April 6, 2000

Special Report:

Deregulation of electric utilities
creates controversy in Legislature

Jessica Free
digital iowa staff reporter
Drake University

DES MOINES, Iowa -- With only a couple of weeks remaining in the 2000 legislative session, Iowa lawmakers are faced with two powerful words: electric deregulation.

House File 2530 -- also known as the "Iowa Electrical Choice and Competition Act" -- is one of the most complex and controversial bills ever to come before the state Legislature. It proposes an end to government regulation of the electric industry, which, in theory, would increase competition and lower prices.

The current system for delivering electricity to individuals and businesses dates back almost to the time of Thomas Edison. Unlike much of the American economy, this system is not based on choice or the free market, but on a government-regulated monopoly. Regulated utilities are assured the opportunity to earn a profit in exchange for delivering electric service to everyone who wants it.

During the energy crisis of the 1970s, electricity prices increased dramatically. Since then new electricity resources have been refined, and the cost of those resources has dropped. According to the U.S. Department of Energy, however, many utilities continue to sell higher cost power to consumers.

A demand for lower rates led the federal government to begin considering a new system based on competition and consumer choice; state governments soon began doing the same.

"Around 1995 we realized something was happening," said Diann Munns, a member of the Iowa Utilities Board. "We began tracking other states' action and approaches [to deregulation]."

Over the next few years, Iowa made the transition from observer to participant.

The first round of Iowa deregulation legislation was filed in the 1999 session of the Iowa General Assembly. Opponents of the bill proposed amendments to provide price protection for residential and small business customers, to preserve the reliability of the current electric system, and to preserve and protect Iowa's environment.

The bill was passed by the House Commerce Committee on a straight party line vote, but was never debated or voted upon by the House.

During the fall of 1999, discussions took place among key state agencies and officials, including the departments of Natural Resources, Human Rights, and Economic Development; the Utilities Board; and the Consumer Advocate's Office, a division of the Justice Department. The result was a series of four reports that presented Gov. Tom Vilsack with consensus recommendations and explanations of disagreement. Essentially, the groups authored the bill that would make its way to the 2000 legislative session.

Large meetings among state agency representatives, deregulation proponents and opponents -- many of the same groups that authored the bill -- began again in late December 1999 and continued through early February 2000. Although some disputed matters were resolved during these meetings, many major issues remain unsettled.

Now the 200-page bill stands before the Iowa House of Representatives awaiting its fate. Meanwhile, the controversy continues to rage.

One of the most visible issues is that of consumer protection. If the bill passes, consumers will be able to choose who produces their electricity much like they now choose who provides their long distance telephone service or which airline to fly.

"But not everyone wants to take the time to shop for their electricity," Munns said. If "shopping for electricity" seems too daunting a task, Munns said consumers can choose to stay with their current provider for a few years. According to House File 2530, deregulation would be implemented slowly.

Despite revisions made to the original bill, many organizations are still pushing for a more comprehensive price protection amendment.

Gary Stewart of the Consumer Advocate's Office acknowledged that the bill currently does provide some price protection for residential and small business customers, called standard offer service. "The problem is that current electric prices are excessive," he said.

Munns disagreed. "We're a low-cost state already," she said. "We have easy access to coal and other clean energy sources."

The Consumer Advocate's Office proposes "that the initial rates for standard offer service be set by the Utilities Board...based on the utility's cost of providing electric service." This is the same procedure used to regulate prices under current law.

Opponents to deregulation see other states that have already passed similar legislation but that have not seen prices go down. Munns said, "Those states were high-cost before deregulation, so it's not a fair comparison."

Stewart and other opponents also dislike that House File 2530 requires deregulation to be implemented for residential and small business customers in 2006, regardless of the effect on price. "In other words," Stewart said, "the bill would force deregulation even if competition failed to develop and prices go up rather than down."

"Electric customers will be financially harmed by electric deregulation unless the legislation includes meaningful price protection until effective competition develops for all electric consumers," he said.

Perhaps as heated as the debate on consumer protection is the one on environmental protection.

The bill currently includes a $29.5 million annual fund for the construction of renewable energy to be administered by the Iowa Energy Center, as well as a $26.5 million annual fund for energy-efficiency programs to be administered by the Iowa Department of Natural Resources.

