A Giant Step Toward Competition

The new Massachusetts Electric Utility Restructuring Act is a national pace-setter in creating a competitive energy market and providing choice to all consumers, while guaranteeing up-front rate decreases, continued energy conservation, and environmental protection. Unfortunately, a handful of critics want to erase the product of a two-year effort that many are calling the largest financial stimulus package ever adopted in the Commonwealth.

This new statute “re-regulates,” or “restructures,” today’s monopoly system. Utilities will continue to operate the transmission and distribution system, ensuring reliable service. As of March 1, the generation of power will be deregulated. Any company may compete to sell power directly to homes or businesses, and consumers may choose their power supplier.

These costs are not due to bad investments.

Recognizing that not all customers will want to enter the market at the same pace, the Legislature included a transition mechanism. For up to seven years, customers may receive “standard offer” service — a package with rates that will be 10 percent less as of March 1, and 15 percent less as of September 1, 1999. Given that the alternative will be rate reduction resulting from competition among suppliers, the new law is a “win-win” for consumers.

So why are a few calling for repeal?

Maybe they were looking for a bigger win at the expense of constitutional standards, utility property rights, decades of public policy and regulatory practice, and the financial stability of the state’s utilities. Under the old rules, utilities were mandated to undertake large capital investments or enter into long-term supply contracts and recoup the investment via regulated rates over a very long time. Allowing competitors free access to a utility’s wires (wires that will still be limited to regulated pricing and returns) to displace the utility’s power supply, would deny the utility the opportunity to recoup its investment.

Recovery of such costs is not a “bailout.” These costs are for commitments already made on behalf of customers. They are incorporated into rates today, will not be new charges, and will decline rapidly over time, creating greater savings in the future. They are not due to bad investments; they were approved or mandated by past regulation or statute. Moreover, they are not all related to power plants; For New England Electric Systems, the majority stem from government-mandated contracts with high-priced, non-utility power producers. Finally, no one is talking a blank check on recovery. The statute requires extensive regulatory review and approval of all transition costs. It also requires utilities to mitigate such costs to the fullest extent. In NEES’s case, that means selling our generating business and cutting our company in half.

So, here is the reality. For over two years, the Massachusetts Attorney General, the Weld-Cellucci administration, the Department of Public Utilities, the Conservation Law Foundation, the Massachusetts Energy Efficiency Council, other business and consumer groups, and the Legislature worked hard to mold principles, craft compromises, and enact legislation that is fair to all while bringing competition and rapid rate reduction. As a result, on March 1 Massachusetts will take a giant leap toward greater interstate economic competitiveness, putting more money in people’s pockets, and creating more jobs.

John Rowe is President of New England Electric Systems.

It’s Good for Consumers

By Scott Harshbarger
Winter 1998

What do Scott Harshbarger, William Weld, Paul Cellucci, Thomas Finneran, Thomas Birmingham, John O’Brien, Michael Morrissey, Daniel Bosley, and Henri Rauschenbach share?

They are leaders of wildly different philosophical stripes who agree that the landmark law deregulating our electric industry is the best deal for Massachusetts consumers. This law was the product of a two-year, bipartisan effort to make our state a better place to live and do business — not a shadowy Oliver Stone conspiracy to “bail out utilities.”

As the only consumer advocate in utility rate setting, I have spent the last seven years fighting every single rate hike request and stranded cost proposal made by utilities in this state.

Critics of the law offer only heroic-sounding but hollow populism.

Our hard work in this complex and obscure field has saved the working families and businesses of Massachusetts more than $400 million. I’m proud of that record, and of our ability to use our expertise to lead the restructuring movement — not by regulation or litigation, but through competition.

Critics of the deregulation law offer plenty of heroic-sounding but hollow populism, and very few realistic alternatives. Their arguments boil down to: “Utilities are evil” or “Life would be better if it were 70 degrees and sunny every day.”

They conveniently ignore the fact that every Attorney General for the last two or three decades has fought the utility proposals that created today’s “stranded costs.” Unfortunately, virtually all of those proposals won regulatory approval.

That is why we have been paying stranded costs as a secret mark-up on electric bills all these years. It is also why our deregulation law is good for consumers. We are forcing the utilities to compete in an open market and to sell off the assets behind those stranded costs. The value of those assets — and any profit — must be subtracted from the costs passed on to residential and business customers. We are bailing out consumers, not the utilities.

