BEECHER - NAWC

8NAWCNATIONAL ASSOCIATION OF WATER COMPANIES1998 NAWC Water Policy ForumThe Water Industry Compared:Structural, Regulatory, and Strategic Issues forUtilities in a Changing ContextJanice A. Beecher, Ph.D.Beecher Policy Research, Inc.September 1998BEECHERA Report Prepared for theNational Association of Water Companies

-~~-~-----8NAWCNATIONAL ASSOCIATION OF WATER COMPANIESPETER L. COOK, EXECUTIVE DIRECTORMEMORANDUMTO:FR:DT:RE:NAWC MembersSharon L. GasconDecember II, 1998The Water Industry Compared: Structural, Regulatory, and Strategic Issues forUtilities in a Changing ContextThe enclosed study "The Water Industry Compared: Structural, Regulatory, and Strategic Issuesfor Utilities in a Changing Context" is provided compliments of the National Association of WaterCompanies. Additional copies may be purchased from NAWC for $40 each.EnclosureSUITE 1212, 1725 K STREET N.W. •WASHINGTON, D.C. 20006·1401 • (202) 833-8383 • FAX (202) 331-7442

MNAWCNATIONAL ASSOCIATION OF WATER COMPANIES1998 NAWC Water Policy ForumThe Water Industry Compared:Structural, Regulatory, and Strategic Issues forUtilities in a Changing ContextJanice A. Beecher, Ph.D.Beecher Policy Research, Inc.September 1998BEECHERPOLICY RESEARCH INC.A Report Prepared for theNational Association of Water Companies

Water ComparedExecutive SummaryExecutive SummaryThe major public utility industries have undergone and are undergoing the most dramatictransformation of their century-old existence. Once considered "natural" monopolies, utilitiesnow truly are "in the business" of providing essential services to communities and customers.Like its counterparts in energy and telecommunications, the water industry is evolving to bemore competitive and dynamic. However, the water sector also demonstrates many of themost fundamental traits of monopolies. Moreover, various characteristics and trends suggestthat the paradigms emerging for the other sectors may not be a good fit for water.This report explores many of the basic technical, economic, and institutional characteristics oftelecommunications, electric, natural gas, and water utilities with an eye toward implicationsfor regulatory change. The report has three basic purposes:DooTo understand the changing context of utilities and utility regulation.To compare fundamental features of water supply to other utilities.To examine the relevance of these features for regulatory alternatives.Water utilities exhibit many unique technical, economic, and institutional characteristics.Technical characteristics including features related to engineering, production, infrastructure,and the physical properties of the resource. Economic characteristics include marketstructure, demand, costs, and prices. Institutional characteristics include ownership,management, and systems of regulation. In many instances, these characteristics areinterrelated and mutually reinforcing. For example, many of water's physical properties andbasic engineering features of the water delivery system are intrinsically related to economiccost characteristics. Some aspects of the water industry, including its substantial public healthand environmental dimensions, are especially unique.Table E-1 summarizes a selected group of the more basic features that distinguish the waterindustry from the telecommunications, electricity, and natural gas industries. Understandingthese characteristics is important to the consideration of structural and regulatory change inthe water industry.The transformation of the utility industries also can be understood in terms of underlyingforces. The technical rationale for restructuring is innovation, the economic rationale isefficiency, and the institutional rationale is reform. While some of the forces that havebrought about change in the telecommunications and energy fields may have relevance to thewater sector, many of the specific vehicles for change (such as access to long-distancetransmission markets) are not applicable. As the other utilities evolve to become "networkindustries," water utilities remain largely local in character, control, and operations.NAWC September 1998

----Water ComparedExecutive SummaryTable E-1A Summary of Selected Characteristics of the Water IndustryRelative to the Other Utility IndustriesCharacteristic I Water ComparedTechnicalCapital intensityand longevityEconomies of scaleProduction-costprofileRationale andpotential forwheelingPhysical propertiesEconomicMarket power ofnoncore customersTrends in demandTrends in pricesTrends in costsWater is among the most capital intensive of the utility industries; percustomerinvestment is rising; water assets also tend to have very long servicelives, making long-term planning and investment essential.Water supply and treatment demonstrate substantial economies of scale, yetthese economies are not realized across the industry due to fragmentation.Water delivery requires substantial investment in transmission and distributionfacilities; in the energy sector, generation costs (including fuel) dominate thecost profile.Water generally cannot be wheeled through long-distance networks because oftechnical, economic, and institutional constraints; transmission costs relative toproduction costs are much lower in the other sectors.Water is a natural resource with unique physical properties (heavy weight,incompressibility, and capacity to corrode); water is the only utility resourcethat consumers ingest.The water industry is very dependent on residential customers; the marketpower of noncore (nonresidential) customers (who desire competition) isgreater in the other utility sectors.Water demand (aggregate and per capita) is very stable and opportunities forgrowth are limited; demand for other utility services is rising.Water prices are rising at a pace faster than inflation due to rising costs and, insome cases, historic underpricing; the other sectors can offer price stability ordecreases.Water costs are rising to meet the needs of an aging infrastructure, comply withpublic health standards, and expand service territories.InstitutionalOwnershipstructureRegulation,accountability, andcompetitive fieldPolicy goalsSource: Author's construct.Public ownership (water supply as "public works") and the desire for localcontrol characterize the water sector; private ownership and the regionalpresence of utilities with large market shares characterize the other sectors.For the water industry, quality regulation is high but economic regulation islimited and uneven, most publicly owned systems are not regulated, and nofederal economic regulatory presence exists (compared to the other sectors);the playing field for competition is highly uneven.Policy goals for the water industry and for water resources are complex andless cohesive than for the other public utility sectors; water is intrinsicallyrelated to other public health and environmental concerns.NAWC 11 September 1998

Water ComparedExecutive SummaryRestructuring in thetelecommunications, electricity,and natural gas industries ...Restructuring in the waterindustry ...A striking difference among the industries is that the concept of restructuring in thetelecommunications and energy sectors generally refers to the process of disaggregatingproviders and unbundling services. For the water industry, the term restructuring is used torefer to consolidation. Although they appear to move in opposite directions, both forms ofrestructuring share the goal of improving efficiency, performance, and service.Although it is manifested somewhat differentlythan in the other sectors, water utilities alsoexperience various forms of competition. Infact, the competition for ownership (publicversus private) has been a persistent form ofcompetition in the water industry. Other formsof competition are relevant as well. The playingfield for competition is very uneven due tovariations in regulatory jurisdiction and otherfactors.Other aspects of restructuring include technicalinnovation and service unbundling. Waterdelivery technologies are highly stable, and theoptions are limited by water's physicalproperties, but cost pressures will induce waterutilities to explore opportunities for change,including technical innovation and serviceoptions.Barriers to water wheelingo High transmission costs in absoluteterms.o High transmission costs relative toproduction costs.o Physical barriers, including terrain,obstacles, and gravity.o Inability to compress or transform.o Depletion of local resources andpotential degradation of quality.o Problems with mixing water fromdifferent sources.o Catastrophic risk of contaminationin a large network.o Preference for local control ofwater resources.NAWCiiiSeptember 1998

Water ComparedExecutive SummaryAs utility industries are restructured, public policy options emerge. Regulation and publicownership are substitutes for competition; when competition emerges, regulation can berelaxed or eliminated. Deregulation presumes that competition and consumer choice aresufficient to protect consumers from abuses of pricing and service than can occur withunregulated monopolies. Emergent competition in the telecommunications and energysectors, along with some concerns about the limitations of traditional regulation in a moredynamic enviroument, has brought about substantial experimentation with alternativeregulatory models and deregulation.This report considers five regulatory models with respect to validity and efficacy for the waterindustry:o Traditional regulation. Regulation of rate base, rate-of-return, and rate structures;emphasizes cost-of-service ratemaking; designed to prevent abuses of monopoly power;oriented toward larger, investor-owned utilities.o Structured competition. Regulation of returns with opportunities for competition andmodified or more flexible regulation under some circumstances; introduces incentives forperformance and restructuring; regulatory jurisdiction could be extended to level theplaying field for competition (including regulatory review of privatization contracts).o Contract-based regulation. Regulation through municipal contracts for utility services;establishes or maintains local governmental control; provides a degree of competition forcontracts among alternative vendors.o Performance-based regulation. Price caps, indexes, benchmarking, profit-sharing, flexiblereturns, and various other alternatives to traditional regulation; shifts the emphasis fromcost to performance.o Deregulation. Elimination of traditional state economic regulation; promotes reliance oncustomer choice at the retail level and competitive markets.Underlying each regulatory alternative are a number of assumptions that may or may not bevalid when considering a specific industry. These assumptions correspond, explicitly orimplicitly to the basic technical, economic, and institutional characteristics reviewed in thereport. Many regulatory models (including deregulation) appear to be based on assumptionsthat might not be appropriate to the water industry.Efficacy, another dimension, concerns how welHhe rtuidel is expected to achieve industryspecificgoals. The water industry not only demon~trates \mique characteristics, but alsoseveral unique performance goals. Performance gmils ~'t 'are especially relevant to the waterindustry include:o Adequate and timely investment in an aging infrastructureo Compliance with public health, safety, and environmental regulationso Environmental stewardship for natural water resourceso Extension of service to unserved or underserved areaso Efficiency and innovation under technical constraintso Industry restructuring to achieve economies of scale and other goalsNAWC IV Septeniber 1998