"This is too much for renewable energy, not enough for energy efficiency, and it does not require utilities to develop renewable energy generation," said Monica Stone, an executive officer for the Department of Natural Resources' Energy Bureau.

Stone and her colleagues at the DNR have developed a strong position on deregulation and proposed an amendment to the bill. Specifically, Stone said the DNR believes that any deregulation legislation in Iowa should include:

-- a renewable portfolio standard, which means that all utilities in Iowa would be required to produce 5 percent of their electricity through renewable energy resources by 2008, and 8 percent by 2011;

-- a provision to encourage net metering;

-- a $21 million annual fund for the development of renewable energy generation, to be administered by the DNR; and

-- a $35 million annual fund for energy efficiency, to be administered by the DNR.

"The DNR believes that the restructuring of the electric industry is a once-in-a-lifetime opportunity, and we should use this opportunity to encourage innovative programs that increase jobs, income and profits for Iowa's businesses and industries and protect the environment," Stone said.

Gov. Vilsack supports the DNR's proposed amendment.

"We're pleased that he shares that vision, and we hope that he maintains his support for energy efficiency and renewable energy," Stone said.

Rep. Willard Jenkins, a Waterloo Republican who floor-managed the environmental section of the bill, disagreed with Vilsack and the DNR. "I think it is wrong to mandate a quantity of energy that utilizes renewable fuels," he said. "This completely overlooks cost and sets up [a] situation where the provider can charge any price because the customers will be required to purchase a given amount."

The Utilities Board also opposes a renewable portfolio standard. Munns said, "If we set it too high, potential competitors might choose not to compete in Iowa."

Munns said she feels that, in the case of deregulation, energy efficiency is more important than renewable energy. "Energy efficiency is something that end-use customers can do; it doesn't affect competition," she said. "We want as few barriers to entry as possible for competitors. That doesn't mean we don't care about environmental concerns, but there has to be a balance."

The balance, according to Munns, may come in the form of technology. "Amazing technological advances came from the deregulation of the phone industry," she said. "Deregulation and a free market tend to drive technological change."

Rep. Janet Metcalf, an Urbandale Republican who has sponsored the bill as leader of the House Commerce Committee, said, "I believe the competitive market will yield great innovations and efficiencies."

Stone agreed that electric deregulation holds potential for technological advances in the energy industry. "There is the potential for incredible technological innovation that will allow energy to be generated and delivered less expensively than ever before," she said. "And there is the potential for the development of a 'green' energy market and the selling of energy services rather than energy as a commodity."

Both Munns and Stone said that the biggest disadvantage to deregulation is uncertainty.

"We'd be changing to a system that we speculate will provide benefits," Stone said.

Munns said: "There is the question of reliability to consider. Will there be sufficient amounts of power? When [the government] had control we could regulate. There will be winners and there will be losers -- that's the chance we're taking."

There are mixed feelings about whether or not House File 2530 will or should pass this session.

Metcalf said she hopes the bill will "accomplish consumer protection, environmental innovations and enhance our competitive position." She also said, "I think it will pass in 2000."

Stone said she feels the environmental amendment may determine whether or not the bill passes. "I expect that for the bill to be signed by the governor, the environmental amendment will have to look a lot more like the DNR's recommendation than it does today," she said.

Stewart said: "I hope the bill will not pass and be signed by the governor unless it is dramatically improved. I believe it is far more important...to protect people who are not demanding electric deregulation and to preserve and protect our environment than it is to give choice to large customers and higher profits to utilities."

According to Munns, Vilsack views deregulation as an inevitability.

"He would like to be a leader in the nation by setting high standards for consumer advocacy and environmental issues," she said.

According to a recent Des Moines Register article, House File 2530 has strong Republican support, but some Democrats say the bill doesn't call for enough renewable energy, or they're concerned that deregulation will only benefit big businesses.

Twenty-five states and the District of Columbia have already adopted or endorsed competition in the electric industry. Many say federal deregulation legislation looms in the near future.

Munns explained that a federal law would "grandfather-in" states that have already deregulated. Metcalf said, "When the feds pass a bill, we will already have one that fits."

Will we? The 2000 legislative session is scheduled to end April 18.