In the case of MassElectric, the state’s largest utility, ratepayer savings of $1.6 billion will be generated from the forced sale of power plant assets. As a result, nearly one million residential and business customers in 150 cities and towns will get an 18 percent rate cut, almost twice the savings floor of 10 percent.

What alternative is Mr. O’Connor offering? Go to court to try to overturn every single regulatory approval of utility investments in the last several decades? Or go to court to try to figure out how much of each dollar of each stranded cost was the fault of regulators, changing consumer desires, the economy, an executive mistake, poor management, well-meaning but misguided management, or OPEC policies?

Under federal law and the law of contract, it is difficult if not impossible to remove most stranded costs from rates. Years and years of litigation will produce no meaningful additional savings.

The choice for the consumers of Massachusetts is clear: We can reduce the cost of living and the cost of doing business, and create thousands of jobs by forcing competition into our electricity industry today.

Or we can take John O’Connor’s advice. No immediate guaranteed savings for anyone, except, of course, big corporate players who continue to cut secret rate deals. Meanwhile, the rest of us continue to pay higher and higher rates — and all those stranded costs — while we spend millions in taxpayer money on a lengthy legal battle that is highly unlikely to achieve anything.

The Massachusetts law is not just the better alternative for consumers and our economy. It is the best deal in the nation.

Scott Harshbarger is the Attorney General of Massachusetts and one of the leading architects of electricity restructuring in the state.

The Market Will Work

By David L. O’Connor
Winter 1998

John O’Connor asks us to imagine energy deregulation “done right.” In two months, Massachusetts residents will not need to imagine it; they will experience first-hand electric utility restructuring that gives them immediate up-front savings, creates a competitive electricity marketplace, and safeguards the environment.

When retail choice begins on March 1, the entire bill of every Massachusetts retail electric customer will be cut by 10 percent. This amounts to $500 million in customer savings in the first year alone — money that will stay in consumers’ wallets instead of being used to pay for energy costs.

Even better, that 10 percent cut will increase to 15 percent on September 1, 1999. You don’t have to choose a new supplier to get these savings. Yet if you do choose a new supplier you won’t lose these savings, because they are drawn from the entire bill – mainly the regulated portions covering distribution, transmission, and access charges, as well as the remaining third for energy supply. The new law protects consumers by allowing them up to seven years to move into the competitive market.

The new market for electricity will be
vibrant, open, and very competitive.

What of Mr. O’Connor’s claim that the market will not be competitive because utilities are being given “$10 billion in front-end cash?” This is simply untrue.

The $10 billion figure — $6 billion is a more accurate number — refers to transition costs as the industry moves from regulation to competition. Customers pay for these costs today as part of each utility’s rate base. Under the new law, divestiture and other mitigation requirements should dramatically reduce these costs to less than $2 billion, increasing customer savings.

To collect any money for such transition costs, the law strongly encourages utilities to sell their power plants and power contracts. Four companies are already doing just that; two have already reached agreements with new buyers. New England Electric Systems will sell its power plants for $1.6 billion — $600 million more than book value. Every dollar gained from the sale will lower transition costs. For Massachusetts Electric Co. customers, this means that the guaranteed 10 percent savings on March 1 will quickly increase to 18 percent.

Boston Edison Co. recently announced the sale of its non-nuclear power plants for $536 million — 20 percent more than book value. Once again, all of it will go toward reducing transition costs.

With these transactions, more than $2 billion in transition costs will be eliminated and never be charged to customers. After divestiture by other companies, the remaining transition costs could drop to a total of $1 billion to $2 billion — an amount that can be quickly eliminated with a few years of competition.

Moreover, utilities won’t be generating power any more. They will be distribution companies, buying power on the open market. Their demand for electricity will stimulate competition. Electricity supply will trade like other commodities, with the price gravitating toward the costs of the most efficient suppliers. As with grain or long-distance phone service, competition is a good thing for consumers.

Many companies also will be offering new products and services on March 1. Already, 25 firms have registered as suppliers with the state. Many of the companies will be offering combinations of products and services — cable TV, Internet access, phone service, and natural gas, as well as electricity supplies. Some companies will offer packages of “green power,” with investments in renewable energy sources. One supplier is currently offering three such products in the California market and expects to offer them here.

And, consumers will also be able to see details about the power they purchase in a uniform disclosure label. The label will identify sources of power — from coal, oil, nuclear, and hydro — as well as pollution emissions from such plants, the price and the kind of contract, and whether the company’s workforce is unionized.