Water ComparedExecutive SummaryoIndustry responsiveness to a dynamic structuraland regulatory environmentThe results of the analysis suggest that theassumptions behind the traditional model ofeconomic regulation fit well with the water industry,but that some of the emerging models may rankhigher in terms of efficacy in achieving performancegoals. Many of the potential shortfalls of traditionalregulation (for example, in promoting efficiency andinnovation) are equally relevant to all utilities.However, not all alternatives to traditional regulationare equally relevant to all utilities.Deregulation may be particularly inappropriate forthe water industry, given both the assumptions thatunderlie it and the model's efficacy in achievinggoals. Contract-based regulation is used widely inthe water sector and its assumptions are generallyvalid, but it may allow for monopolistic behavior andfail to accomplish the broader social goals ofperformance and restructuring.For the water industry, structured competition(including a relaxation of regulation under somecircumstances) offers a conservative approach toimproving the regulatory environment and promotingCompetition in watero Extending service to unservedor underserved areas.o Engaging in acquisitions andmergers (voluntary).o Bidding for operationscontracts (involving utilities aswell as private contractors).o Bypassing the utility (largevolumecustomers, includingself-supply).o Purchasing water on wholesalemarkets.o Trading water rights (includingalternative water uses).o Competing with bottled waterand home treatment methodsfor service quality and image.o Promoting public versusprivate ownership.o Contesting markets or utilityownership (includinginvoluntary acquisitions).o Participating in convergenceacquisitions.some forms of competition. Performance-based regulation is a somewhat less conservativeapproach. To be effective, however, performance-based regulation should be industryspecific.Structural and regulatory changes raise a number of salient issues for water utility managers:Changes in the other utility sectors are relevant for water in a number of specific ways, not theleast of which is the potential for regulatory reform to neglect the unique characteristics of thewater industry. More generally, water managers will want to monitor a number of strategicissues that will affect the industry and individual companies, a sample of which issummarized in Table E-2. Managers also can engage in a number of strategic activities toensure their continued success in responding to changing conditions.NAWC v September 1998

Water ComparedExecutive SummaryUtilitycharacteristicsValidity ofassumptionsI.1Performancegoals_....Efficacy ofmodeli/alternativesI~Relevance ofstructural andregulatoryFigure ES-1. Conceptual Approach to Evaluating ModelsNAWC vi September 1998

Water ComparedExecutive SummanrHiPerformancebasedregulationLoTraditionalregulationDeregulationContract-basedregulationValidity ofassumptionsLoEfficacy ofmodelFigure ES-2. Evaluation of Regulatory AlternativesNAWC Vll September 1998

Water ComparedExecutive SummaryII !!'I ilITable E-2A Sample of Strategic Issues for Water ManagersDimensionTechnicalIssueo Product differentiation and implications for service qualityo Environmental stewardship role (source protection and conservation)o Engineering-economics and the treatment-transport tradeoffo Economies of scale in construction and incentives to buildo Capturing economies of scale and scope in operationso Alternative technologies and innovation under constraintsEconomic o Flat and constrained demand for watero Emerging competition and marketso Disaggregation and unbundling of serviceso Cross-ownership of utility services and convergence of utilitieso Flexing energy purchasing powero Mergers, acquisitions, and consolidationo Wholesale water markets and other regional opportunitiesInstitutional o Continuity of economic regulation under changing conditionso Appropriateness of alternative modelso Distinction between regulated and unregulated serviceso Constraints on full and fair competition (playing field)o Pricing flexibility for noncore (nonresidential) customerso Means of achieving universal water serviceo Affordability and competing policy goalsSource: Author's construct.I !II !! IMuch can be gained from an understanding of the similarities and differences among theutility industries. By comparison to the water industry, the public utility industries that aremoving toward competition and deregulation:o are much less capital intensive,o do not depend on a constrained natural resource that consumers physically ingest,o have exploited economies of scale,o can market their product at a relatively low cost through massive transmission grids,o have an adequate (or more than adequate) infrastructure in place,o are not facing rising capital and operating costs,o are experiencing rising demand,o can offer price freezes or decreases or can offer more services at the same price,o can compete on the basis of alternative technologies and services and customer choice,o are primarily privately owned and uniformly regulated,o present reasonable risks in terms of reliability and related concerns, ando provide services that arguable are less "essential" for meeting basic human needs.NAWC Vlll September 1998

Water ComparedExecutive SummaryStructural change in the water industry to achieve economies of scale and variousperformance goals is highly desirable. Economic regulation can promote beneficial structuralchange in the water sector. Whether traditional economic regulation, a modified version, or anew model is needed will be a continuing matter of debate. The current policy environmentsuggests that the water utility managers should be prepared for inevitable changes in thebroader system of economic regulation that will affect their industry indirectly or directly.The current climate also presents opportunities for experimentation and innovation to utilitiesinterested in promoting change.However, given the unique characteristics and challenges of the water sector, it makesexceedingly more sense to craft unique structural and regulatory models for the water industryrather than try to adapt the water industry to models designed for and perhaps better suited toother utility industries.NAWC IX September 1998

Water ComparedExecutive SummaryAppendix AChronology and Status of Utility IndustryRestructuring Activity by State ..................................................................... 1 03Appendix B Restructuring Timelines by Industry ............................................................. 139Appendix CStatus Of Regulatory Alternatives For TheTelephone Industry ........................................................................................ 143Data Sources ....................................................................................................................... 149Glossary on Restructuring ..................................................................................................... 155NAWC XI September 1998

Water ComparedExecutive SummarvTablesTable E-1Table E-2Table 1-1Table 2-1Table 2-2Table 2-3Table 2-4Table 2-5Table 2-6Table 2-7Table 3-1Table 3-2Table 3-3Table 3-4Table 3-5Table 3-6Table 3-7Table 3-8Table 4-1Table 4-2Table 4-3Table 4-4Table 4-5Table 4-6Table 4-7Table 4-8Table 5-1Table 5-2A Summary of Selected Characteristics of the Water IndustryRelative to the Other Utility Industries ......................................................... .iiA Sample of Strategic Issues for Water Managers ...................................... viiiInvestor-Owned Industry Profiles (1996) ....................................................... 2Facilities Used in Utility Services by Functional Area .................................. 5Overview of Technical Characteristics .......................................................... 8Overview of Economic Characteristics ........................................................ 25Overview of Institutional Characteristics ..................................................... 44Profile of Smitll Community Water Systems ............................................... 46State Commission Regulation of Public Utilities ......................................... 50Selected Characteristics of the Water IndustryRelative to the Other Utility Industries ........................................................ 52Potential Benefits and Costs of Retail Electricity Wheeling ........................ 58Illustration of Comparative Transmission Costs .......................................... 59Restructuring Timeline ................................................................................. 70Highlights of the Telecommunications Act of 1996 .................................... 71Highlights of the Clinton Administration's Comprehensive ElectricityCompetition Plan (March I 998) ................................................................... 72NARUC Principles to Guide the Restructuring of theElectric Industry (1996) ................................................................................ 73Water Industry Restructuring Pursuant to the1996 Safe Drinking Water Act.. ................................................................... 75Water Wheeling: The California Water Code .............................................. 77Regulated and Umegulated Functions by Sector ......................................... 80Regulatory Models and Modes of Social Control ........................................ 83Comparing Regulatory Alternatives ............................................................. 84Performance-Based Ratemaking .................................................................. 85Regulatory Objectives and Variations of Performance-Based Regulation .. 87Performance Goals for Public Utilities ........................................................ 89Validity of Assumptions and Efficacy ofModel... ...................................... ."90Washington State's Alternative Regulation Policy (Telecommunications). 95A Sample of Strategic Issues for Water Managers ....................................... 99Presence of the Investor-Owned Water Industry andState Restructuring Activity ....................................................................... 1 01FiguresFigure ES-1 Conceptual Approach to Evaluating Models ................................................. viFigure ES-2 Evaluation of Regulatory Alternatives ......................................................... viiFigure 3-1 Integrated Functions in a Traditional Utility ................................................ 54Figure 3-2 Competitive Relationships for a Modern Utility Company ......................... 54Figure 4-1 Conceptual Approach to Evaluating Models ................................................ 88Figure 4-2 Evaluation of Regulatory Alternatives ......................................................... 92Figure 4-3 Risks and Rewards of Regulatory Alternatives ............................................ 93Figure 5-1 Evolution of Public Utilities ......................................................................... 98NAWC xu September 1998

