February / 2000
The Future of Electricity

Restructuring report
by:  

  The Kentucky Special Task Force on Electricity Restructuring released its findings in December, including the recommendations it was required to make to the legislature. The Task Force was created by the legislature in 1998, to study whether Kentucky should consider deregulating the electric utility industry in the state, and to provide the results to the 2000 session of the General Assembly. Here are excerpts from those Task Force findings. They refer frequently to RDI, or Research Data International of Boulder, Colorado, a consulting firm hired by the Task Force to provide background studies:

There is no compelling reason at this time for Kentucky to move quickly to restructure 

  Despite the prospects of congressional legislation to mandate restructuring, actions taken by 23 states to restructure, and the fact that some of those states are geographically contiguous to Kentucky, there are obvious advantages for Kentucky adopting a wait-and-see approach to electricity restructuring. Congressional action to pass a nationwide restructuring bill appears unlikely at this time. Representatives from other states that have restructured, as well as experts in the field of electricity restructuring, indicate that Kentucky is in a unique position because of its existing low electricity rates, which currently are the lowest east of the Rocky Mountains. A wait-and-see approach allows Kentucky to monitor the progress of restructuring in other states and to develop options that protect Kentucky's existing low rates for electricity.

Restructuring is expected to have multiple effects on Kentucky's electricity prices

  Restructuring would be expected to cause greater variability in electricity rates over time. If Kentucky's electricity rates are deregulated, price fluctuations would be expected to be larger than under cost-of-service regulation. Analysis conducted by RDI indicates that prices will increase as the excess capacity in the generation market decreases. RDI analysis shows that deregulated electricity prices can dramatically increase during "severe" electric conditions characterized by unplanned outages. During these "severe" conditions, the potential exists for utilities to raise prices above the competitive market price.
Price gains from restructuring are predicated heavily upon excess generating capacity in the electricity market. In the short run, RDI analysis shows that as excess generation capacity is reduced, the deregulated price of electricity rises, and the regulated price of electricity remains relatively unchanged. The only scenario that shows sustained price reductions over the long run is when improvements are made in the transmission and generation infrastructure and a reduction occurs in the utility's production costs.

Restructuring is not expected to have a negative impact on electricity rates in rural areas

  There are three components to the electricity bill: generation, transmission, and distribution. According to RDI analysis, rural areas have traditionally had higher average electricity rates compared to customers in urban areas. The disparity in rural/urban electricity rates is primarily due to relative differences in distribution costs. However, RDI analysis shows that the cost of generation would not vary in accordance with the population density of the market. The cost of acquiring a customer in a rural area is the same as that of acquiring a customer in an urban area. Therefore, rural customers are expected to have higher distribution costs than urban customers in a restructured market, but rural customers are expected to receive the same generation price as urban customers in a restructured market.

Task force recommendations

 
The Task Force recommends that no action be taken during the 2000 session of the General Assembly to restructure Kentucky's electric utility industry.

  The Task Force recommends that the General Assembly continue to study the issue of retail competition. The Task Force also recommends that the General Assembly monitor actions taken in other states that have opened their retail markets to competition and to address other issues, such as reliability of service, transmission, and consumer education. Action should be taken during the 2000 session of the General Assembly to reauthorize the Special Task Force on Electricity Restructuring.

  For a complete copy of the Task Force findings, visit the Web site of the Kentucky Association of Electric Cooperatives at www.kaec.org. For more information from the Special Task Force on Electricity Restructuring, visit the Legislative Research Commission's Web page at www.lrc.state.ky.us/legresou/99studs.htm#ELECTRIC.