The new market will be open not only to individual consumers, but to groups of consumers known as “aggregators” — towns, nonprofits, educational institutions, and public agencies — who can join together and buy their own energy supplies. Many of the towns on Cape Cod are banding together to purchase power for their residents; 462 health and educational facilities — and their employees — have joined with the Massachusetts Health and Education Financing Agency to create a $115 million annual electricity purchasing pool. The market will be vibrant, it will change rapidly, and it will be very competitive.

David L. O’Connor is the Commissioner of the Division of Energy Resources in the Office of Consumer Affairs and Business Regulation. Under his direction, the first principles for restructuring the electric utility industry in Massachusetts were developed in 1995.

It’s Good for the Environment

By Lewis Milford
Winter 1998

John O’Connor is a friend and ally. Over the years, he has passionately and articulately fought utility company investments in stupid, uneconomic power plants. I know, because the Conservation Law Foundation has fought those same investments, side by side with John. Those investments, in a restructured electricity industry future, are the “stranded costs” that John so strenuously opposes. Unfortunately, to make his opposition absolute, John seems to feel the need to completely dismiss the key environmental benefits this new electric restructuring law will bring to the Commonwealth. So that balance is not sacrificed to overstatement, some correction is needed.

The law contains the strongest environmental provisions in the nation.

The Conservation Law Foundation believes that the bill contains the strongest environmental features of any restructuring bill passed in this country. What have the citizens and environment of Massachusetts gained through this legislation?

Breaking the Monopoly. The most important result of restructuring is that the monopoly of the electric utility companies is broken. Competitors in the marketplace — both in electric generation and retail services — will transform the environmental and consumer “friendliness” of electricity. Gone are the days of monopolists forcing uneconomic and environmentally disastrous power plants down the throats of helpless ratepayers. (Just the sorts of projects that John O’Connor and our organization fought for years. Now the market will do the fighting for us.)

No Operating Subsidies. Future operating subsidies for existing coal, oil, and nuclear plants will be removed, forcing such plants to compete in the market. This is the single most important environmental feature of the bill, which creates a historic shift in investment incentives for power plants. For the first time in our history, plant owners will have to bet with their own money on future plant construction and operation, not with ratepayer money. The result? Cheaper, cleaner, more efficient generation will be built — solar, gas, fuel cells — an energy revolution away from big, central generation plants.

Energy Efficiency. In a significant victory for reduced energy use, the law requires that utilities maintain financial support for existing levels of energy efficiency programs now at historic highs. Massachusetts continues to lead the nation in utility-based efficiency programs, a result that would not have been possible without this legislation.

Renewables. Significant new funding is now available, again for the first time in the country, to provide commercialization support for a designated list of renewable technologies, including photovoltaics, wind, ocean thermal, fuel cells, landfill gas, and low emission advanced biomass power conversion. This funding will build new projects, companies, and institutions devoted to renewable power. The law also requires consumer purchases of renewable power in the next several years, another historic environmental requirement.

Divestiture of Generation. In another first in the country, the law will lead to the transfer, spin-off or sale of 100 percent of the utilities’ generation business to non-affiliated entities. This will create real markets for competitive generation, without the abuses that would have occurred with continued utility-owned generation.

Disclosure of Environmental Information. The Massachusetts law contains the toughest environmental disclosure provisions in the country, requiring that sellers of electricity give customers information about the power they are buying, including fuel sources and air emissions.

John O’Connor’s point seems to be that he could have done better — that if he had participated in the legislative process, he could have forced the utilities to eat more of their stranded costs; that if he had his way, he would have gotten more environmental improvement. Perhaps so. But the truth is that no other state in the country has done better on these environmental problems — none. And none has included all these protections in one bill — none.

John O’Connor makes a forceful case, but its fury shoudn’t blind the rest of us to the fact that this bill does a great deal for the environment. Reversing this law would do much more environmental harm than good. And that’s not an overstatement.

Lewis Milford, a senior attorney at Conservation Law Foundation, directed CLF’s energy project during negotiations on the state’s electricity deregulation bill.

An Opportunity Missed

By Michael H. Best
Winter 1998

The electric power industry is in the midst of a technological transition potentially as momentous as the 1930s, when cheap, widely available electricity was made a reality in America.

Recent advances have enabled independent power producers to generate electricity at less than half the cost of nuclear energy. The yawning gap between the high prices of existing utilities and the low capital and operating costs required by streamlined independent power producers using combined gas turbine technology has altered the economics of electric power generation and introduced a new industry dynamic.

Elected officials took a cynical attitude toward the public.