Water ComparedIntroduction1. IntroductionPublic utilities-enterprises providing vital telecommunications, energy, and water serviceshavein common a number of salient characteristics. Sometimes called the "fixed" utilities,these characteristics include a high degree of capital intensity, the nonfungible nature ofassets, an obligation to serve, and the intrinsic role of these services in maintaining standardsof living in communities.Traditionally, public utilities were regarded asmonopolistic, even characterized as "natural"monopolies. This characterization, of course, hasbecome antiquated in the context of emerging forms ofcompetition. Although monopolies once wereconsidered creatures of their own engineering andeconomic characteristics, current thinking viewsmonopolies as creatures of institutions-laws,regulations, and policies. The view that utilitymonopolies were borne of manmade "laws" versuseconomic ones has led to the unraveling of long-heldassumptions and approaches.Traditional utilitymonopolieso Economies of scaleo Capital intensiveo Nonfungible assetso Barriers to entry and exito Exclusive franchiseo Obligation to serveo Essential servicesAmong the utility sectors, the water industry is particularly unique. Although water serviceshares many of the traits ofthe other utility services, it is distinguishable in several regards,including various structural and regulatory features. Where utility services are monopolistic,water supply is particularly so; where utilities are capital intensive, water utilities areparticularly so; and so on. A regulatory panel at the 1997 Annual Convention of the NationalAssociation of Regulatory Utility Commissioners asked whether water utilities were the "lastutility monopolies."The water industry is hardly exempt from the forces of structural and regulatory change,including emergent competition. In fact, some of the changes occurring in the utility sectorsgenerally are especially striking for water because of the traditional character of the waterindustry. However, lumping water utilities together with telecommunications and energyutilities can mask important differences among the industries. Doing so also runs the risk ofcrafting regulatory policies (by state legislatures or public utility commissions) thatundermine the water industry and its ability to provide safe, adequate, and reliable service.Industry ProfilesTable 1-1 provides a profile for each of the investor-owned industries providing localtelephone, electricity, natural gas, and water services. Measured in terms of revenues andassets, the electricity industry is the largest of the group. Measured in terms of employees,however, the service-oriented telephone industry is largest.NAWC 1 September 1998

Water ComparedIntroductionTable 1-1. Investor-Owned Industry Profiles (1996)Local Electricity Natural Gas NAWCWaterTelephone (1996) (1995/1996) (1996)(1996)Number of ProvidersLarger investor-owned utilities 51 243 107 132Approximate total providers 1,400 3,200 2,700 50,289Income Statement ($mil )Revenues 100,650.5 188,901.0 63,299.0 2,701.0Total operating expenses 73,508.9 156,938.0 56,623.0 2,092.4Total operation and maintenance na 109,256.0 45,843.0 1,353.9Depreciation 20,863.8 19,510.0 4,474.0 258.0Net operating income 15,779.2 31,963.0 6,675.0 608.6Net income 12,852.2 21,228.0 4,605.0 367.1Balance Sheet ($m1l).Total assets (total liabilities) 198,496.5 581,991.0 141,965.0 11,400.1Gross utility plant (incl. CWIP) 296,251.2 581,364.0 143,636.0 11,834.0Net utility plant (less fuel) 157,866.3 363,854.0 80,912.0 9,305.8Construction work in progress 3,897.3 11,396.0 na 297.7Total capitalization 119,986.3 365,783.0 90,581.0 7,436.0Total equity 73,806.3 193,156.0 54,402.0 3,568.1Common equity na 61,919.0 na 3,437.9Preferred stock na 18,830.0 na 130.2Total long-term debt 46,180.0 172,627.0 35,548.0 3,867.9Total retained earnings 21,508.8 57,466.0 na 1,533.8Contributions in aid of construction na na na 986.8Customer advances for construction na na na 737.7Select Rat1osReported return on equity(%) na 12.30 13.4 (LDCs) 11.23Net income/total equity 0.17 0.11 0.08 0.10Long-term debUtotal assets 0.23 0.30 0.25 0.34Long-term debUtotal capitalization 0.38 0.47 0.39 0.52Net income/operating revenues 0.13 0.11 0.07 0.14Net utility planUtotal assets 0.80 0.63 0.57 0.82Net utility planUconnection (000) 1.02 4.05 1.35 1.62Net utility planUemployee (mil.) 0.36 0.94 0.47 0.80EmployeesEmployees (n) 436,717.0 386,250.0 171,600.0 11,563.0Salaries and wages ($mil.) 23,224.5 15,824.0 7,911.0 498.9Customers and SalesTotal connections or lines (000) 155,164.6 89,891.0 59,820.0 5,736.2Residential customers 104,314.8 79,021.0 54,968.0 5,233.8Commercial customers 49,247.5 10,022.0 4,616.0 395.2Industrial and/or other 1,602.3 849.0 236.0 117.2Total sales 600 bil. calls 2.98 bil. mWh 8,882 bil. BTUs 905 bil. gal.na - not availableSource: See Data Sources appendix.NAWC 2 September 1998

Water ComparedIntroductionThe investor-owned water industry is much smaller than its private-sector counterparts. Theprimary reason is that in the water sector, municipal ownership prevails. A secondaryconsideration is that water supply, though very capital-intensive, historically has commandeda smaller share of the economy. The water industry as a whole (including publicly andprivately owned systems) is much larger than these profiles indicate. 1The significant differences in the size and ownership profiles of the industries are explored inother parts of this report. For comparison purposes, the utilities present a moving target;change has become constant. For this reason, comparing trends is as important as comparingbasic features.Overview of the ReportThe purpose of this report is to explore in relative detail many of the features of the basicfixed utilities, with an emphasis on the unique characteristics of the water industry. Thefindings suggest that structural and regulatory alternatives for the water industry, as well asmanagement strategies, would be well served by an informed understanding of water's manydistinguishing characteristics.The relevance of. ~ The report begins with an overview of many basic~ characteristics of the telecommunications, electric, naturalindustry traits ~ gas, and water industries with an eye toward highlightingThe characteristics of the ~ important differences (Section 2). Key traits are,,"futility industries, as well as organized according to technical, economic, andperformance goals specific tothose industries, areextremely relevant when itcomes to choosing among (Section 3).~structural and regulatoryalternatives. In some cases,the assumptions and modelsthat make sense for oneindustry may not make sensefor another.institutional categories and these categories are usedthroughout the report. This analysis is followed by anoverview of structural change in each of the industries- An analysis of emerging regulatory models is provided inorder to highlight the implications of selected alternativesfor the water industry (Section 4). Specifically,traditional economic regulation is compared to structured;l!competition, contract-based regulation, performancebasedregulation, and deregulation. Based on waterindustry characteristics, the analysis considers the validity of the assumptions behind eachmodel and the potential of each model for achieving performance goals. The report concludeswith a brief discussion of strategic issues for the water industry in light of the differencesamong the industries, patterns of structural change, and emerging regulatory approaches(Section 5).1In terms of total assets (public and private), however, the water industry is comparable to the size ofthe naturalgas industry.NAWC 3 September 1998

! ',Water ComparedIntroductionII11.~INAWC4 September 1998

Water ComparedIndustries Compared2. . The Utility Industries ComparedThe telecommunications, electric, natural gas, and water utilities have a number of features incommon. All provide services considered more or less essential to a comfortable modemexistence. At a general level, all demonstrate parallel functions-production, transmission,and distribution. Historically, the similarities among these industries, particularly in terms ofmonopoly features, were stressed more than the differences. In some cases, "combination"utilities provided more than one service, notably electricity and natural gas (and sometimeswater). The similarities among the utilities also were reflected in the legal and regulatoryinstitutions overseeing them.Table 2-1 compares the four industries according to basic functions. The comparisonillustrates that at a fundamental level, the industries have much in common in terms offunctional activities. However, important differences also begin to emerge.Table 2-1Facilities Used in Utility Services by Functional AreaFunctional Telecommunications Electricity Natural Gas WaterAreaGeneration/ Equipment based Power generation Natural gas Surface water andproduction transmission of voice facilities; produced wellfields; a groundwater withdrawal;and data. mostly from nonrenewable a locally renewablenonrenewable natural resource. natural resource.natural resources.Storage None (service on None (service on Natural gas storage Raw water storage indemand). demand). facilities reservoirs andunderground storage inwellfields.Transmission Local access and Higb voltage Interstate and Water mains and pumpingtransport area transmission intrastate pipelines stations; relatively(LATA); relatively facilities (675,000 (300,000 miles); expensive to transportinexpensive to miles); relatively relatively because physicaltransport. inexpensive to inexpensive to properties cannot betransport transport. altered (e.g., through("wires").compression).Treatment Not applicable. Voltage regulation Drying and Water treatment facilitiesfor transmission. compression for for meeting drinkingtransmission. water standards.Distribution Local exchange Local distribution Local distribution Local distribution systemscarrier services. systems ("wires''). systems. (29 million miles of pipe),including treated waterstorage.Source: Author's construct.NAWC 5 September 1998

