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compati bl e wi th competi ti on. An exampl e mi ght be a uni versal
servi ce fund, fi nanced by charges l evi ed on al l tel ecommuni cati ons
carri ers, or even more broadl y. Al l el i gi bl e consumers coul d draw
on the fund, to hel p them pay for the provi der of thei r choi ce. Al ter-
nati vel y, the ri ght to provi de subsi di zed servi ce to a desi gnated
group coul d be al l ocated through competi ti ve bi ddi ng among al l
qual i fi ed potenti al provi ders.
I n the absence of expl i ci t mechani sms to fund uni versal servi ce
or other soci al goal s, regul ators mi ght feel compel l ed to meet such
goal s by i mposi ng obl i gati ons on entrants. Such obl i gati ons coul d
easi l y sti fl e competi ti on. For exampl e, regul ators mi ght be l ed to
requi re entrants to offer a confi gurati on of servi ces, regi onal cov-
erage, and rate structure very si mi l ar to that of the i ncumbent
l ocal monopol i st. But entry i s more l i kel y to occur and to be more
val uabl e i f entrants have fl exi bi l i ty i n choosi ng thei r technol ogi es
and mi x of servi ces to best expl oi t thei r comparati ve advantage.
Revampi ng the fundi ng of uni versal servi ce therefore i s an i ntegral
part of a successful move toward i ncreased competi ti on i n tel e-
phone servi ce. Consi stent wi th thi s goal , the pri nci pl es i n the new
l egi sl ati on cal l for maki ng support mechani sms expl i ci t and pre-
di ctabl e; requi ri ng al l provi ders of tel ecommuni cati ons servi ces to
make nondi scri mi natory support contri buti ons; and maki ng al l i n-
terested carri ers el i gi bl e for support to provi de servi ce i n des-
i gnated areas, wi th the excepti on of any area served by a rural
tel ephone company.
PROMOTI NG COMPETI TI ON I N ELECTRI CI TY
The Nati on’s major el ectri c uti l i ti es have hi stori cal l y been verti -
cal l y i ntegrated, engaged i n both the generati on and the del i very
of el ectri ci ty. Del i very i s over hi gh-vol tage transmi ssi on l i nes from
generators to substati ons, and from there over l ocal di stri buti on
l i nes to users. The Federal Energy Regul atory Commi ssi on (FERC)
regul ates i nterstate transmi ssi on servi ces and i nterstate whol esal e
power transacti ons (sal es to uti l i ti es for resal e), whereas the States
regul ate thei r i nvestor-owned uti l i ti es’ retai l sal es. I n the past the
suppl y of el ectri ci ty wi thi n a gi ven geographi c area was seen as a
natural monopol y, and State publ i c uti l i ty commi ssi ons awarded
uti l i ti es excl usi ve franchi se areas. They requi red uti l i ti es to serve
al l consumers i n thei r franchi se areas at regul ated, bundl ed rates,
coveri ng generati on and del i very, based on cost of servi ce.
A major crack i n the verti cal l y i ntegrated structure of the i ndus-
try came wi th the Publ i c Uti l i ti es Regul atory Pol i cy Act (PURPA)
of 1978, whi ch requi red uti l i ti es to buy power from nonuti l i ty gen-
erati ng compani es that empl oyed renewabl e energy sources or co-
generati on (co-generati on uses steam both to generate power and
1996
182
to heat adjoi ni ng bui l di ngs). Al though i ts pri mary goal s were to re-
duce dependence on i mported oi l and encourage renewabl e energy
sources, PURPA pl ayed a major rol e i n promoti ng competi ti on i n
power generati on. By gi vi ng ri se to a cl ass of nonuti l i ty generati ng
fi rms, PURPA created momentum for efforts to unbundl e genera-
ti on from del i very. Moreover, experi ence wi th PURPA dem-
onstrated that i ndependents coul d bui l d generators on ti me and on
budget and coul d be rel i abl y i ntegrated i nto the transmi ssi on gri d,
subject to uti l i ti es’ control . Nonuti l i ty generati ng fi rms have grown
rapi dl y si nce PURPA’s enactment. Thei r share of nati onwi de gener-
ati ng capaci ty has doubl ed from 3.6 percent i n 1987 to 7.2 percent
i n 1995; si nce 1990 they have contri buted over hal f of al l new i n-
vestment i n generati ng pl ant.
