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Retail Competition
A Concept in Search of a Definition

Discussions about coming competition in the electric utility industry have been much in the news lately in Illinois and across the nation. Some call it deregulation, some call it open access, while still others use the term retail wheeling. Whatever it's called, the concept means open competition for electric service. Most discussions leave the impression that in the near future consumers will buy their electricity much as they now buy gasoline for their cars and trucks or supplies for their homes, farms and businesses.

Some form of competition is coming in the electric utility industry . . . perhaps next year or the year after, . . perhaps in five to ten years. What shape that competition takes, and who benefits, will be the subject of many discussions over the coming months in the Illinois General Assembly, electric utility and other business offices, and in homes and coffee shops. Electric cooperative leaders will be in the middle of those discussions and are vitally concerned about how the outcome affects electric cooperative members.

Electric cooperatives have been involved in the question of competition in the electric utility industry since their beginning in the late 1930s and early 1940s. It was the total lack of competition in the rural countryside that led to the organization of electric cooperatives when investor-owned electric utilities refused to serve rural residents. Today many Illinois cooperatives serve prime growth areas near growing cities. Other utilities, which refused to serve in earlier times, covet those areas. Other cooperative service areas are as remote today as they were in 1940, in electric utility terms. When the subject of competition comes up, electric cooperative leaders are concerned equally about rural and emerging urban areas within their service territories.

"We want to ensure that the new electric utility environment will provide benefits to all classes of consumers," Earl Struck, president of the Association of Illinois Electric Cooperatives, said.

The Energy Policy Act approved by the U.S. Congress in 1992 mandated that the electric energy transmission system be opened for movement (wheeling) of bulk power among electric energy suppliers. Electric cooperatives supported those new laws that would open wholesale bulk power supplies to competition. Although it has been law since 1992, the Federal Energy Regulatory Commission is only now dealing with the complex regulations necessary to govern the effects of open transmission of electric energy and bulk power competition at the wholesale level. One effect of the Energy Policy Act of 1992 has been to cause large businesses and manufacturers to pressure for open competition for electric energy supplies at the retail level.

Last year the Illinois General Assembly adopted Senate Joint Resolution 21 (SJR 21) which created the Joint Committee on Electric Utility Regulatory Reform and charged the committee with bringing to the General Assembly a proposal on electric utility deregulation in Illinois. The resolution was approved in response to a legislative proposal by a coalition consisting of Illinois Power Company, the Illinois Manufacturers Association and others to allow complete open competition for large customers in Illinois. SJR 21 set up a Technical Advisory Group, made up of representatives of Illinois utilities and interested consumer groups, and mandated that the advisory group work with the Joint Committee to produce a legislative proposal on retail competition in Illinois by November 8, 1996.

Working through the Association of Illinois Electric Cooperatives, cooperative members have had representation in the deliberations of the Technical Advisory Group and meetings of the Joint Committee on Electric Utility Regulatory Reform. Rural electric leaders see a number of areas of concern as


legislative proposals unfold:

• Universal Service—All rural consumers must continue to have access to basic electric service at reasonable rates.

• Uniform Rates—All consumers within a class must be treated equally in rate making.

• Benefits—Competition or direct access must provide benefits to all consumer classes.

• Service—Safety, service reliability and power availability must be assured for all consumers.

Electric cooperative leaders are concerned that deregulation legislation would allow large industrial electric consumers to leave their traditional electric supplier for a cheaper source of power with the result that homeowners, farmers and small business consumers will have to pay higher rates as a result. "We want to ensure that the new electric utility environment will provide benefits to all classes of consumers," Earl Struck, president of the Association of Illinois Electric Cooperatives, said. "Our focus has to remain on the member at the end of the line."

