The new rules for electric utilities explain everything from TVA's silly television ads to its bold restructuring
by Bill Dockery
The phone rang early one recent Sunday afternoon in Knoxville.
"Hello...We're conducting a survey...We're not trying to sell anything...May I speak to the person responsible for your utility bills?" Then followed a lengthy interview on the homeowner's habits, preferences, and opinions about the electric service the household used. The young woman asking the questions quickly determined who the local power distributor was (the Knoxville Utilities Board) and launched into a series of questions about whether the customer was satisfied with KUB's courtesy, response time to outages, rates, and overall management.
Then the interrogator turned her attention to the Tennessee Valley Authority, KUB's supplier, with similar questions: Can you rely on TVA power? What do you think of their commitment to the environment? Their land management practices, rates, management? Finally, after 20 minutes, the questioner turned to the core of the interview: If someone offered you the same service and reliability for 5 percent less than you now pay, would you switch from KUB/TVA? No. 10 percent? Probably not. If another firm offered you the same service and reliability for 20 percent less than you now pay, would you switch? Yes. Tucked amid the final questions was the kicker: Have you changed long-distance telephone providers in the past year? No.
That telephone tete-a-tete was an indicator of the newest move toward freeing industry of government regulations. As it came to the airlines, natural gas, and telephone services, deregulation is marching toward the electric utility industry. When it gets here, TVA and KUB may well undergo radical makeovers, and the way we buy electricity is likely to change dramatically.
Witness TVA's proposal on January 21 to shed its federally-funded activities, such as river basin management, in order to concentrate on the competitiveness of its core power business.
The interviewer's query about switching long-distance carriers was an attempt to measure whether electric-industry deregulation will follow the competitive pattern of the telecommunications industry. And the fact that the call took place at all is evidence that someone is exploring just how volatile customers of TVA are in their loyalty to the agency and its distributors. The interviewer would not say who her client was, but TVA officials admit that they have done such polling, and other electric utilities in the region are known to be just as interested in answers to those questions.
The electric service that powers our life has faded into the background for most of us. Not only do we light our homes and cook our supper with it, but we depend on it for entertainment, work, and communication. We even curl our hair and brush our teeth with it. Unless it fails us or the bill for it gets too high, we hardly notice it.
It's not that simple, of course. For most of this century, we've gotten our ever-more-vital supply of power from vertically integrated monopolies, economically speaking; that is, we've bought from companies that generate the power, transmit it on big cross-country lines, and distribute it to us on local lines. Because of the costs of building the dams and power plants and stringing the millions of miles of wires, the state and federal governments have given the utility companies exclusive rights to market their electricity in certain areas.
Having no competition, these officially sanctioned monopolies have been heavily regulated (except for TVA which oxymoronically regulates itself). In 1992, pressured by industrial lobbies, Congress moved to mandate competition between electricity-mongers at the wholesale level on which TVA operates. Deregulation at the retail level is also underway on a state-by-state basis. Several states, notably California and New Hampshire, are already experimenting with allowing individuals to choose their own power providers.
For now, TVA remains largely insulated from competition by what is known colloquially as "the fence." Passed by Congress in 1959, the fence is a legal barrier that keeps TVA from selling power outside its region, and the 1992 legislation exempted TVA from having its own territory opened to outside competition. But industry restructuring is eventually expected to jump the fence--or even tear it down--and shake up the authority, which is the largest single producer of electricity in the country. The changes in federal law are not the only factors reshaping the industry. Technological developments are playing a major role in promoting customer choice. Advances in communications and monitoring make it possible for individual consumers to choose among competing marketers of electricity.
Likewise, power generation has made significant advances that let small-fry independent power producers (IPP's) make electricity as cheaply as the big boys. Allen Pulsifer, former chief economist at TVA and now a professor at Louisiana State University, points out that generation of electricity no longer requires massive nuclear or coal-fired installations.
"The technology to generate electricity is a lot cheaper and comes in much smaller increments," Pulsifer says. "Combustion turbines like jet engines have been developed that use natural gas and can be put on a freight car or an off-shore platform. Two of them will produce enough electricity for a small town."
Another pressure driving deregulation is the disparate costs of electric power across the country, depending on the availability of hydro and fossil resources. Consumers in the Northeast and in California pay considerably higher rates than in other regions of the country. Heavy industrial users of power, who are hard hit by high power bills, are among the most ardent supporters of removing constraints on the transmission of power from low-cost producers in the hinterlands to the high cost regions on the coasts.
"People who use a lot of power see that there are variations of price from one area to another," Pulsifer says. "If it were supplied at a competitive price, without any more profit than is necessary to stay in business, prices would be lower by 15 to 30 percent."