An obvi ous reason for some i ndependents’ growth i s obl i gati ons
i mposed on uti l i ti es to purchase power from PURPA-qual i fyi ng fa-
ci l i ti es. Al though PURPA requi red purchases at pri ces that were
supposed to refl ect uti l i ti es’ expected costs were they to suppl y
power from thei r own sources, regul ators i n a few States cal cul ated
these pri ces i n ways that l ed to arti fi ci al l y hi gh purchase pri ces.
But technol ogi cal change al so pl ayed a major rol e i n the growth of
i ndependents. The advent of smal l , effi ci ent, natural gas-fuel ed
generators, coupl ed wi th fal l i ng gas pri ces, drasti cal l y reduced the
capi tal cost and mi ni mum effi ci ent scal e of generati ng pl ants, mak-
i ng i t easi er for i ndependents to fi nance pl ants (because of shorter
constructi on l ags and l ower fi nanci ng needs) and to bui l d pl ants
under contract to serve a parti cul ar uti l i ty. Market i nnovati ons i n
the fi nanci ng of power pl ant constructi on by i ndependents al so
were i mportant.
Asymmetri cal regul atory treatment al so contri buted to the i nde-
pendents’ growth. I ndependents had stronger i ncenti ves than uti l i -
ti es to cut costs, because onl y they were exempt from cost-based
regul ati on. The Energy Pol i cy Act of 1992 expanded thi s exempti on
to a broader cl ass of i ndependents than PURPA had covered, al l ow-
i ng such i ndependents to enter the whol esal e power market, where
they coul d sel l power to uti l i ti es at unregul ated market rates (un-
l i ke PURPA, however, the 1992 Act di d not obl i ge uti l i ti es to pur-
chase from the i ndependents). I n addi ti on, some uti l i ti es may have
refrai ned from bui l di ng thei r own pl ants, feari ng that regul ators
woul d l ater reject some of the costs when i t came to resetti ng thei r
rates. And regul ators i n some States requi red uti l i ti es to l ook fi rst
el sewhere, to nonuti l i ty generati ng fi rms or to other uti l i ti es wi th
excess capaci ty, to suppl y thei r i ncremental generati ng capaci ty
needs before bui l di ng more pl ants themsel ves. I n thi s the regu-
l ators’ i ntent was to foster competi ti on, as part of an effort to curb
the ri se i n el ectri ci ty pri ces fol l owi ng the oi l shocks of the 1970s.
1996
183
These changes expanded whol esal e competi ti on among generat-
i ng fi rms to sel l power to uti l i ti es. Pressure i s growi ng to al l ow re-
tai l competi ti on as wel l : for generati ng compani es or uti l i ti es to sel l
di rectl y to fi nal customers i n the franchi se area of a di fferent uti l -
i ty, payi ng regul ated rates to use the uti l i ti es’ exi sti ng trans-
mi ssi on and di stri buti on l i nes. Thi s pressure comes mai nl y from
l arge customers, who, among other thi ngs, can credi bl y threaten to
bypass thei r l ocal uti l i ty by generati ng thei r own el ectri ci ty usi ng
smal l natural gas pl ants, or through muni ci pal i zati on (di scussed
l ater i n thi s secti on). Promoti ng i ncreased whol esal e competi ti on
and i ntroduci ng retai l competi ti on present three major chal l enges,
whi ch are di scussed bel ow.
