Customer must be in equation

Of course Colorado should deregulate. Traditional utility regulation virtually guarantees that utility customers will pay higher prices, receive less innovative service offerings and likely a lower quality of service.

But that being said, things get more complicated.

Colorado is not a leader in the wave of deregulation sweeping the country (and indeed, the world) for several reasons, one of which is good news for Colorado consumers — we have had lower energy prices than many of the states leading the charge. By and large, the system of electric and gas utilities regulated by the Colorado Public Utilities Commission and the Federal Energy Regulatory Commission has worked well for Colorado.

However, as my opening sentence suggested, there are certain aspects of how traditional state regulation of utility service works that still should motivate Colorado to replace the use of traditional utility regulation wherever possible with the discipline of competition.

Why?

* Reason one: Traditional regulation discourages innovation.

Imagine you own a business that has just invested in upgrading your equipment at a substantial cost that will take 10 years to recover. Unfortunately, the next year the technology in your business changes, and you could provide more services at lower cost to your customers if you completely replaced your equipment again. Do you do it? Not if you have a monopoly, and your customers have no choice.

But imagine the difference if a competitor is waiting in the wings to get into your market. The competitor doesn’t have to write off the investment, it is making a fresh start, and will invest in the best technology available today. Perhaps the new technology becomes a necessity. This leads to my second reason:

* Reason two: Competitors motivate utilities like regulators never have and never will. World-class service cannot be required by regulators.

We are comfortable letting the “market” do things to our utilities that we would never allow regulators to do. Regulated utilities have several huge advantages over regulators:

* They have all the information.

* They typically have more resources and experience in the industry.

* They have the advantage of being there for the long haul.

* They have the relationships with customers.

* Regulators are part of government, and worse yet, part of government bureaucracy, which even the Legislature consistently disrespects and fails to adequately support.

Add up the effect of these advantages, then consider the following alternatives:

A potential competitor to Public Service Co. offers the state a 25 percent cut in electric rates with service quality guarantees for the right to serve Colorado customers.

The Colorado public utility commission thinks that while the service and rates of the incumbent utility are “within the ballpark,” they have not achieved the level of excellence possible, so they will reduce rates by 25 percent!

Which do you think more likely? The very issues assumed in much of the deregulation discussion — rate cuts, stranded assets, etc., demonstrate by their very existence that under the regulated regime things were more comfortable than the competitive market place allows.

Finally, a pedantic but powerful point: The fundamental task of traditional rate-base, rate-of-return regulation is to regulate the prices charged by the regulated monopoly, to ensure a fair rate of return.

There is an equation that all traditional regulators use.

Here is a dirty little secret, which is:

* Reason three: Customers aren’t in the equation!

Innovation, customer satisfaction and service quality are not part of the traditional determination of profit of a regulated utility.

So I think whether we should deregulate is the easy part of the question for Colorado. The hard part will be making sure the result of deregulation is not to put in place a much worse animal — an unregulated monopoly. While I’ve tried to show how regulated monopolies are not optimal, unregulated monopolies are much worse!

Gary Nakarado is a former Colorado Public Utility Commissioner now serving as the director of utility strategies at the National Renewable Energy Laboratory in Golden.

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