This push to deregulate is what has TVA doing all kinds of new tricks, including a recent one that had Knoxville leaders fearing the end times.
The first announcement in late September didn't cause much of a fuss. TVA was reorganizing to prepare for deregulation, whatever that was. In the future there would be new units dealing with customer service and with transmission. Each of the new groups would report directly to the TVA board, etc., etc. Ho-hum. Another day in the bureaucracy. But even in that first news release, there was a clue, a hint of coming controversy: "In order to be more accessible to customers, the Customer Service and Marketing Group will be headquartered more closely to the region's geographic center in Nashville."
A few days later, on Oct. 3, TVA got more explicit, dropping what turned out to be a bombshell: "TVA is relocating its Knoxville-based Economic Development headquarters to Nashville..." Never mind that the move involved only about 60 Knoxville workers or that Chattanooga was taking the biggest hit. The resulting story was headlined "TVA Shifting More Work to Nashville."
Government and business people quickly set up a hue and cry. Chief among them was Mayor Victor Ashe, who complained, "The city was never consulted or informed of the decision to move these well-paying jobs from Knoxville to Nashville...with this transfer, TVA is hurting the economies of Knoxville and Chattanooga." He questioned whether the authority had studied the cost-to-benefit relationships of the move. "Why," he mused darkly in a press release, "is such a move necessary, unless someone has a hidden agenda?" In the following whoop-tee-do, Chairman Craven Crowell relented and delayed the decision, citing the agency's excellent relationship with the mayor and city. In mid-December, to no discernible outcry, TVA announced its modified plans for the move that will involve 135 TVA workers, only 11 of them from Knoxville. The mayor pronounced himself pleased that most of the 60 jobs would remain in Knoxville, and Norm Zigrossi, TVA's chief administrative officer, promised to continue reviewing staffing needs "to ensure TVA's success as our industry deregulates."
While the skirmish had all the marks of a local pissing match, the reasons given for the move are actually more than rhetoric. Whether Crowell likes living in Knoxville or not (and all the insider indicators are that he does), the reason given by TVA brass for relocating the customer service group is likely the truth: Nashville is more centrally located to TVA's five biggest customers: Memphis, Nashville, Knoxville, Chattanooga, and Huntsville, Ala. A former high-level TVA staffer suggests another reason: If the agency is to influence decisions about the shape of the newly competitive market, it has to have more people in the state capital. "They have to have a presence in the seats of power," he says. "I wouldn't be surprised if they opened an office in Atlanta."
Deregulation also helps explain those seemingly inane television ads TVA started running a couple of years back. The early ads were image-oriented, with a Zen-like obscurity that left viewers scratching their heads in annoyance. Another unpopular series followed featuring a dog and a sleeping man in front of a TV set and another man generating electricity by peddling an exercise bike. A recent series of print ads and broadcast ads featuring TVA's industrial customers have stirred less antagonistic responses. The ads are TVA's first attempts to show the public what's coming and to try to cultivate brand loyalty for the utility and its distributors.
"Any company faced with competition is faced with creating an identity," says Alan Caron, TVA's senior vice president for strategic planning. "It will want the public to understand what it stands for."
"TVA may not, in the Valley, sell directly to customers, but the distributors are selling TVA power. We're bigger, and we can help out in preparation for deregulation." Caron says that, if regulatory fences come down, TVA might itself market to retail customers outside the Valley. "The advertising is all part of the packaging up of a strong TVA, clarifying facts, clearing up myths," he says. "We want to define what we are before someone comes along to define it for us."
Less obvious changes are structural and reflect the shape TVA expects the industry to take after the rules have been changed. The announcement of the October move to Nashville was preceded by plans for reorganization, which saw transmission and power supply services separated from customer service and marketing and made to report directly to the board. Deregulation will require that many utilities operate their power generation, transmission, and distribution systems as separate entities, and the TVA restructuring reflects that fact.
Even the type of people TVA is hiring reflects a new awareness of the impending competition. Caron himself is an example. A veteran of deregulation in the natural gas industry, he comes to TVA charged with positioning the utility as a leader in the deregulated electric utility industry. Other recent hires have had careers in corporate America rather than in public utilities--one top communications post went to Steve Bender, the former national communications manager for McDonald's.
"If TVA doesn't take a proactive stance, it will have the rules written for it," Caron says. "A variety of bodies formulates the rules. We anticipate deregulation bills in the new Congress, bills from many of the coalition groups. We can't let that go by without defining what we think the rules of the game ought to be."