UNBUNDLI NG GENERATI ON FROM TRANSMI SSI ON
AND DI STRI BUTI ON
To del i ver power to fi nal consumers, generati ng fi rms requi re ac-
cess to the transmi ssi on and di stri buti on faci l i ti es that uti l i ti es
own and operate. These faci l i ti es appear to be natural monopol i es,
l i kel y to remai n subject to pri ce regul ati on. Thi s gi ves ri se to a by-
now fami l i ar probl em: i f uti l i ti es are al so permi tted to generate
thei r own power and sel l i t at unregul ated rates, they wi l l have an
i ncenti ve to evade regul ati on by favori ng thei r own generators and
real i zi ng profi ts through unregul ated power sal es. Such favori ti sm
coul d i nvol ve cross-subsi di zi ng the unregul ated power generati on
busi ness from the regul ated transmi ssi on and di stri buti on busi ness
or, more i mportant, di scri mi nati ng agai nst outsi de generators i n
provi di ng access to transmi ssi on and di stri buti on networks.
I f there were no si gni fi cant economi es of scope between genera-
ti on and other functi ons, an obvi ous way to prevent di scri mi nati on
woul d be to requi re separate ownershi p of regul ated transmi ssi on
and di stri buti on assets and of unregul ated generati on assets. How-
ever, as di scussed bel ow, transmi ssi on and generati on may be sub-
ject to i mportant economi es of scope. The chal l enge to pol i cymakers
and market parti ci pants i s to devi se sol uti ons that bal ance poten-
ti al l y confl i cti ng goal s: preventi ng access di scri mi nati on, but wi th-
out compri si ng the rel i abi l i ty of el ectri ci ty suppl y, sacri fi ci ng econo-
mi es of scope, or i mposi ng excessi ve regul ati on.
The technol ogi cal rel ati onshi p between the generati on and trans-
mi ssi on of el ectri ci ty i s more compl ex than that between producti on
and transportati on i n most other i ndustri es. Modern al ternati ng-
current transmi ssi on networks requi re ti ght and rapi d bal anci ng
between power generated i nto and power wi thdrawn from the
transmi ssi on gri d. Stori ng el ectri ci ty i n si gni fi cant vol umes i s gen-
eral l y i mpracti cal , and fai l ure to bal ance power i nfl ows and out-
fl ows can resul t wi thi n seconds i n seri ous deteri orati on of system
operati on and wi despread damage to equi pment. The system i s
1996
184
much l ess tol erant than, say, gas pi pel i nes, whi ch can accommo-
date i mbal ances for l onger peri ods through external storage and by
changi ng the degree of gas compressi on wi thi n the pi pel i nes. More-
over, el ectri ci ty fl ows cannot be easi l y routed wi thi n an i ntegrated
transmi ssi on network; rather, power fl ows automati cal l y and i n-
stantaneousl y al ong the path of l east i mpedance. I mbal ances at one
poi nt on the gri d therefore can have wi despread and unpredi ctabl e
consequences throughout the network.
Al though network operati ons are l argel y computeri zed, unfore-
seen conti ngenci es can requi re central i nterventi on by the gri d op-
erator: transmi ssi on constrai nts may resul t from unforeseen de-
mand surges or equi pment fai l ures, requi ri ng some generati ng sets
to be unexpectedl y di spatched and others turned off. I n addi ti on,
there are common costs i n operati ng a transmi ssi on network, such
as mai ntenance of reserves, and chargi ng i ndi vi dual generators for
such costs requi res a central authori ty. Operati ng such a compl ex
system therefore requi res the gri d operator to have substanti al con-
trol over at l east some generati ng assets, and over some network
functi ons that entai l common costs.
Unti l now such compl i cati ons have been addressed wi thi n the
context of a verti cal l y i ntegrated i ndustry, and through regi onal
power pool s and other vol untary associ ati ons. However, movi ng to
a more competi ti ve regi me may requi re devi si ng al ternati ve i nsti -
tuti ons. Verti cal i ntegrati on opens the possi bi l i ty that uti l i ti es
woul d use thei r control of transmi ssi on to di scri mi nate i n favor of
thei r own generati ng pl ant. And, as expl ai ned bel ow, rel i ance on
vol untary cooperati on to resol ve regi onal transmi ssi on i ssues may
be more di ffi cul t i n a competi ti ve envi ronment.
