial pressure for regulatory reform by potential entrants before reform ultimately occurred under the stewardship of Alfred Kahn. Companies like World Airways and Southwest in the US and Freddie Laker in the UK for years before that were knocking on the doors of the CAB and the corresponding British agency and finding their entry blocked by regulators.
21. In a recent study, Oak Ridge National Laboratory estimated that stranded costs could range from $69 billion to $99 billion, and they cite a range of estimates by others from $10 billion to $500 billion. By comparison, the current market value of utility stock is about $200 billion. See Lester Baxter and Eric Hirst, Estimating Potential Stranded Commitments for US Investor Owned Electric Utilities, Oak Ridge National Laboratory, ORNL/CON-406, January 1995.
22. See, for example, the chapter on interexchange competition in Crandall and Flamm, op. cit., ref 13.
23. See, for example Larry Ruff, "Stop wheeling and start dealing: resolving the transmission dilemma", The Electricity Journal, Vol. 7, No. 5, June 1994, pp. 24-43 and Richard Pierce, 'The advantages of deintegrating the electricity industry,' The Electricity Journal, Vol. 7, No. 9, November 1994, pp.16-21.
24. See, for example Larry Ruff, "Stop wheeling and start dealing: resolving the transmission dilemma", The Electricity Journal, Vol. 7, No. 5, June 1994, pp. 24-43 and Richard Pierce, 'The advantages of deintegrating the electricity industry,' The Electricity Journal, Vol. 7, No. 9, November 1994, pp.16-21.
25. See Morrison, op. cit., ref 8.
26. It is not clear, however that this competitive entry is efficient. It may simply represent a response to the remaining price/cost disparities which persist in these markets.
27. As long as the regulated utility is prepared to construct capacity at regulated rates of return, it seems unlikely that actual avoided costs would ever rise high enough to stimulate entry by firms with higher risks and, hence, higher costs of capital. 29 A thorough discussion of FERC and state commission implementation efforts with regard to PURPA can be found in Pfeffer, Lindsay & Associates, Inc, Emerging Policy Issues in PURPA Implementation, prepared for the US Department of Energy by DOE/PE/70404H1, March 1986.
28. For example, in New York, a floor of 6 cents per kWh for payments to cogenerators was established by statute in 1984 even though it was recognized that the rate would at times exceed avoided cost. In Maryland, energy payments to a QF were set at 2.0 cents per kWh for off-peak and 3.0 cents per kWh for on-peak sales even though the hearing examiner determined off-peak avoided energy costs were 1.5 cents per kWh. Similarly, capacity payments were set at 2.5 cents per kWh even though the examiner acknowledged that the utility could purchase capacity for 0.7 cents per kWh. This was done expressly because the examiner was "of the opinion that a higher rate....[was] needed to encourage QF development and operation." Thus, QF rates were based not on the utility's avoided costs but on the level the Commission assumed would be needed to assure QF development. (Ibid. p. 6.20.)
29. In 1979, non-utility producers accounted for 5% of capacity additions in the US. Since 1990, non-utility producers' share of capacity additions had been about half of the total. (Source: Capacity and Generation of Non-Utility Sources of Energy, Edison Electric Institute, 1993 and 1985 editions.)
30. By the mid-1980s so much nonutility capacity was forthcoming that utilities turned to a process of competitive bidding. This approach has become quite common and currently utilities often receive bids for capacity that exceed the amount solicited by 100% or more. (Pfeffer, et al., op. cit., ref 29).
31. In New Jersey, IPP contracts contain a 'sunset date' 3 years after the expected in-service date that allow the utility to cancel the project if it has not been completed by then. Jersey Central Power and Light entered into an agreement with an independent power producer to build the Crown-Vista project with such a provision. The Crown-Vista project was not completed by its sunset date, however (in fact construction had not even begun). In response to the utility's attempt to exercise its right to cancel the contract, the IPP is attempting to have the state legislature pass a law that would force the utility to honor the contract even though its completion date is uncertain, its power is no longer needed and its costs are well above those of other alternatives available to the utility.
32. For example, in New York, Rochester Gas and Electric Corporation was required to enter into a contract in 1990 with an independent power producer (Kamine) that was based on 1988 estimates of avoided costs. The contract avoided costs are far in excess of those currently expected to prevail in New York. The contract contains a provision that the difference between contract and actual avoided costs will be collected in an adjustment account and paid back to consumers. However, the disparity between current avoided costs and the 1988 avoided costs reflected in the contract is so large that it is unlikely to be feasible for Kamine to repay the adjustment balance. Because of this, the utility has taken legal action to have the contract voided or its terms altered.
33. The nature of the reforms being proposed is discussed more fully in Kahn, op. cit., ref 14.