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White House Announces Electricity Deregulation Plan

Spring 1998

Recently, the Clinton White House announced a new comprehensive Electricity Competition Plan which is designed to encourage states to implement retail competition and assure access to and reliability of the transmission system necessary to support such retail competition in the electrical markets.

Federal Mandate for Competition. The Clinton proposal includes federal legislation that would establish a flexible retail competition mandate to require each investor-owned public utility to allow retail customers to purchase power from the supplier of choice by January 1, 2003. Under this proposal, any state could opt out of the competition mandate if it finds that, on the basis of public proceedings, customers would be better served within their state by alternative state policies such as the state's own restructuring plan or under the current monopoly system.

Stranded Cost Recovery. The Clinton Administration's proposal also endorses the concept that utilities should be able to recover legitimate and verifiable stranded costs. Stranded costs are those capital costs incurred by the utility under the tariff-based system, based upon a legitimate expectation that the costs would be recovered through future tariff-based revenue streams. Under the Clinton proposal, the states would be the primary engine for determining recovery of the stranded cost items. The federal energy regulatory commission would act as a fallback authority if the state lacks the cost recovery mechanism under its existing law.

Self-Regulated, Reliability Standards. The Clinton plan would also include amendments to the Federal Power Act to require the Federal Energy Regulatory Commission ("FERC") to approve the formation of a private, self-regulatory organization which would prescribe and enforce reliability standards. The Clinton Administration proposal relies upon the industry's long established tradition of self-regulation. Market participants would be required to join such private organizations that would establish reliability standards and enforce those standards subject to oversight by the Federal Energy Regulatory Commission. In addition, the Administration's plan would amend the Federal Power Act to specifically authorize the Federal Energy Regulatory Commission to require transmission utilities to turn over operation and control of those facilities to an independent system operator.

Federal Empowerment for Restructuring. The Administration's plan would require modification of the existing federal regulatory framework. Most of the existing federal regulation is based upon the premise that utilities are vertically integrated and enjoy advantages of monopoly franchise territories. Given the Administration's emphasis on customer choice by the year 2003, the existing federal regulatory framework will need to be changed to provide FERC with adequate authority to fully implement the Administration's open access policy. Such authority also may be necessary to infuse the states with the clearly defined power to effectively implement retail competition.

Significant Energy Savings. The Administration has estimated that retail competition under its plan would save users $20 billion per year in their electricity bills. According to the Administration, this would translate directly into savings for the typical family of four of $104 per year in savings. The Administration assumes that there will be an additional indirect savings for lower costs of other goods and services of $128 per year.

Finally, the Administration estimates that its plan will reduce greenhouse gas emissions by 25-40 million metric tons by the year 2010. The Administration's plan provides an incentive for more efficient fuel use which will result in lower emissions.

G&K Follows Development. It will be important to follow the Administration's activities to implement the new plan. In particular, the Administration's plan may serve to expedite electrical market restructuring activities in states such as Wisconsin. These developments should be watched closely by large energy users located in the State of Wisconsin and elsewhere. The Environmental and Energy Practice Group at Godfrey & Kahn, S.C. is watching these developments closely and will report new developments as they occur. Anyone interested in more information regarding the Clinton Administration's comprehensive electricity competition plan should contact Arthur J. Harrington, John L. Clancy, or Donald F. Kiesling, Jr.

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