The FERC has addressed the i ssue of expandi ng transmi ssi on ac-
cess by requi ri ng uti l i ti es si tuated between one uti l i ty seeki ng to
purchase power and another uti l i ty or i ndependent power producer
seeki ng to sel l power to al l ow use of thei r transmi ssi on l i nes to
compl ete the sal e. At fi rst efforts to expand access were epi sodi c;
for i nstance, approval s of uti l i ti es’ merger requests were made con-
ti ngent on thei r granti ng transmi ssi on access. The 1992 Energy
Pol i cy Act expl i ci tl y authori zed the FERC to requi re whol esal e
transmi ssi on access upon request. The FERC i s i n the mi dst of an
i mportant rul emaki ng to establ i sh a comprehensi ve framework for
i mpl ementi ng open, nondi scri mi natory whol esal e transmi ssi on ac-
cess: a uti l i ty woul d have to grant access to outsi ders seeki ng to
consummate whol esal e transacti ons on the same terms as to i ts
own generati ng faci l i ti es.
I mportant as these i ni ti ati ves are, some observers bel i eve that
more wi l l have to be done. Defi ni ng and pol i ci ng agai nst di scri mi -
natory access may be di ffi cul t when an i ntegrated uti l i ty runs the
gri d. I n addi ti on, i ncreased competi ti on wi l l strai n the current sys-
1996
185
tem of i nformal coordi nati on between uti l i ti es, each operati ng
transmi ssi on faci l i ti es that are connected i nto regi onal gri ds. Con-
necti ng such systems offers i mportant advantages: i t provi des al -
ternati ve transmi ssi on paths and economi zes on redundant faci l i -
ti es, and i t faci l i tates power sal es to resol ve temporary l ocal i mbal -
ances between suppl y and demand or to benefi t from di fferences i n
the cost of power over a wi der regi on. Such i nformal coordi nati on
worked reasonabl y wel l i n an era when uti l i ti es had excl usi ve fran-
chi ses, but may become i ncreasi ngl y frayed i n a competi ti ve envi -
ronment.
To address these concerns, some observers have proposed, and
Cal i forni a regul ators have recentl y endorsed, the formati on of an
‘‘i ndependent system operator.’’ I nvestor-owned uti l i ti es and i nde-
pendent nonpubl i c generati ng compani es woul d bi d competi ti vel y to
sel l power i nto a regi onal gri d. Uti l i ti es woul d retai n ownershi p of
transmi ssi on faci l i ti es but woul d turn over thei r operati on under
contract to an i ndependent enti ty, whi ch woul d manage the system
on a regi onal basi s. The operator woul d have authori ty over deci -
si ons such as how to respond to unforeseen conti ngenci es and,
under FERC oversi ght, how to pri ce certai n network servi ces and
al l ocate certai n common costs. Al though promi si ng, thi s model al so
rai ses some questi ons. Can an operator be trul y i ndependent of
uti l i ti es whi l e they retai n ownershi p of transmi ssi on and di stri bu-
ti on? And wi l l such a system cope wel l wi th coordi nati ng i nvest-
ments i n transmi ssi on and generati on, gi ven that di fferent generat-
i ng fi rms that rel y on the gri d can often have di vergi ng i nterests?
I n short, movi ng toward a more competi ti ve market i n el ectri c
power generati on wi l l requi re i nnovati ons i n both regul ati on and
market i nsti tuti ons. Maxi mi zi ng the benefi ts from competi ti on wi l l
al so requi re i mpl ementi ng pri ci ng pol i ci es that more accuratel y re-
fl ect transmi ssi on congesti on and the costs of generati on at di f-
ferent ti mes (peak and off-peak). Fi nal l y, the gai ns from i ncreased
competi ti on beyond those al ready bei ng real i zed from today’s
whol esal e competi ti on may be modest i n the short run, because
much of uti l i ti es’ expenses are associ ated wi th past i nvestments,
and wi th fuel expenses, whi ch cannot be greatl y reduced.