Water ComparedIndustries ComparedToday, some of the fundamental differences among the utilities are increasingly relevant.This section of the report provides a qualitative and often quantitative comparison of the fourutility sectors in terms of basic structural characteristics that are organized into three areas:o . Technical. Engineering, production, infrastructure, and commodity.o Economic. Market structure, demand, costs, and priceso Institutional. Ownership, management, and regulation.Of course, these categories and the indicators within them are not entirely exclusive. Forexample, capital intensity is both a technical and economic characteristic. And severaltechnical and economic characteristics are related to institutional policies.Numerous data sources were used to compile the comparisons. In many instances, theempirical evidence suggests significant differences among the utilities. Some differenceswith regard to industry structure and structural change are further explored in Section 3 of thisreport.Technical CharacteristicsSeveral key technical traits of the utility industries are compared in Table 2-2. The utilityindustries have many technical features in common and many features that set them apart.For some technical characteristics, such as the physical properties of the resource, water is aunique utility industry. For other technical characteristics, the differences among theindustries are a matter of degree. For example, reliability is an important issue for all utilities;however, disruptions of water service pose an immediate threat to public health and wellbeing in terms of drinking water safety, sanitation, and fire protection.A number of technical characteristics distinguish the water industry from other utilityindustries, as the following observations suggest:oooooWater utility functions-source development, treatment, storage, and distribution-arehighly integrated and separation of functions (or unbundling) is uncommon. Some of thelimited forms of unbundling in the water sector include wholesale markets, contractmanagement, and selective contracting out for certain technical and customer services.The water supply and wastewater treatment industries are the most capital intensive of theutility industries; per-customer investment is relatively high; duplication of facilities isparticularly impractical and uneconomic.Water utility assets have very long lives (in some cases lasting more than a generation ofcustomers), reflecting a very old and stable technology.For water utilities, large increments of capital ("lumpy investments") are needed to exploitconstruction and production economies and provide a safe margin of reliability.The ratio of fixed to variable costs in the water industry is high relative to other utilities.NAWC 6 September 1998

Water ComparedIndustries Comparedo Economies of scale in water supply and treatment are significant, but generally notrealized due to a large number of providers and ownership constraints.o The cost of "production" (that is, source-of-supply cost) for water is low relative to energyutilities (where fuel costs are substantial).o Water supply networks are very localized. Although some water transfers occur, largescalewheeling is limited by technical, economic, and ecological considerations? Inaddition, blending treated water from different facilities carries risks and requires moreintensive quality-control measures.o Water is a product of nature that is heavy in weight and a universal solvent. Water is•·fugitive" in time and space (not always where we need it, when we need it). Althoughrenewable at the local level, water resources are finite. Treated and delivered drinking"atcr can be characterized as a "value-added" commodity.:J Weller is storable. Raw water storage is used to meet long-term ("average") demand andtreated water storage is used to meet peak demand.n Water resource flows are complex and public water supply must compete with otherin stream and offstream uses of water.o For community water service, reliability is a high priority and interruption generally is nottolerated for health and safety reasons (including fire protection).o While units of energy (therms and killowatthours) are relatively uniform, gallons of watercan vary dramatically in terms of safety and aesthetic quality (taste, color, and odor). Interms of public-health protection, tolerance for quality ,..J"if!l!lli':l'!'· aE>i!i!!BIIIii!llli!­differentiation is relatively low.o Water must be treated to standards set by federal andstate drinking water agencies. The quality of sourcewater and the level of treatment required to meetstandards vary from place to place.ooWater is tangible and the only utility product consumersphysically ingest. However, consumers are exposed onlyto a small fraction of all treated water through ingestionor inhalation (steam from baths, showers, and washers).No substitutesWater has no substitutes;only the quality of waterand the method ofdelivery can be varied.Water has no substitutes; only the quality of water and the methods of water delivery(such as bottles v. pipes, community supply v. self-supply) can be varied. Safe water isconsidered integral to the quality oflife and highly essential.These many technical differences among the industries can be substantiated logically orempirically. In the following analyses, data are used to illustrate differences among the utilityindustries along the following key technical dimensions:o Capital intensityo Economies of scaleo Utility plant investmentD Operating expensesD Resource flows2Wheeling is discussed further in Section 3.NAWC 7 September !998

Water ComparedIndustries ComparedIIIII I! ,,Table 2-2Overview of Technical CharacteristicsUtility SectorTrait Telecommunications Electricity_ Natural GasVertical Divestiture, service Vertically Restructured tointegration of unbundling, long- integrated with separatefunctions distance restructuring production,competition; local underway. transmission, andcompetitiondistributionemerging.functions.Capital intensity Less capital Capital intensive. Capital intensiveintensive; morebut unbundled bylabor intensive.function.Asset longevity Relatively shorter; Relatively long- Relatively longandobsolescence technology evolving lived, but potential lived and stablerapidly with high for innovation. technology forpotential fordelivery.innovation.Capacity Opportunities to add Opportunities to Varies.increments smaller increments. add smallerincrements.Ratio of fixed to Low. Moderate. Moderate.variable costsEconomies of Substantial Generally realized Substantialscale realization. with transition to realization.economic smallpower.Production costs Low. Very high Very highrelative to other {including fuel). (including fuel).costsWheeling and National networks, National grid, National pipelineinterconnection with an open wholesale power, system. "Mixing"network architecture and emerging retail gas from differentand access policies. wheeling. sources is not a"Mixing" kWh major issue.from differentsources is not amajor issue.WaterHighly integrated withsome local wholesalewater markets andcontract management.Highly capital intensive(wastewater also);higher cost ofinvestment percustomer; duplicationimpractical.Very long-lived (50 to100 years or more); anold and very stabletechnology for delivery.Large increments ofcapital needed toexploit construction andEoduction economies.Highest of the utilitysectors.Realized within largersystems, but not acrossthe industry due tolarge number ofproviders andownership constraints.Relatively low, exceptwhere resources arescarce.Local networks. Someraw water transfers, butwheeling is limited bytechnical, economic,and ecologicalconsiderations.Blending treated watercarries risks.NAWC 8September 1998

Water ComparedIndustries ComparedTable 2-2 (continued)Utility SectorTrait Telecommunications Electricity Natural Gas WaterPhysical Artificial and uses a Artificial and uses Product of nature Product of nature,properties of the range of inputs. non-renewable and nonrenewable heavy in weight, aresource and resources for (for practical universal solvent,renewability production. purposes). fugitive in time andspace, locallyrenewable but fmite; avalue-addedcommodity.Storage No. Service on No. Service on Underground Raw water (used todemand. demand. storage facilities. meet long-termdemand) and treatedwater storage (used tomeet peak demand).Resource flows All related to All inputs related All inputs related Complex resourceand competition communications. to energy to energy flows, where publicfor inputs production. production. supply must competewith other instreamand offstrearn uses.Reliability and Customer service Can be used to Can be used to Reliability is a highinterruption issue. differentiate differentiate priority andservices and prices. services and prices interruption generally(contracts). is not tolerated forhealth and safetyreasons.Product Much differentiation Little Little Quality varies, butdifferentiation in terms of an differentiation from differentiation from tolerance forincreasing variety of an energy-unit an energy-unit differentiationproducts. (therrn) (kWh) (especially for healthI oersoective. I oersoective). orotection) is low.Quality control Service quality is Some standards. Some standards. Treatment is highlyand standards Increasingly market- regulated by federalbased.and state drinkingwater standards.Tangibility and No. No. Somewhat. Tangible. Only utilityconsumptionresource consumersphysically ingest; onlya portion is actuallyconsumed.Substitution Yes. Various Some fuel Fuel switching, and No substitutes fortechnologies and switching, and alternative energy. water, only for theconsiderable alternative energy. method of delivery;consumer choice.considered highlyessential.Source: Author's construct.NAWC 9 September 1998