The biggest threat to TVA is that during deregulation, other power producers might be allowed to go after TVA's customers while TVA is still fenced in. Likewise, the investor-owned power companies fear that TVA might get outside the fence while competitors wouldn't be permitted to market in the Valley.
That fence will have to be dealt with eventually, of course. To much fanfare, Crowell called for taking it down a couple of years ago. Now, he's willing to wait.
"Territorial restrictions for both investor-owned and public utilities will no longer exist in a deregulated environment," he explains, "but what everyone wants to know is when."
Crowell says the board has decided to postpone for the moment a two-step approach to fence removal that one of its consulting firms recommended, but he has no doubt that the market is about to get more competitive. "We believe it is inevitable that the fence will come down, and we will work with our customers to ensure that all of us are ready to be successful when that does happen."
The program started May 28. The customers were chosen by lottery from a pool of applicants that included companies, individuals, and aggregated groups, like whole communities. Thirteen marketing groups lined up to sell them electricity.
The marketers, many of which were joint ventures, included a mix of national and international energy firms, as well as in-state and regional utility companies. Hydro Quebec joined a subsidiary of Green Mountain Power to compete in the market. Enron, the natural gas firm out of Houston, marketed to the pilot program participants, as did Working Ventures of San Francisco, which marketed environmentally sensitive power.
Public Service of New Hampshire, the state's major electric utility, consented to allow its lines to be used in the pilot program without legal opposition, though it will have a chance to seek redress for the use of its system before the final deregulation is complete.
Ellsworth reports that the PUC has received a good response to the pilot, with some industries reporting savings of 20 percent. Not all residential customers have experienced savings that great, however, and the commission is seeking to start a reporting process that will give a clearer sense of the program's economic impacts. "No one is opposing it," Ellsworth says. "There's been extraordinary cooperation."
The companies involved have used a variety of marketing ploys. One gave away a bird feeder to new customers; another gave away a package of energy-efficient light bulbs; a third offered signees a $50 energy audit of their household. One company even marketed "green" electricity, power generated from environmentally friendly sources, but later ran into trouble when consumers discovered it was hawking electricity that had been generated by environmentally unpopular nuclear plants.
Much as free-marketers expected, price has turned out to be the chief factor consumers use to pick an electricity provider, although the environmental sensitivity of the power source also turned out to be important. "The more expensive their power, the more likely consumers are to look on choice favorably," observes a New England journalist who covers utility issues. Newspapers and consumer advocates told New Hampshire residents to take a typical bill and ask the marketers to tell them how much it would cost under their pricing plan.
With the pilot program under its belt, the New Hampshire PUC has turned its attention to the next big step--making the program universal. In hearings in December and January, the PUC is laying the groundwork for letting all consumers choose their electricity provider. The deadline for a completed deregulation program is a scant year off--January 1998. The issues appear more complex. Chief among them are who will pay for the so-called stranded assets (the high-cost generating plants that won't pay for themselves once anti-competitive regulations are removed), as well as environmental concerns about whether there should be limits on generation by coal-fired plants.
One thing is sure: New Hampshire consumers can expect an onslaught of utility marketing. While the pilot program targeted only 15,000 people, companies will be selling to a pool of more than 300,000.
In California, another testing ground for reform, the success of deregulation is less clear. The state legislature has passed a measure that would deregulate the industry, bringing competition to California's three large investor-owned monopolies--Pacific Gas and Electric Co., Southern California Edison, and San Diego Gas & Electric Co.
"The big winners...are the investor-owned utilities and their big industrial clients," the San Francisco Chronicle reports. The law allows the utilities to collect some $22 billion from their customers for such infamous bad investments as nuclear power plants at Diablo Canyon and San Onofre. These are the proverbial stranded assets that are giving electric utilities the jitters all over the country. In this case, California lawmakers have said that customers--instead of investors--will take the hit for the utilities' mistakes. The lawmakers were generous to some of the state's municipal utilities as well. Suppliers in Sacramento, Los Angeles, and other cities will be allowed to charge exit fees to customers who choose to buy their power elsewhere.
Tucked away in all this techno-babble about economies and electricity is a central, easily overlooked irony: There's no brand label on the electricity powering the lamp that's letting you read these words. The transmission lines all over the country are connected in a grid that makes sure power is going to everyone.
As a columnist for the Chicago Tribune, Steve Kloehn puts it: "...since electricity is a commodity, it will be hard to compete on price...That leaves image as the great battleground in the deregulation of electricity." In other words, for lighting your bulb, Brand X electrons are as good as the premium variety; marketing is all the utilities have to differentiate themselves one from another.