Neverthel ess, some effi ci ency gai ns coul d materi al i ze even i n the
short run: from i ncreased uti l i zati on of excess capaci ty, from supe-
ri or operati on and mai ntenance of exi sti ng pl ants, and from boost-
i ng l abor producti vi ty. I n the l onger run the gai ns may be greater,
si nce generati on accounts for about hal f of the cost of el ectri ci ty to
the end user, and i ncreased rel i ance on competi ti on rather than
regul ati on coul d al l ow both better operati ng deci si ons and better
i nvestment deci si ons regardi ng the amount, mi x, and speed of con-
structi on of new pl ant.
1996
186


Northeast
West
East Central
Southwest
Mid-Atlantic
Southeast
Texas
Mid-America
Mid-Continental
0
5
10
15
20
25
30
35
0
50
100
150
200
Billions of dollars Percent of equity Percent of equity
Billions of dollars (left scale) Percent of equity (right scale)
Chart 6-3
Northeastern electric utilities have the highest potentially stranded costs,
Potentially Stranded Costs of Investor-Owned Electric Utilities by Region
Note: Data are estimated present values of total costs minus revenues from 1996
to competition. Some utilities located in Texas are included in the
both in dollars and as a percent of equity.
12
7
5
6
2
0
2
0
0
through 2005, assuming a move
Source: Moody’s Investors Service.
"Southwest," and not in the "Texas" category.
STRANDED COSTS
Al l owi ng competi ti on woul d put pressure on uti l i ti es’ pri ces and
customer base, threateni ng to create stranded costs. Stranded costs
are those unamorti zed costs of pri or i nvestments that are sched-
ul ed for recovery through regul ated monopol y rates but woul d not
be recovered under competi ti on. Stranded costs for the i ndustry as
a whol e have been esti mated at $135 bi l l i on— wel l over hal f the
total equi ty val ue of al l i nvestor-owned uti l i ti es. Many of the vul -
nerabl e uti l i ti es are concentrated i n Cal i forni a, New York, New
Engl and, Pennsyl vani a, and Texas (Chart 6–3 provi des a break-
down by regi on). Many of these uti l i ti es woul d be threatened wi th
bankruptcy i f unfettered whol esal e and, especi al l y, retai l competi -
ti on were al l owed wi thout provi di ng uti l i ti es assi stance i n coveri ng
stranded costs.
One source of stranded costs i s past i nvestments that turned out
di fferentl y than expected. I n some cases nucl ear power proved
more expensi ve than projected, and gas pri ces much l ower; there-
fore some i nvestments i n nucl ear generators l ed to hi gher generat-
i ng costs than those of modern gas-based pl ants at today’s gas
pri ces. Second, i n many regi ons uti l i ti es overesti mated power de-
mand, l eadi ng them to bui l d excess generati ng capaci ty. I f thi s ca-
paci ty were ful l y used under the pressure of competi ti on, i t woul d
1996
187
dri ve the pri ce of power down to the short-run margi nal cost, and
thus wel l bel ow average cost (whi ch i ncl udes sunk capi tal costs).
Al though such pri ci ng promotes short-run effi ci ency, i t woul d i m-
pose l arge l osses on some uti l i ti es. Fi nal l y, stranded costs al so
ari se from regul atory obl i gati ons i mposed on some uti l i ti es but not
on other suppl i ers, i ncl udi ng requi rements to buy power from
PURPA-qual i fyi ng faci l i ti es at pri ces above today’s market pri ces,
to i nvest i n pol l uti on control equi pment, and to fund demand con-
servati on programs.
I n unregul ated markets the possi bi l i ty of stranded costs typi cal l y
does not rai se an i ssue for publ i c pol i cy— i t i s si mpl y one of the
ri sks of doi ng busi ness. However, there i s an i mportant di fference
between regul ated and unregul ated markets. Unregul ated fi rms
bear the ri sk of stranded costs but are enti tl ed to hi gh profi ts i f
thi ngs go unexpectedl y wel l . I n contrast, uti l i ti es have been l i mi ted
to regul ated rates, i ntended to yi el d no more an a fai r return on
thei r i nvestments. I f competi ti on were unexpectedl y al l owed, uti l i -
ti es woul d be exposed to l ow returns wi thout havi ng had the
chance to reap the ful l expected returns i n good ti mes, thus deny-
i ng them the return promi sed to i nduce the i ni ti al i nvestment. A
strong case therefore can be made for al l owi ng uti l i ti es to recover
stranded costs where these costs ari se from after-the-fact mi stakes
or changes i n regul atory phi l osophy toward competi ti on, as l ong as
the i nvestments were i ni ti al l y authori zed by regul ators.