The $200 billion national market for electric power is in a state of flux between the old, slow-moving utilities and an emerging industrial order. On a world scale, electric power could be an industry that compares with the automobile industry: Some estimate that more electric power generating capacity will be installed in the next 25 years than in the previous century. The related, global market for environmental services and technologies is expected to exceed $400 billion by the year 2000 according to the World Bank. New England has the chance to be a part of a new, innovation-driven electric power industry that focuses on environmentally advanced technology.

My fear is this: The companies that propelled the old order in the electric power industry will not keep pace with the changes and may even have the power to block the transition. They may well be organizationally and technologically unfit for the challenge. The deregulation bill passed in Massachusetts did not seriously address these matters. Unfortunately, it is the kind of public-policy-making that can make no one proud. Elected officials took a cynical attitude toward the electorate: Give them a 10 percent cut in electricity rates and they will accept virtually any deregulation program. It was backed by the threat of the utilities to hold the region hostage to years of court battles. But did the utilities get too greedy? A 100 percent bailout smacks of “crony capitalism,” a phenomenon not exclusive to Asian political economies.

We do know that the case of the Massachusetts deregulation of the electricity industry has been one of policy-making driven primarily by lobbyists in which virtually no substantive public debate or involvement and remarkably little legislative deliberation occurred in an area with deep and widespread public consequences. Not surprisingly, a backlash is developing. It will likely grow. Where, for example, is the electricity going to come from in New England if five of the region’s nuclear plants not presently operating are permanently shut down? When this likely event does occur, the electric power industry in the region will be in need of substantial investment funds at the same time that the region’s largest utility declares bankruptcy and its shareholders continue to collect the “transmission access” charges.

The challenge for public policy was, and is, to negotiate a new social compact that can move the region toward taking advantage of new opportunities. Policy-making that flaunts its responsibility to openly pursue the common good risks undermining the trust of the electorate and spreading cynicism. Those supporting the call for a popular referendum may become a force for educating and involving the citizenry in one of the major issues of the day. It is unfortunate that the elected officials did not accept the challenge.

Michael H. Best directs the Center for Industrial Competitiveness at the University of Massachusetts-Lowell. He is the author of Power to Compete (UMass Economic Project, 1997), a study of the electric power industry in America.

Closing Argument

Let’s Ask the Voters

By John O’Connor
Winter 1998

The Harshbarger-Cellucci deregulation bill isn’t simply an assault on our pocketbooks and lungs, but on democracy as well.

While the Legislature will passionately debate every penny spent on a poor kid or a school (as they should), the $12 billion bailout of the utilities wasn’t deemed worthy of even one minute of dialogue in the Massachusetts House. Had it been, maybe some of the critical disputes could have been resolved, as they have been here.

Below are some of the facts I offered which neither the lead utility advocate (John Rowe) nor the top government supporter (Scott Harshbarger) refute.

First, we have among the highest electric rates in the nation. After deregulation, those rates will remain 50 percent above the national average.

Second, the total bill for the utilities’ investments-gone-bad will approach $10 billion, or roughly $3,000 per family.

Third, had the issue of “stranded costs” been confronted and shared fairly, our bills could have gone down three to four times as much as proposed under the new law.

Fourth, the initial 10 percent rate cut will quickly be subject to erosion. (And by the way, even if the $5 to $6 per month cut were to remain in place, it would take the typical ratepayer 50 years to recoup what he or she’s paid in stranded costs courtesy of this law.)

Where we appear to disagree is over semantics and spine. Neither Rowe nor Harshbarger like the word “bailout.” In the spirit of compromise, we’ll agree to call it ransom.

And they rely on specious legal arguments to make the no-litigation case. In fact, despite Rowe’s assertions, the U.S. Supreme Court found there to be no constitutional right to full recovery. All that’s left for the attorney general is to ridicule my contention that he stand up and fight the utilities’ excesses, as New Hampshire’s governor, Jeanne Shaheen, is doing on this very issue.

Meet the Author
Ratepayers in Pennsylvania and Connecticut are benefiting from just such advocacy. In December in Philadelphia, the Public Utility Commission rejected a utility proposal and adopted a plan calling for 28 percent rate cuts. Several days later, state regulators in our southern neighbor barred Connecticut Light & Power from charging customers for operations at the shutdown Millstone plant.

While the debate never occurred on Beacon Hill, it will everywhere else in Massachusetts once we submit signatures in February to place our repeal-then-fix effort on the November ballot. Then, finally, democracy will get its day.