Electric cooperatives in Illinois serve only four consumers per mile of line while investor-owned electric utilities serve 41 consumers per mile of line. Only about five percent of the consumers served by electric cooperatives in Illinois are industrial or other large power members. That five percent accounts for about 33 percent of the kilowatt-hour sales of electric cooperatives. In contrast, about 66 percent of the sales of investor-owned electric utilities are to large power customers. In other words, the effect of writing the rules to benefit large power customers will mean that losing even one large power customer will have a much greater effect on an electric cooperative than on an investor-owned utility.

Electric cooperatives were organized in rural areas in the late 1930s and early 1940s when other electric providers would not, or could not, extend their lines into the rural countryside to meet the growing needs of rural residents. Investor-owned utilities felt there would be no profit potential in serving scattered rural loads.

"Our focus has to remain on the member at the end of the line."

Electric cooperatives provide an essential service to all consumers within their assigned service territories because no one else could, or would, and they do so on a not-for-profit basis. The not-for-profit operation status of electric cooperatives is another reason that any retail competition legislation designed to benefit large loads at the expense of smaller loads will have a greater effect on electric cooperatives than on investor-owned electric utilities.

In order to meet the requirements of the Energy Policy Act of 1992, the Federal Energy Regulatory Commission is expected to order utilities this year to "unbundle" their service components . . . generation, transmission and distribution. Generation or bulk wholesale power sales will be deregulated by commission order and transmission facilities will become basically a common carrier at regulated rates. This will mean open competition for energy supplies at the bulk power level. Federal deregulation will not extend, at least for now, into the distribution area. Few see any prospect of passage this year of federal legislation that would mandate retail wheeling. Generally, it is felt that individual states should be left to decide if and when retail competition is allowed within their borders, as well as the shape of that competition.

Illinois is one of a number of states that are responding to the pressure of large industrial and commercial electric consumers with various legislative proposals for electric competition at the retail level. Taking part in the discussions through the Technical Advisory Group are the four investor-owned electric utilities based in Illinois, as well as the Association of Illinois Electric Cooperatives, the Illinois Manufacturers Association, the


Illinois Municipal Electric Agency, the Citizens Utility Board, the Illinois Commerce Commission, members and staff of the General Assembly and others. Each interested stakeholder in the discussions has an interest to advocate or protect . . . the investor-owned utilities are primarily responding to the wants of their largest customers while protecting the interests of their stockholders; the municipal systems and electric cooperatives, as customer-owned utilities, seek to assure benefits equally to all classes.

At this point no one knows what shape electric competition will take in Illinois. Will competition be introduced suddenly and be open to all customers? Will competition be open only to large customers and be phased in over a number of years? How do utilities maintain high quality service and reliability in a competitive environment? Will the rural member have equal access to competitive energy? One thing is known ... some form of electric utility competition is coming, probably sooner rather than later.

Recognizing that fact, Illinois electric cooperatives have not yet taken a position on any one of the many proposals to encourage retail competition. Rather the board of directors of the Association of Illinois Electric Cooperatives has adopted a set of "Principles" to guide later evaluation of specific proposals on electric utility competition. Each keeps the cooperative structure and the most remote member in mind. The principles are:

• Support deregulation/direct access in the electric utility industry so long as such action ensures benefits to all electric cooperatives and their members, and guarantees adequate and reliable service to all present and future members.

• Support participation in deregulation/retail wheeling within the electric utility industry at the discretion of each individual electric cooperative.

• Support retention of the Electric Supplier Act, thereby ensuring no duplication of facilities, preventing unnecessary adverse environmental effects, avoiding unnecessary taking of farmland, and avoiding other unnecessary social costs.

• Support the continued regulation of the electric cooperatives by their member-owners.

With these principles as a guide, electric cooperative participants will be able to respond to retail wheeling or competition proposals likely to come before the Illinois General Assembly. Electric cooperatives do not want to stand in the way of meaningful deregulation proposals that will benefit their members. At the same time, they must ensure that whatever the shape of electric utility deregulation, all members benefit. Whatever the definition of electric energy competition and the future shape of the electric utility industry in Illinois, electric cooperatives are committed to keeping their members informed about developments.


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