The case for al l owi ng recovery i s even stronger where stranded
costs ari se from regul atory obl i gati ons i mposed on uti l i ti es. Several
States, notabl y Cal i forni a, requi red uti l i ti es to purchase power
from qual i fyi ng faci l i ti es under PURPA at l ong-term contract pri ces
based on hi gh esti mates of future oi l and gas pri ces, even after uti l -
i ti es resi sted purchasi ng al l the capaci ty offered at the hi gh pri ces.
Uti l i ti es al so were requi red to fi t coal -fi red generators wi th costl y
pol l uti on control equi pment, agai n wi th the expectati on that costs
woul d be recovered through regul ated rates. Uti l i ti es shoul d be al -
l owed to recover such costs mandated by regul ati on.
To be sure, uti l i ti es shoul d be granted recovery onl y of costs pru-
dentl y i ncurred pursuant to l egal and regul atory obl i gati ons to
serve the publ i c. I nvestments made after uti l i ti es are noti fi ed that
competi ti on i s comi ng and are rel i eved of thei r obl i gati on to serve
shoul d not qual i fy; and uti l i ti es must try to mi ti gate thei r l osses.
But recovery shoul d be al l owed for l egi ti mate stranded costs. The
equi ty reason for doi ng so i s cl ear, but there i s al so a strong effi -
ci ency reason for honori ng regul ators’ promi ses. Credi bl e govern-
ment i s key to a successful market economy, because i t i s so i mpor-
tant for encouragi ng l ong-term i nvestments. Al though pol i cy re-
forms i nevi tabl y i mpose l osses on some hol ders of exi sti ng assets,
good pol i cy tri es to mi ti gate such l osses for i nvestments made
1996
188
based on earl i er rul es, for i nstance, by grandfatheri ng certai n i n-
vestments when l aws and regul ati ons change.
Because stranded costs are sunk, economi c reasoni ng suggests
that they shoul d be recovered through mechani sms that do not ar-
ti fi ci al l y reduce power consumpti on. One possi bi l i ty i s a charge l ev-
i ed on transmi ssi on, but as a fi xed fee rather than a margi nal
charge: customers woul d be requi red to pay speci fi ed amounts,
based perhaps on thei r past consumpti on, regardl ess of thei r future
use of el ectri ci ty.
Si nce stranded costs refl ect pol i cy deci si ons, recovery shoul d be
borne broadl y by al l parti es on whose behal f the stranded costs
were i ncurred, i ncl udi ng customers that swi tch to other suppl i ers.
Consi stent wi th thi s pri nci pl e, the FERC proposed that whol esal e
customers departi ng a uti l i ty be assessed a contri buti on toward
stranded costs. Al though the FERC proposal woul d di rectl y appl y
to stranded costs resul ti ng onl y from i ncreased whol esal e competi -
ti on, i t coul d al so serve as a model for States contempl ati ng retai l
competi ti on, and serve as the FERC approach to recoveri ng strand-
ed costs resul ti ng from retai l competi ti on i n the unl i kel y event that
the State l acked authori ty to address the i ssue.
