Implement competition properly

Colorado’s electric industry is an economic giant. In 1996, Colorado’s electric utilities had revenues well in excess of $2 billion, constituting roughly 3 percent of the state’s total economic activity. The industry directly employs 10,000 people and thousands more work in coal mining, railroad, natural gas extraction, and other energy-related businesses.

At a more micro level, utility bills often comprise a significant component of a household’s income or a business’ expenses.

The environmental footprint of the electric industry on Colorado’s landscape rivals its economic impact. Utility emissions impair visibility in places likely Rocky Mountain National Park, exacerbate health concerns associated with the “brown cloud” in Boulder and Denver, and contribute to concerns over global warming. In addition, Colorado’s utility industry is linked to concerns over nuclear waste disposal, the damming of free-flowing rivers, and the siting of new transmission lines.

Given these economic and environmental realities, the stakes associated with the restructuring of Colorado’s electric industry are enormous.

Since the 1940s, the electric industry has been characterized by a fundamentally unique structure where utilities in Colorado operate within a legally protected monopoly franchise service territory. This means that homes and businesses only can purchase electricity from their local utility supplier — no choice exists. In return for these protections, utilities cannot alter their prices or site a new power plant without getting regulatory approval.

For decades, from the 1940s through the 1970s, this regulated monopoly structure produced cheap and reliable power in Colorado. The technology exhibited “economies of scale” — meaning that as bigger coal and nuclear plants were built, the per unit costs of electricity declined.

By requiring customers to purchase from a single monopoly supplier and allowing that supplier to recover its costs in rates charged to a fixed customer base, sizable demands could be aggregated and ever larger power plants constructed. Stable fuel prices, interest rates and demand forecasts facilitated this cycle.

Although this system produced benefits, it also created a utility industry in Colorado unlike most other businesses. For one, electricity prices in Colorado depend on the supplier. The price of electricity is different in Longmont than in Boulder because of the arbitrary drawing of lines between utility service territories. These price differentials can influence where businesses locate and the type of energy-using equipment installed, often in non-economic ways.

Perhaps even more importantly, in a regulated monopoly world, the risks associated with poor business decisions by utility executives are generally borne by customers. The costs associated with utility decisions to invest in the Fort St. Vrain nuclear plant and in other large coal stations — that, in retrospect, did not turn out to be economic — have been paid, in significant part, by customers.

Finally, allowing utilities to recover their costs in rates charged to captive customers does not tend to encourage innovation or efficiency.

A Changing Industry: The Benefits of Competition

Since the early 1980s, the fundamental rationale for having regulated monopoly utilities in the generation business has largely disappeared. Changing technology, fluctuating fuel prices and interest rates, and shifts in the demand for electricity associated with the boom-bust nature of Colorado’s economy have changed electric industry economics.

For example, new, small, modular natural gas-fired turbines — based on the designs of jet plane engines — can now be constructed more quickly, at lower cost, and with less risk than large new coal and nuclear power plants.

In this new world, there is little justification for allowing a single provider to have a monopoly over the provision of generation. Any credible supplier can site, finance, and construct these plants. Why should utility executives, subject to regulatory review, have the final say over what power plants get built — with all the risks borne by utility customers?

Increased competition — providing choice to customers who were previously obligated to purchase electricity from a single monopoly supplier — can produce significant benefits when done correctly.

If an electric supplier makes a poor business choice and builds a new power plant that is not needed or too expensive, private investors bear the risk in a competitive world, not Colorado’s electric users.

Moreover, as customers have the ability to choose their own suppliers, prices will equalize based on market economics, not the arbitrary patterns associated with utility service territories. This should allow more rational business siting and investment decisions. Likewise, competition can spur innovation and greater efficiencies among suppliers.

Competition, however, must be implemented properly and in a way that protects key long-term public interests. Protections must be put in place to ensure that the rates of small customers are not negatively affected as the big customers leave the system.

States like Arizona, Nevada, and others have all developed protections that provide guaranteed rates to small customers. Likewise, provisions ensuring adequate investments in public goods such energy efficiency, renewable resources, and low-income energy assistance must also be included to ensure equity and mitigate the adverse environmental impacts associated with the electric industry.

Examples of these provisions exist in Arizona, California, and Massachusetts.

In sum, we believe that there is simply little justification for continuing the monopoly system that currently exists — the world has changed. Competition can equalize prices, shift risks from customers to private investors, and spur innovation.

However, there is nothing magical about competition. Public interest protections must be put in place to protect small customers and mitigate adverse environmental impacts. Delayed competition is likely to better than a poorly implemented competitive regime.

Eric Blank is the director of the Energy Project for the Land and Water Fund of the Rockies (“LAW Fund”). The LAW Fund is a non-profit environmental group that seeks to make it financially and politically possible for key stakeholders in the electric industry to operate in an environmentally and economically sustainable fashion. He has been working on electric utility issues as both a lawyer and economist since 1982.