Water ComparedIndustries ComparedII'!,ICapital IntensityThe water sector clearlydemonstrates a high degree ofcapital intensity relative to theother utilities. For water utilities,an investment of about $4 to $5 isneeded for every dollar ofrevenue generated. The capitalintensity of the water ismanifested in the vasttransmission and distributionpiping system, along withproduction, treatment, andstorage facilities. Water by far isNAWCwater(1996)Electric (1996)Local telephone(1996)Natural gas(1995)Capital Intensity:Ratio of Utility Plant to Revenues(1995 and 1996)$0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.001'21 Total plant/revenues• Net planVrevenuesthe "heaviest" com!nodity that the delivery system must accommodate (which is a majorconstraint on transmission, as discussed in Section 3). Water facilities also have very longlives; water pipes easily can last beyond a generation., 'II,!i iI .Because of the high cost and substantial physical requirements of water delivery systems,duplication of facilities generally is impractical. Dual systems for delivering treated anduntreated water are feasible under some conditions, but are not justifiable on a widespreadbasis for economic and environmental reasons.Collecting and impounding reservoirsAverage Service Life of Water Assets(Florida Administrative Code)Plastic pipeTransmission and distribution (composite)Rernforced concrete structuresServicesLakes, rivers, and other intakesGeneral plantConcrete ground storage reservoirsCast rron or ductile rron pipeDistribution reservoirs and standpipesGalvanized steel pipe and frttlngsSupply mainsStructures and improvements (all)Wells and springsWater treatment equipmentMeters and meter installation0-(10 20'Years'30 40--_,50NAWC 10 September 1998

Water ComparedIndustries ComparedThe electricity industry also has been regarded as highly capital-intensive. On the verge ofrestructuring, however, there is some indication of a slight downward trend in the ratio ofelectric plant to revenues. The industry that once added enormously expensive nuclear powerplants to its portfolio of assets now appears to be moving toward the use of smaller and lowercostincrements of capacity.For water utilities, an upward trend in capital intensity is detectable. Continued investment incapital facilities (also discussed later in this section) is expected to maintain or even increasethe industry's capital intensity. A key explanation for the rising investment levels is thereplacement of pipelines that are five or more decades old. "Vintage" lines that were installedoriginally for a few dollars per foot will require an investment of $75 to $100 per foot toreplace.Recent Trend in Ratio ofElectric Plant to Revenue (1991 to 1996)5.00 .--------------4.50 +------------4.00------------- ---------3.50 +------------------Gross plantto revenue3.00 -1--~~=~==---~oc--=======2.50 ·-----------------·---Net plant torevenue2.00 +-----======-===~~~~~~--1.50 ~----------------------------1.00 +---.----.----~---,--. -1991 1992 1993 1994 1995 1996Recent Trend in Ratio ofWater Plant to Revenue(NAWC 1991 to 1996)5.00 l------4.50-----=:-:-- ~-- -4.00 +-----.:::~==~--~=---3.50+----3.00 =-==:-::::::====-=====-===~2.50------Grossplant torevenue1.501.00 +---~1991 1992 1993 1994 1995-- ~Net plantto revenue1996NAWC 11September 1998

Water ComparedIndustries ComparedAs older water delivery infrastructure isreplaced, net plant per customer continuesto rise at a face pace. Aggregate NA WCdata demonstrate the dramatic rise in netutility plant investment per customer(about 75% between 1986 and 1996).Ratio of Net Utility Plant to Connections(NAWC 1986 and 1996)Economies of Scale1966 1996Water service exhibits substantialeconomies of scale, particularly for water supply development and for water treatment.Larger water systems can produce, treat, and deliver water at a much lower unit cost (dollarsper gallon). Substantial economies of scale have been realized by telecommunications andenergy utilities, and by larger individual water systems. Unfortunately, economies of scaleacross the water industry have not been realized because of the industry's significantfragmentation (discussed later in this section). The existence of so many smaller communitywater systems and the prevalence of public ownership, have limited the achievement of scaleeconomies in the water industry. Public ownership constrains size and precludes economiesof scale when systems are not allowed to grow beyond geopolitical boundaries.~UJc0"iiiCl000~

Water ComparedIndustries ComparedEconomies of scale in the water industry also can be detected within the investor-owned waterindustry, as measured by revenues per gallon sold and assets per gallon sold. In combination,the capital intensity of the industry and the substantial economies of scale have a directbearing on capital facility planning. Generally, it is more cost-effective to add largerincrements of capacity at once (in one "lump") as compared with smaller increments. In theutility business, the line between "surplus capacity" (for foreseeable needs) and "excesscapacity" (the cost of which is not recoverable) can be a fme one. A certain amount ofsurplus capacity is needed by water utilities in order to provide a margin of safety (includingthe "safe yield" from supply resources).Water utilities continually must balance construction and operation economies with thepressure to conserve water and to build only facilities that will be used and useful toratepayers. Larger, regional water systems could help water utilities achieve least-cost goalsEconomies of Scale in Water Supply:Operations and Maintenance Expense(NAWC 1996)$6,000 ,------~ $5,000 -;-- ---·-----"' U>.§ $4,000 +-----:.c-~----------·----··-roE• • •$3,000 ~K_~...... ·--_--E (i; $2,ooo ••• ~ --;'.;;;·:..:·-~· • • • ; =-~-;=~..::·~::;::==~~~====• • • •~ $1,000 . _!~~ : _..,__•..:.•·c..·_.__•___._.__•• _~--------~- ----•$0 +----- --,_.. . . .--------~--------~----~0 5,000 10,000 15,000 20,000Annual gallons sold (millions)Economies of Scale in Water Supply:Total Assets (NAWC 1996)$60,000 ,----~ $50.000 1.:"'"'.§ $40,000Cii~ $30,000 - •• ••- -------.--•t $20,000 ~ ·--~-------0; -:~----:·1·:··:·:-:-.:..·_:.·_--=-_...______-=~ $10,000 .......:·:·· --~-- --.----------• • •••$0+----~-··-~-···---~0 5,000 10,000 15,000 20,000Annual gallons sold (millions)NAWC13 September 1998

Water ComparedIndustries Compared1, 11in terms of supply and demand management. Specifically, regional facilities could be sized tomeet an efficient level of demand (that is, properly priced and managed to reduce wastefuluse), while also being large enough to capture economies of scale and provide effectivewatershed management.I ,Some water utilities also demonstrate economies of scope in terms of joint management ofwater supply and wastewater treatment. Economies of scope also might be realized in thejoint provision of water supply and source-water protection. Regional water utilities are morelikely to exhibit economies of scale and scope.The economies of scale in the drinking water industry are associated primarily with watersource withdrawals and treatment, as well as management and operations. However, theseeconomies are offset by diseconomies associated with transporting treated water longdistances. Research in the early 1980s, in an excellent illustration of the engineeringeconomicsdimension, indicated that at distances of only about seven miles, the diseconomiesof transmission and distribution outweighed the economies of extraction and treatment. 3IThese economies are shifting. With higher source and treatment costs (including costsassociated with standards compliance), economies of scale are becoming more pronounced.In addition, technological improvements and lower energy costs have the potential to reducetransmission and distribution costs. The result is that larger, regional water systems arebecoming more economic 4 Anecdotal evidence suggests that treated water can be transported20 miles and even farther under favorable physical conditions (including terrain and gravityeffects), as well as favorable market conditions (such as the avoided cost of alternatives andthe size of the service markets involved). 5 Of course, even these distances pale incomparison to long-distance transportation of electricity and natural gas.Utility Plant Investmentl'Ii•..Although all of the utility industries are considered capital intensive, they do not necessarilydemonstrate the same patterns of investment. Especially striking is the contrast betweenelectricity supply and water supply. For traditional electricity suppliers, a substantial share ofinvestment was required for production and generation facilities (about 54% of total plant). Itis this lion's share of utility plant that is being deregulated and opened to competition .Although not included here, measures of capital investment in production sometimes includenuclear fuel (treated as an asset). For the electric industry, transmission and distribution planttogether account for about 41% of total utility plant in service.3Robert M. Clark and Richard G. Stevie," Analytical Cost Model for Urban Water Supply," Journal of WaterResources Planning and Management 107, no.2 (October 1981).4Regional water systems also can help accomplish a number of other goals, such as providing water at a moreaffordable price and implementing source protection programs.5See Section 3.NAWC 14 September 1998