Even proponents of deregulation like lobbyist Wayne Brough admit that "it's all paper transaction. It doesn't really matter whose electrons you get." He compares the electric industry to a lake. If you draw out a bucketful of water, it doesn't matter whose molecules of H2O you get, so long as you get as much as you need. All that is necessary is that some water supplier somewhere on the lake is pouring in enough water so that you can draw out the bucketful you're paying him for.
Issues like "green" electricity are just marketing ploys but, as
California economist Robert Michaels says, "There's a lot to be said for marketing."
What this will mean for local consumers is still a matter of some speculation. So is the timetable. Tennessee consumers, along with Kentuckians and Idahoans, are among the groups that will benefit the least, says Robert McCormick, an economics professor at Clemson University who was part of an influential study of deregulation. Rates are already low in Tennessee, and the impact of deregulation will be proportionally low.
Nor does TVA's Caron expect electricity marketers to find the region very fruitful, at least at first. Because TVA is a low-cost generator of electric power, he predicts that competition will be stronger in regions with higher rates, because the potential profit margins for marketers will be higher.
"TVA right now is among the lowest-cost providers, and that's certainly going to stay that way," he says. Caron looks for deregulatory competition to show up in the region in three to seven years, assuming the anti-competitive fence is removed.
KUB president and CEO Larry Fleming believes the push toward a free market is already making itself felt at KUB and other area distributors, not in customer-choice marketing but in the utilities' approach to their customers. Though it's requiring some retooling and rethinking, Fleming says he's enthusiastic about the prospects. "It's already making a difference in how we do business," says Fleming. Though heavy industrial users of electricity are pushing the drive toward deregulation, he thinks that individual customers of KUB are already reaping the benefits.
"We're getting away from a monopolistic environment. The threat of competition makes us think about how we do things. The market is evolving into service.
"We used to offer you what we thought was best. Now we're asking you what you want us to offer you."
In recent years, KUB has quietly pared away its work force (the guy who reads your meter may not even work for KUB anymore) and is looking for other ways to become more competitive. For example, Fleming expects a time to come when the utility will not require a deposit of most customers. "Our philosophy will be, we're proud to have you as a customer," he says.
As the third largest customer of TVA (and, by the way, one of the 20 largest publicly owned electric systems in the country), KUB could expect challenges from corporations like British Petroleum, which could come into the local market offering KUB customers a BP credit card, electric service, and a $50 signing fee. Fleming admits that KUB is already working on similar packaging deals itself.
Why would KUB--which has taken decades to weave together its complex net of wires and poles, transformers and substations--be willing to let another company use its lines to sell electricity to its own customers?
"It wouldn't necessarily be our choice," Fleming says. He notes that in orders 888 and 889, the Federal Energy Regulatory Commission opened the large transmission lines to use by all utilities. "We certainly think that public policy will force us to do likewise."
Fleming sees sharing KUB lines with a competitor as an economic decision: The sharing will be done for a charge, and the alternative is that a big-enough competitor could begin to string its own parallel wires.
"Anybody who impedes the ability to offer cheaper power will be standing in the way of a freight train," Fleming concludes.
Several issues remain to be decided before free-market electric service becomes a reality here or anywhere across the country. One is the issue of stranded costs, the who-will-pay decision. Investor-owned utilities insist that the expensive nuclear plants they've built and some of their contracts for power were undertaken with the implicit guarantee that regulators would allow them a return on their investments. Now that legislatures are considering changing all the rules, the utilities fear they'll lose to competitors that don't have to pay off high-priced generating capacity.
For TVA, the comparable issue is its $27-billion-plus indebtedness, mainly for some of the world's most expensive nuclear power plants, some of which are never to be finished. Caron says the debt won't hurt TVA in competing with other utilities.
"Our debt is not that greatly out of line with anybody else's" if it's figured as amount of debt per unit of generating capacity, he says. "If that was all equity, would you tell me that I had too much equity?"
Another vital question is who will regulate the deregulation, for, as Crowell is fond of saying, the industry "is not deregulating, it's re-regulating." Right now, electric utility regulation (TVA excepted) still rests primarily on the PUCs of the individual states. The TVA chairman has called for federal legislation that will supersede these state commissions and bring all utilities under the same regulatory roof.
"Deregulation of the electric-utility industry is no longer an abstract
idea. It's happening right now," says Crowell in TVA's annual report. "Anyone who has watched deregulation reshape the airline and telephone industries knows there will be winners and losers. In the coming years, TVA will be a winner in the energy business because we are taking the right steps today."
Exactly where those steps will lead TVA and the people of the Valley is a question only the next century can answer.