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PUBLIC UTILITY STATUS AND OBLIGATION TO SERVE
Electricity
Historically, regulation developed because some businesses were perceived as
being "affected with a public interest" to the point that government intervention was
considered warranted. This led to a number of industries being regulated extensively,
including electricity. The regulation of the prices charged in several indu~tries in the last
several decades has been relaxed or removed. In the mid 1990's, many states began
considering whether the generation portion of electric service should be deregulated.
By 2000, approximately 40 states, including North Carolina, were at least studying the
issue. Approximately half the states (not including North Carolina) had pursued de­
regulation of retail electric service. Today, I think 15 states and the District of Columbia
have not suspended it. [See first two pages of separate handout.]
Electric service consists of several components: generation, transmission,
distribution, and general (e.g., metering, billing, customer service).
If the generated
electricity is sold to an end user, it is a retail sale and subject to regulation by the states.
If it is sold to someone for the purpose of resale, then it is a wholesale sale and subject
to regulation by the Federal Energy Regulatory Commission (FERC). With respect to
transmission, if the transmission of electricity is provided as a separate service and is in
interstate commerce, then it is subject to regulation by the FERC. All transmission to a
wholesale customer, which are usually electric cooperatives and municipalities, is
subject to FERC regulation. With respect the sale of electricity to retail customers, it
depends upon whether the service is "bundled," which means provided as a package, or
unbundled into separate services.
If it is bundled, then transmission is subject to
regulation by the states. If it is unbundled, retail transmission is subject to regulation by
the FERC. Distribution is almost always exempt from federal regulation.
I am first going to talk about how North Carolina regulated electric service and
then will discuss generally the current status of states that have deregulated.
For purpose of electric service, North Carolina General Statute § 62-23(a)
defines a "public utility" as a person owning or operating in North Carolina equipment or
facilities for
(1) producing, generating, transmitting, delivering, or
furnishing electricity, piped gas, steam, or any other like
agency for the production of light, heat or power to or for
the public for compensation;
This is a fairly broad definition in terms of the activities that are included. There
are only a few stated exceptions.
One is a person that constructs or operates an
electric generating facility, the primary purpose of which is for the person's own use and
not for the primary purpose of producing electricity, heat, or steam for sale to or for the
public for compensation. The question raised in this context is whether the proposed
activities constitute self-generation.
In most cases decided by the Commission, the
interpretation of "to or for the public" has been the critical determination.
Another
exception is that a landlord and an employer may provide public utility service to its
tenants and employees, respectively, as long as such service is not metered or other
wise charged on a measured basis.
The standard for determining whether a given enterprise is a public utility was
established by the North Carolina Supreme Court in State ex reI. Utilities Commission v.
Simpson, 295 NC 519, 246 S.E.2d 753 (1978).
The Supreme Court found the
Commission to have considerable flexibility in this regard. This opinion held that what is
the "public" in any given case depends upon the regulatory circumstances of the
particular case. Some of these circumstances are (1) the nature of the industry sought
to be regulated; (2) the type of market served by the industry; (3) the kind of competition
that naturally inheres in that market; and (4) the effect of non-regulation or exemption
from regulation of one or more persons engaged in the industry. The Supreme Court
concluded that the meaning of "public" must in the final analysis be such as will, in the
context of the regulatory circumstance!:,. accomplish the legislature's purpose and
comport with its public policy.
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Accordingly, an interpretation of "public" must (1) accomplish the legislature's
purpose and (2) comport with its public policy. The primary purpose of Chapter 62 is to
assure the public of adequate utility service at reasonable rates, which includes such
things as the imposition on the utility of an obligation to serve all customers within its
franchised territory, the granting of a monopoly right in exchange to serve all such
customers, and the elimination of any uneconomic duplication of facilities.
With respect to public policy, G.S. § 62-2 declares it to be the policy of the State
to provide fair regulation of utilities; promote the inherent advantage of regulated public
utilities; promote adequate, reliable and economical utility service to all of the citizens
and residents of the State; and to provide just and reasonable rates and charges for
public utility services consistent with long-term management and conservation of energy
resources by avoiding wasteful, uneconomic and inefficient uses of energy. In return for
having its rates and provision of service regulated, each electric utility in North Carolina
has the right, and the obligation, to serve all customers within its franchised territory
With respect to steam, the Commission has concluded that steam is not as
common a utility function as other services and traditionally it has not been regulated to
the same degree. The Commission also has noted that an agreement by an industrial
entity to purchase steam constitutes a "bargained for" transaction. Another important
factor has been the fact that the industrial entity will use the steam only for process use
and not to generate electricity. The Commission has prohibited the use of steam to
generate electricity in these situations because that would allow the industrial entity to
bypass the utility that has a monopoly franchise for retail sales of electricity.
One thing that many do not realize is that, if a given activity is determined to
make the person performing the activity a public utility, then the activity cannot be
performed.
Under current law, it is not a question of whether the person should be
regulated as a public utility. If the person would be a public utility by virtue of performing
the activities then the exclusive franchise of the regulated public utility prohibits the
activities from being performed. The question as to whether a third party owning solar
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equipment and providing electricity directly to an end user would be a public utility has
not been presented directly to the Commission.
ELECTRIC DEREGULATION IN OTHER STATES
There is so much variety among the states that have deregulated that it is hard to
summarize them briefly.
Many of these states required their regulated, vertically
integrated utilities to sell off their generating facilities. A number of them allowed the
utilities to sell this generation to affiliates. To the extent alternative electric suppliers
were not willing to serve or a retail customer did not choose to switch, the incumbent
utility has been required to provide default service, which is sometimes called provider
of last resort. Almost all of the states that pursued de-regulation froze the rates for
default service in the short term.
By the mid-2000's, additional legislation or other
intervention was often necessary because rates were going to increase dramatically
once the freeze expired.
Because of the recession, beginning in 2009 and still
continuing to some extent, demand dropped rather significantly. In addition, increases
in the production of shale gas have significantly reduced the cost of natural gas, which
also has led to a lowering of fuel costs.
Depending upon who is asked, you would get several different opinions as to
whether retail restructuring has worked. In most states, it has not significantly lowered
prices and only a fairly small percentage, particularly of residential customers, have
switched. Some states have had the majority of customers and load switched, so there
is information out there to support many different positions. Some of the states that
have suspended deregulation still allow large customers to choose or allow third party
sales for renewable facilities, which makes the information more difficult to synthesize.
Pages three through five of the separate handout (marked pages 6, 7, and 8)
show the EIA's calculation of average residential, commercial and industrial retail prices
in 2000 and then in 2010. The restructured states are the lighter columns. This is from
a report of the Michigan utilities commission to the Michigan legislature, so Michigan is
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the black column. You can see from these charts" there the relative positions of the
states have not changed as a result of deregulation. The last few pages (marked pages
9 and 10) are from the same Michigan report and show the average rates for the ten
largest states in 2010. You'll notice North Carolina has the lowest or second lowest
rates for all three categories of service.
I'll be glad to answer any questions.
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