Water ComparedIndustries ComparedElectric Utility Plant in Service (1996)Total productionplant ($309.8bil.)54%Intangible plantand other ($3.4bil)1%fluctuate by region and water availability.supplies.Totaldistributionplant ($163.3bil)29%Totaltransmissionplant ($65.5 bil.)12%Total generalplant ($25.0 bil)4%Water utilities demonstrate avery different pattern in termsof the relative investment inproduction versus distribution.Based on data for the systemsof the American Water W arksService Company, Inc.,production (source-of-supply)facilities account for onlyabout 5 percent of total plant;another 24 percent is neededfor treatment and pumping.Transmission and distributionaccount for the largest share(about 46 percent). Theseproportions, however,Source costs are higher in areas with limited waterThe trend in electric plant additions appears to indicate a decline in investments in productionfacilities, while additions to transmission and distribution facilities appear to be holdingsteady. In fact, a central issue to restructuring in the electricity industry, and to an extent intelecommunications as well, is stranded investment that no longer is economic in arestructured environment. 6Investment trends in thenatural gas sector reflecta restructured gasindustry, in whichutilities (namely, localgas distributioncompanies) are lessinvo I ved in theproduction and pipelinefunctions. Most waterindustries, by contrast,remain verticallyintegrated, withresponsibility for theentire delivery systemfromproduction throughdistribution.Water Utility Plant in Service:American Water Works Company, Inc. (1997)Transmissionand distribution($2,016 mil)46%Source ofsupply ($215mil)5%Treatment andpumping($1,053 mil.)24%Services,meters, and.- -hydrants ($758mil)structures andequipment($282 mil)7%18%6It is noteworthy that stranded investment is an after-the-fact restructuring issue in the telecommunicationsindustry, and clearly a before-the-fact restructuring issue in the electricity industry.NAWC 15 September 1998

~'Water ComparedIndustries Compared"'Recent Trends in Electric Utility PlantAdditions (1991 to 1996)$25,000-g $20,000., "'0 "~ $15,000 +-----.," 0~ $1 0,000 t--::=:s:;::::::~=~=::s=:;;;~::==:;--"E "'£ $5,000 +----------6-Tolal----Production--Distribution--Transmission--6-Generar1991 1992 1993 1994 1995 1996--Plant purchasedand experimentalI' ,I,:1,,,,,,;I'j!I.·I'IIQ)--"'.E -gQ) =5 " "'l!:_.cc::-=:..Natural Gas Industry:Miles of Pipeline and Main(1970 to 1996)1,000.0900.0800.0-----700.0600.0500.0400.0300.0200.0100.00.0,.._ 0 co"',.._ ,.._"' "' "'~"' ,.._"'-----.. .. •·-.,N., "' .,"' "' "'-• --Transmission~...;--~a;"'"'~Distribution~Field andgatheringNatural Gas Industry ConstructionExpenditures (1996), IIiDistribution($4,234 mil.)55%Transmission($1,316 mil.)17%General ($1 ,213mil.)16%Underground'- ""~- ~.,~ ($309mil.)Production and4%storage ($651mil.)8%NAWC16September 1998

Water ComparedIndustries ComparedCurrent Energy Plant Additions(1996)$25,000$20,000:!! $15,000.Q~ $10,000$5,000~General and otherintangible1111 Transmission~ Distribution1111 Production and storageElectricityNatural GasThe investment need for the water industry is substantial (as discussed in relation to trends incosts in the next section). Rising investment needs are affected primarily by three factors:repair and replacement of the aging infrastructure, water quality improvements (especiallytreatment plants but also source development and protection) related to compliance withdrinking water standards, and expansion to meet growth.Recent data indicate thatexpansion costs accounted forabout half of total capitalexpenditures for the total waterindustry. The cost of expansionoften is paid for by developersin the form of "contributedcapital" or advances with longtermpayback provisions. Giventhat per-capita demand for wateris relatively stable (as discussedunder EconomicCharacteristics), expansionneeds appear to be drivenprimarily by population growthand extension to underserved orunserved areas.Allocation of Current Capital Expendituresin the Water Industry (1995)Expansion49.9%Water qualityimprovements19.5%Repairs andreplacements30.6%NAWC17September 1998

IWater ComparedIndustries ComparedBy comparison to both energy and water, however, investment in the telecommunicationssector is very technology driven. Cable and wire facilities constitute the biggest share oftelecommunications plant in service. The industry is deploying newer technologies, includingfiberoptic cable, at rapid rates in anticipation of the growing needs of the industry. The surgein wireless communications (mobile phones and pagers) is particularly strong.II:I ILocal Telecommunications Plant inService (1996)Total cable andwire faciliti.es($128.8 bil)44%Central officeswitching($58.5 bil.)20%Other ($1.2 bil.)0%Total informationorigination/termination assets($5.2 bil.)2%Total land andsupport assets($42.8 bil.)15%Central officetransmission($54.3 bil.)19%Total Telecommunications FiberopticCable and Copper Wire(1988 to 1996)25~ 20 ·1---* ~ 15:52-0(/)t:g10~ 5··-- . =-=-=--=-=·0 •cocoOl~--·----···----- -+-Fiberdeployed(lit anddark):~·I =--1-+-Fiberequipped(lit)I 8OlcoOl~. -,-0OlOl~-.----.-- · ·-,--------, ~Copper~ ~ sheathOl OlNAWC18September 1998

Water ComparedIndustries ComparedA recent survey of private investment in the utility sectors illustrates another difference incapital expenditure patterns. 7 Not surprisingly, expenditures in the telecommunications areainclude more equipment than structures. Equipment expenditures also exceed structureexpenditures for the electric industry.These findings also point to another important difference among the industries, whichconcerns asset lives and depreciation rates. Many water utilities use depreciation rates of oneto two percent for major facilities, indicating an expected life span of 50 to 100 years. For theelectric industry, a life span closer to 30 years is considered standard. The depreciation ratesused for telecommunications structures and equipment have shortened with technologicaladvances and the rapid pace obsolescence. For both the natural gas and water sectors, capitalexpenditures in 1995 were divided about evenly for structures and equipment.Annual Private Capital Expenditures forStructures and Equipment (1995)L...Een~en::::1 c:!:::::: .Q-o_c ·-Ql..ca.~>c..$40$35$30$25$20$15$10$5$0+-~=-~==~,~-==~·~==~-==c; c;"0 c; "' c;0 0"' 0G.l ... ~CQ),Q0 .c c;.c-=>c.DE.!!1 E()) 0>- 0135=>.0"'0 ·;::a­O..i) ~ "'"'""c;(9 "'~EquipmentIIIII Structures7U.S. Department of Commerce, Annual Construction Expenditures 1995 (April 1997), Table 4.NAWC 19 September 1998

I'!Water ComparedIndustries ComparedI;Operating ExpensesA cursory analysis of utility operating expenses also is revealing ofthe cost profiles of thedifferent industries. A clear majority of expenditures by electric and gas utilities is forproduction; investor-owned water utilities spend proportionately half as much on production(not including treatment costs). Water utilities that rely on water purchases, however, mightsee lower capital investments for production but higher expenditures in this area. In generaland compared to the other industries, however, investor-owned water utilities exhibit a verybalanced expense portfolio with respect to various key functions.Investor-Owned Electric Industry:Expenses by Function (1996)Natural Gas Industry:Expenses by Function (1996)Generation andproduction.Including fuel($80.9 bil.)74%Transmission($2.2 bil.)2%Distribution($6.1 bil.)6%Customeraccounts,'-""""'-.. andsales($.6.2 mil.)6%Administrationand general($13.6 bil.)13%Production andpurchases($28.9 bil.)63%Administrationand general($6.6 bil.)14%Storage($.8mil.)2%accounts,service, andsales ($2.8 bil.)6%Transmission($3.7 bil.)8%Distribution($3.1 bil.)7%Local Telephone Industry:Expenses by Function (1996)NAWC Water Utilities:Expenses by Function (1996)I!':Plantnonspecificoperationsexpenses($30.0 bil.)39%Plant specificoperationsexpenses($19.7 bil.)27%Customeroperations($13.7 bil.)19%Corporateoperations($11.0 bil.)15%Production($454 mil.)34%Treatment($150 mil.)11%Transmissionand distribution($207 mil.)15%Customeraccounting($137 mil.)10%Administrativeand general($396 mil.)30%NAWC20September 1998

Water ComparedIndustries ComparedThese data also illustrate another key difference betweenthe energy and water industries. For the electricity andnatural gas industries, production costs are relatively highand transmission costs are relatively low. Further, aninterconnected transmission grid allows for thedevelopment of regional and even national markets forelectricity. For the water industry, the opposite situationpertains. The capital and operating costs associated withwater transmission (namely, pipes, pumps, and energy)are substantial, due to water's physical properties. In fact,the high cost of transporting water can quickly offset theeconomies of scale achieved in water supply andCost profilesIn the electricity industry,production costs arerelatively high comparedwith transmission; theopposite is true for water.Electricity restructuringcenters on deregulation ofgeneration and openingtransmission markets.treatment. Under typical conditions, a transmission pipeline of greater than twenty miles maynot be cost effective. 8 These differences are very relevant when considering restructuring ofelectricity markets.Resource FlowsA final technical comparison highlights how water differs from energy in terms of resourceflows. In the energy sector, electricity and natural gas follow similar resource-flow patterns.Energy resources, quite obviously, are used to produce energy. End-users-residential,commercial, and industrial-provide the focal point for production. Electricity production isbased on a variety of fuel inputs, including natural gas. A transmission network exists forboth electricity and gas.Public water supply is part of a somewhat more intricatepicture. Water is a natural resource that must be renewedlocally, not only to serve the public needs but also forother needs (including the environment itself).Resource flows are very important for understandingtechnical as well as institutional constraints on longdistancetransmission of water (or "wheeling") and relatedWater wheelingWheeling treated waterlong distances isconstrained by economic,health, and ecologicalconsiderations (see Sectionstructural change. Moving water outside of a watershed is costly, not only from a financialstandpoint but from an ecological standpoint as well. Over time, diversions oflarge quantitiesof water can disrupt the local ecology and impair the capacity for water resources to renew.Recent court battles and other disputes in California and elsewhere provide ample evidence ofthe sensitivity to disrupting water resource flows. 98Pipelines extending longer distances can be cost effective depending on such factors as the cost and feasibilityof alternatives, the relative cost of treatment, and gravity effects.9A recent case involved exports to the City of Los Angeles. The Cal-Fed process also limits transfers fromnorthern to southern California. Similar disputes have occurred over diversions in areas where water appearsplentiful (such as the Great Lakes region).NAWC 2I September I 998