Most State di scussi ons of i ni ti ati ves to foster retai l competi ti on
i n fact have i ncl uded, as an i ntegral part, mechani sms to recover
stranded costs. But some retai l customers threaten to bypass thi s
process, for exampl e, by resorti ng to ‘‘muni ci pal i zati on.’’ A muni ci -
pal uti l i ty wi thi n the franchi se area of an i nvestor-owned uti l i ty
may generate none or onl y some of i ts requi red power, and as a
power resel l er i t qual i fi es for FERC-mandated whol esal er access to
outsi de suppl i ers. Al though muni ci pal uti l i ti es typi cal l y serve l e-
gi ti mate functi ons, they mi ght at ti mes provi de a l oophol e for
avoi di ng fai r shari ng of stranded costs. A muni ci pal i ty mi ght ex-
tend i ts boundari es to encompass the premi ses of a l arge i ndustri al
customer served by the i nvestor-owned uti l i ty; that customer be-
comes el i gi bl e to buy power from outsi de suppl i ers, usi ng the mu-
ni ci pal uti l i ty as condui t. Such acti ons rai se i mportant i ssues of eq-
ui ty and cost-shi fti ng, both for the l ocal uti l i ty and for other cus-
tomers i n i ts franchi se area that may be stuck wi th a l arger share
of stranded costs. The FERC has stated that muni ci pal i zati on
shoul d not be a vehi cl e to escape responsi bi l i ty for stranded costs.
COMPETI TI VE PARI TY, UNI VERSAL SERVI CE, AND
ENVI RONMENTAL PROTECTI ON
For competi ti on to work wel l , i t must take pl ace on a l evel pl ay-
i ng fi el d: competi ti on wi l l be di storted i f producers are gi ven sel ec-
ti ve pri vi l eges, or subjected to sel ecti ve obl i gati ons i mposed to fur-
ther even l egi ti mate soci al goal s. Thi s pri nci pl e rai ses several i s-
sues as we move toward i ncreased competi ti on.
1996
189
As competi ti on grows, i ncreasi ng di storti ons may resul t from
some enti ti es havi ng access to speci al pri vi l eges such as federal l y
tax-exempt bonds or other preferenti al treatment. Accordi ngl y, re-
exami ni ng speci al pri vi l eges of vari ous enti ti es may become more
i mportant.
On the other hand, producers shoul d not be subjected to sel ecti ve
obl i gati ons. New ways must be found, as i n the tel ephone i ndustry,
to address uni versal servi ce, assi st l ow-i ncome consumers, and
meet other soci al goal s currentl y addressed through obl i gati ons on
regul ated monopol y uti l i ti es. Conti nui ng to i mpose such requi re-
ments onl y on some producers woul d pl ace them at a competi ti ve
di sadvantage and i mperi l thei r abi l i ty to meet these obl i gati ons.
Accordi ngl y, these obl i gati ons woul d be better fi nanced through
more broadl y based mechani sms.
I ncreased competi ti on i n el ectri ci ty can al so affect the envi ron-
ment. To reap the advantages of more effi ci ent el ectri ci ty markets
and a cl eaner envi ronment, envi ronmental pol i cy wi l l need to re-
spond to any ri sks that restructuri ng may pose for envi ronmental
qual i ty. But pol i cy toward restructuri ng shoul d al so recogni ze those
ri sks and, where possi bl e, faci l i tate appropri ate responses. For ex-
ampl e, the burden of fundi ng renewabl e energy sources or energy
conservati on programs to reduce pol l uti on shoul d be shared broad-
l y, not pl aced sol el y on verti cal l y-i ntegrated uti l i ti es. Symmetri cal
treatment of al l pl ayers wi l l address envi ronmental concerns more
effecti vel y and provi de competi ti ve pari ty.
CONCLUSI ON
Our tel ecommuni cati ons and el ectri ci ty sectors are undergoi ng
sweepi ng transformati ons, whi ch hol d the promi se of i ncreased rel i -
ance on market forces and competi ti on, wi th potenti al l y l arge di vi -
dends for consumers and busi ness. To faci l i tate such trans-
formati ons, regul atory and competi ti on pol i cy must adapt. Unnec-
essary l egal restri cti ons on entry must be removed, and regul ati on
must be reformed to better address those i ndustry segments where
monopol y power wi l l persi st. But bl anket deregul ati on wi l l not en-
sure an equi tabl e, effi ci ent, and durabl e transi ti on to competi ti on.
To ensure a successful transi ti on and protect i mportant soci al
goal s, government wi l l have to pl ay an evol vi ng but ongoi ng rol e.
1996

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