July 09, 2020

Bridge to power competition, price cuts

Maine families and small businesses could get a break on electricity prices from the Maine Legislature, which is now considering partial deregulation of the state’s electric utility industry.

Competition in the generation and sale of electricity for all customers is no longer a question of “whether,” but “when.” Large customes have already begun to benefit from competitive forces. Other customers should have the samer opportunity.

A careful restructuring of Maine’s utilities, inclduing approval of CMP’s proposal to reduce the carrying costs of past state mandates, could allow the first significant rate decrease for small customers in more than 15 years.

Lawmakers and regulators around the country are studying ways to inject more competition into the electric industry, which has long been a state-regulated monopoly.

Most policy-makers believe offering customers a choice among competing electric suppliers could improve efficiency and service, reduce costs, and help preserve and create jobs.

That won’t happen overnight. The costs of the current system reflect many state commitments and mandates that are still being paid off. Utilities like Central Maine Power Co. are still financing hundreds of millions of dollars spent following state policies on nonutility power, conservation, subsidies, tax deferral, and generation investments — all approved or even required by state regulators.

If CMP were suddenly thrown into a fully competitive electricity market, these postponed costs could become unrecoverable, or “stranded,” because customers could avoid them.

Maine can choose one of three basic approaches to this problem.

One is to say, “Those werze yesterday’s promises, let’s forget about them and move on,” leaving utility investors to absord massive write-offs.

Three problems arise with this approach: it’s probably an unconstitutional taking that would invite years of litigation and delay the start of competition; it could force some utilities into bankruptcy, possibly jeopardizing service reliability; and, most seriously, it would undermine Maine’s credibility in honoring contracts and commitments.

A second policy choice is to let the current trend continue. That means a few large customers take advantage of competitive opportunities to self-generate or demand discounts, while small businesses and homes are left with the full burden of past costs.

Large customers might relish this course, but it would be unfair to everyone else. Public policies of the past were undertaken for the benefit of all customers. Whether they worked out well or not, it’s economically inefficient and basically unfair to allow some customers to duck out and shift thier share of costs to other people.

That’s not just utility rhetoric. Other states, the President’s Council of Economic Advisers, and the Federal Energy Regulatory Commission have already concluded that the desirable move to competition should prevent unfair cost-shifting to other customers or to utility shareholders. (As a former state regulator myself, I agree with that general conclusion.)

A third approach is to move to competition while simultaneously respecting past commitments and lowering the costs of paying for them.

Pennsylvania and California have already chosen this approach to rate reductions. A dozen other states are considering it. The approach uses an established financial technique called securitization.

For utilities, securitization simply involves the state’s confirming that the costs previously reviewed and approved for recovery by regulators will not be revised again. On that basis, utilities can access cheaper financing for these obligations than their credit ratings would otherwise permit. CMP proposes to pass all the savings to residential and small-business customers on the grounds that most large customers have alredy extracted price concessions.

Preventing cost-shifting while reducing rates through securitization is an economically attractive policy. It provides and opportunity to continue recovering legitimate costs while offering price reductions, all without restricting anyone’s choice of energy supplier and without creating any risk to taxpayers.

Electric competition is inevitable and desirable. But in changing the practices of more than 80 years, government must be responsible, not opportunistic.

Utility management should not be insulated from the costs of bad business decisions. But those costs, such as the $85 million CMP wrote off in the Seabrook nuclear project, have already been screened out from the list of costs that would be “stranded” in a competitive market.

Maine must face the need to honor commitments it made when it ordered utilities to subsidize low-income customers, promote energy efficiency, buy non-utility energy to reduce fossil-fuel dependence, and otherwise support state energy policies.

Securitization, based on Maine’s simply confirming that its promises will be honored, is the bridge between regulation and competition that can reach the twin necessities of fair treatment for investors, and much-needed price reductions for all customers.

Economist Kenneth Gordon of Windham is a former chairman of the Maine Public Utilities Committee and the Massachusetts Department of Public Utilities. He is now with National Economic Research Associates, a Washington-based firm that performs economic and policy analysis for a variety of clients, including CMP.

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