Water ComparedIndustries ComparedlSOURCEUSEDISPOSITIONSURFACE WAlER DOMESTIC-COMMERCIALOONSl.MPllVELSE~~~9~27.8%A... ON2 ~~~9976.5%245,000Mgal/d72.2%GFOUND79,400Mgal/d23.5% 67.6%r------------J 38.1%Figure 7. Source. use. and disposition offi"eshwater in the United States. 1990. For each water-use categmy,this diagram shows the relative proportion of water source and disposition and the general distribution ofwater from source to disposition. The lines and arrows indicate the distribution ofwaterfrom source to dispositionfor each category; for example, surface water was 76.5 percent of total freshwater withdrawn, and goingfrom "Source" to "Use" columns, the line from the surface-water block to the domestic and commercial block indicatesthat 0.6 percent of all surface water withdrawn was the source for 4.1 percent oftotal water (self-suppliedwithdrawals, public-supply deliveries) for domestic and commercial purposes. In addition, going from the "Use"to "Disposition" columns, the line from the domestic and commercial block to the consumptive use block indicatesthat 17.3 percent ofthe water for domestic and commercial purposes was consumptive use; this represents7.2 percent of total consumptive use by all water-use categories.Source: U.S. Geological Survey, Water Use in the United States, 1990.NAWC 22 September 1998

Water ComparedIndustries ComparedEconomic CharacteristicsMany of the technical or engineering issues raise in the previous section also raise economicissues. In fact, most of the intrinsic characteristics of public utilities have both technical andeconomic dimensions, which in turn have a direct bearing on the rationale and nature ofeconomic regulation (as discussed later in this report).Table 2-3 provides an overview of economic characteristics. A number of economic traitsdistinguish the water industry from other utility industries, as the following observationssuggest:ooooooooooThe water industry demonstrates a particularly fragmented structure; in the United States,more than 50,000 community water systems are in operation and many are very small insize. (Ownership is discussed in the next section.)Water utilities (and wastewater utilities) are considered highly monopolistic, which isrelated to technical features already discussed.The customer profile for water utilities differs from the energy industry in terms ofsubstantial reliance on revenues from residential (or "core") customers.Water demand generally is considered less price elastic than demand for other goods andservices, including other utilities; large-volume (industrial) and outdoor uses aresomewhat more price-responsive than domestic indoor use.Unlike other utility products over the past few decades, few new uses for water have beenintroduced to society; existing uses are becomingmore efficient.For the water industry, total and per capita usageis declining; household usage is stable ordeclining due to efficiency improvements andend-use conservation. Of course, regional andlocal exceptions to this general observation canbe found.Weather affects both the supply and the demandfor water. Long-term drought conditions canhave serious economic consequences for waterproviders.Economic trendsThe telecommunications andenergy industries areexperiencing expandingdemand, along with decliningcosts and prices. The waterindustry is experiencing stabledemand, along with rising costsand prices.Among utility services, water appears to be abargain; aggregate data suggest that water accounts for about 0.8 percent of totalhousehold expenditures.Water prices are increasing at a rate faster than the overall rate of inflation. As theyposition themselves for competition, many telecommunications and energy firms areimplementing price freezes or reductions.The water industry faces rising costs due to the need to replace an aging infrastructure,comply with drinking water standard, and satisfy demand associated with growth. By oneestimate, the current investment in the nation's total water supply assets should be morethan doubled over the next two decades.NAWC 23 September 1998

.,Water ComparedIndustries ComparedoThe marginal cost of source water will continue to rise because water is a constrainednatural resource. Over time, however, the cost of conventional water supplies will becompared with alternative technologies, including conservation, reuse, and desalinization.In the following analyses, data are used to highlight differences among the utility industriesalong the following key economic dimensions:IooooCustomer profileTrends in demandTrends in pricesTrends in costsCustomer ProfileThe market structure of the various utility sectors can becompared in terms of the distribution of customers, sales, andrevenues. Residential customers constitute the majority ofconnections for most utilities. However, in the energy sectors,residential customers (sometimes considered "core" or"captive" customers) do not account for the majority of salesand revenues. In fact, commercial and industrial energycustomers have played a significant role in restructuringenergy markets by demanding more competitive choices.When they have service options, noncore customers canthreaten to bypass the local utility. Increasingly, noncoreCustomersWater utilities arehighly dependent oncore residentialcustomers, for whichcompetitive choices forutility services aremore limited.energy customers have access to alternative providers through more open transmissionnetworks. For example, an increasing share of gas sold by distribution companies is sold "onaccount of others" (see Section 3).In the water industry, the residential market ("core customers") accounts for most ofthecustomers served, water sales, and utility revenues. Service options for core customers areespecially limited in the water sector due to high transmission distribution costs. Somenoncore water customers, however, have exerted pressure on the water industry. If a largeindustrial customer has supply options, they might be able to bypass the local water utility.As in the other sectors, this presents a potential threat in terms of shifting costs to remainingcore customers and even the possibility of stranded investment.The majority of local telephone access lines also serves the residential sector; however,revenues generally are subdivided according to types of usage (for example, local versus longdistance). The telecommunications industry is becoming diverse, particularly in terms ofproviders, services, and revenue generation. Of course, much of the growth in thecommunications sector is associated with the ever-expanding market for wireless services.NAWC 24 September 1998

Water ComparedIndustries ComparedTable 2-3Overview of Economic CharacteristicsUtili y SectorTrait Telecommunications Electricity Natural Gas WaterIndustry structure Diverse with a Cohesive but Generally Highly fragmented ingrowing number of undergoing unbundled terms of large numberservices and service restructuring to production, of community waterproviders. unbundle transmission, and systems (>50,000).generation from distributiondistribution. providers.Markets Competitive. Increasingly Competitive. Monopolistic.competitive.Customer profile Customer choice Substantial Substantial Substantial revenuesexpanding for all revenues from revenues from from residentialclasses. noncore customers. noncore customers. customers.Price elasticity Elasticities vary for Can be significant Can be significant Usage is generally lesstypes of services; for noncore for noncore price elastic; largecanbe high. customers. customers. volume and outdooruses are somewhatprice-responsive.End uses for Evolving rapidly. Evolving, often Expansion into Few new uses;utility product with other electricity efficiency gains fortechnologies. production. existing uses.Demand Not weather Weather affects Weather affects Weather affects bothsensitivity sensitive demand demand suooly and demandTrends in Aggregate and per Aggregate, per Aggregate, per Aggregate, per capita,demand capita usage is capita, and capita, and and household usagerising. New services household usage household usage are stable or declining.-Consumeremerging. are rising. are rising.About 2 percent of About 2.6 percent About l percent of About 0.8 percent ofexpenditures household of household household householdexpenditures. expenditures. expenditures. expenditures, includeswastewater and refusecollection.Trends in prices Falling prices due to Falling prices due Falling prices. But Rising prices and pricecost reductions and to achievement of greater volatility distortions and historiccompetition. economies, low- based on market underpricing due tocost technologies, fluctuations. institutionaland emergingcompetition.arrangements, andsubsidies. ill-defmedmarkets,Trends in costs Falling costs due to Falling costs, but Relatively stable Rising costs due totechnological considerable costs based on compliance,advancement concern about healthy markets. infrastructurestrandedreplacement, andinvestment.demand growth.Source: Author's construct.NAWC 25 September 1998

Water ComparedIndustries ComparedInvestor-Owned Electricity Industry:Customers, Sales, Revenues (1995), IIIIIi~Sales for resaleIll Industrial and otherr.il Commercial11 Residentiali'Customers (n) Sales {kWh) Revenues($)Natural Gas Industry:Customers, Sales, Revenues (1996)! ~ Elecbic utilitiesllllnduslrialI I'rll CommercialICustomersSalesRevenuesTotal Water Industry:Customers, Sales, Revenues (1995)I'll NonresidentialBll ResidenlialNAWC Water Industry:Customers, Sales, Revenues (1995)Customers Sales RevenuesBU VVholesale!SI Governmentauthorities~OtherNote: Legends correspond to barvalues from top to bottom.l!l!IFireprotection~IndustrialIll Commercial11 ResidentialCustomersSalesRevenuesNAWC26September 1998, I

Water ComparedIndustries ComparedLocal Telephone Access Lines (1996)Residential(104 mil.)67%Mobile(.060%Public(1.5mil.)1%Business(49 mil)32%Telecommunications Carriers:Number and Revenues (1996)l!:l Prepaid calling card~Pay telephone providers1:1 Operator service providers• Other toll carriersfa Competitive access provider~IIJ Paging and other mobilel:liToll resellersliiill Cellular and personalcommunicationsli.:'llnterexchange carriersNote: Legendscorrespond to barvalues from top tobottom.NumberRevenuesIll Local exchange carriersTelecommunications Industry Revenues(1996)Long distance~Cellular and other($29.3 bil.)13%($93.3 bil.) •42%Local service($100.7 bil)45%Local networkservice($49.5 bil.)22%Network access,.,,rvl

------------------------------~·Water ComparedIndustries ComparedTrends in DemandI'IIDemand for telecommunications and energy services is rising both in aggregate and per capitaterms. Electricity demand has grown with the expanding array of electrical products. Theprojected growth in demand for natural gas is related directly to electricity restructuring andthe use of combined cycle turbines for managing peak demand. The growth intelecommunications generally tracks the rate ofpopulation growth. According to the FCC, "Withvirtually all businesses having telephone lines and morethan 90% of the nation's households having telephoneservice, the growth in the number of!ines tends to reflectgrowth in the general economy, which averages about 3%per year." 10 Even household energy usage appears to becreeping upward.DemandEfficiency and conservationare dampening waterdemand; opportunities forexpanding water marketsare limited.Such is not the case for water, where aggregate demand,per-capita demand (measured by total withdrawals divided by total population), andhousehold demand (residential use divided by residential customers) indicate stability anddetectable declines. According to the United State Geological Survey, the trends in water usein the latter part of the century can be attributed in part to the following factorsY'''oooDemands for irrigation water declined due to higher energy prices, improvedapplication techniques, increased competition for water, declines in farm commodityprices, and a downturn in the farm economy in the 1980s.Demands for industrial water declined due to new technologies requiring less water,improved plant efficiencies, increased water recycling, higher energy prices, theeconomic slowdown, and changes in laws and regulations to reduce the discharge ofpollutants. A related trend is that less water is being returned to the natural systemafter use.Demand in general has declined due to the enhanced public awareness of waterresource issues and active conservation programs in many states.Like other utility sectors, different types of demand affect the water utility's functional costs.Average-day demand drives the need for raw-water storage capacity. Maximum-day demanddrives the need for transmission lines, treatment facilities, and major feeder lines. Maximumhourdemand (maximum-day demand plus frre-flow requirements) drives the need fordistribution lines, pumping stations, and treated water storage. The role of fire-flowrequirements in the design and operation of water systems is important, and without clearanalogies in the other utility sectors.1° Federal Communications Commission, Trends in Telephone Service (Washington, DC: FCC, FederalCommunications Commission, March 1997): 24.11U.S. Geological Survey, Estimated Use of Water in the United States in 1990 (Reston, VA: U.S. GeologicalSurvey, 1993).NAWC 28 September 1998

Water ComparedIndustries ComparedAs noted by the USGS, conservation also affects aggregate demand. Some forms ofconservation address average-day demand, while others address maximum-day demand; thisdistinction becomes important when considering if, and how, conservation might affectfacility requirements. The high ratio of fixed to variable costs in the water industry, as notedpreviously, means that reductions in demand through conservation usually require rateincreases in order for water utilities to cover fixed capital costs.1101009080II)...-c:70~.E 60.5 50II)CDc: 40:.:::i30-20100Number of Telephone Lines(1884 to 1996)--------~mcomom~---.....------------.-------LOm......com--+-- Residentialswitchedaccess lines-e- Businessswitchedaccess lines--specialAccess lines--+--Publicswitchedaccess-e-MobileswitchedaccessTelephone Dial-EquipmentMinutes and Calls(1980 to 1996)2,500 --,---------------------------Local dialequipmentminutes--+--Local calls~ 2,000 +---------------------=---...,-------=-----c: - _... -+-Interstate toll·E ___... _... dial-equipment5 1 ,500 ,... .......- minutes!!l-+-Intrastate toll~ dial-equipment0 1,000 minutes~ -~~~ill 5000a0com:-; : ;•=:•I I I ! ! ~ __.,_ Internationala • •minutes13 13 131313 El" ""..... N C') 'It U') co r-- co m 0 ..... N C') 'It U') co -&-Internationalco co co co co co co co co m m m m m m m0> 0> 0> 0> 0> 0> 0> 0> 0> 0> 0> 0> 0> 0> 0> 0> calls..... ..... ..... ..... ..... ..... ..... .....Note: Legends correspond to end-year graph values from top to bottom.NAWC29 September 1998

Water Compared· Industries ComparedHistorical and Forecast Trends inElectricity Sales by Sector(1970 to 2020)1,600 -,---------·---------.._ca~ 1,200 --+------------~~::;~~=--=- --- Residential.._Q)c...c.~r::::.Qiii8004000000C»"" C» ""'" C»""..- ..- ..-I I I I I I I I I I I I I I I I I I I I 1 I I I I I I I t I I I I I I I I rTTl--Industrial---CommercialHistorical and Forecast Trends in NaturalGas Consumption ·by Sector(1970 to 2020)10,000-(1,)7,000~6,0000:0:::::s5,0000t::.Q 4,000ffi 3,0009,0008,0002,0001,00000 ...,........ .......(J)(J)...... ......CX) C'\1 co....... (X) CX)0') 0') 0')...... ...... ......0(J)(J)d'; S; 0 ~ ~0') 0') 0 0 0...... ..- ..- N N N('I') ............. 0 0N N ---Vehicle fuelNote: Legends correspond to end-year graph values from top to bottom and breaks intrend lines separate historic from forecast data.NAWC30 September 1998

Water ComparedIndustries Compared9.0(/) 8.0Q)-::Ic 7.0.E0 6.0 -.!!}.n;0.._0(/)5.04.0"03.0cm(/)2.0::I0.s::.1- 1.00.0·Per-Capita Telephone Dial-EquipmentMinutes and Calls(1980 to 1996)~----------.A--Local dialequipmentminutes--Local calls--1 nterstate tolldial-equipmentminutes--Intrastate tolldial-equipmentminutes--Toll calls-e-lnternationalminutes-+-InternationalcallsTrends in Per-Capita Energy Use(1947 to 1996)--::I~ 50:260 ~---------------------------------------Natural gas:industrial~ 40+-------------~------~~-------------=0:;::::;tiJ~ 30 +-----=,...,..,__-----::~------- _..,......__~~-..,.,----Natural gas:::Ic:8 20 +------=-=-----------residential andcommerciale; --e-- Electricity:Q) 10 --t.r.___________ ~~~!-8""'=---=

:!.:ii:iil!.• II .. II.!Water ComparedTotal Daily Water Withdrawals in the U.S.(1950 to 1995)Industries Comparedi! I500450400~'ffi0 350rnr::: 300..QroC) 250-0rn 200r:::g 150iD100. ..5000 1.0 0 1.0 0 1.0 0 1.0 0 1.01.0 1.0

Water ComparedIndustries ComparedWhile per capita usage patterns reveal the general relationship of usage relative to populationlevels, household usage provides a more specific measure of residential use. These dataindicate detectable growth in household energy consumption (both electricity and naturalgas). However, residential water use is very stable and many utilities anecdotally reportdeclines in average use. A plausible explanation is that household markets are well-saturated(so to speak) with water-using fixtures (such as bathroom fixtures, clothes washers, anddishwashers); relatively few new uses of water are being introduced to homes. In addition,efficiency-oriented plumbing standards, appliances, and landscaping practices gradually arereducing residential water needs.Single~Family Water Use(Metropolitan Water District of Southern California, 1993)Total use = 150 gallons per capita per dayOther outdoor use(7 gpd)5%Landscape ~irrigation (46 gpd)30%Indoor use65% Toilets (30 gpd)20%Showers/bath(27 gpd)18%Clothes washing~~r- (21 gpd)14%Cooking/cleaning(13 gpd)9%Dishwashing (6gpd)4%NAWC33September 1998

Water ComparedIndustries Compared, :II!I6.00Annual Household Energy Usage(1978 to 1993)5.00en~ 4.00IIlc:.Q 3.00·c"0a:s0 2.001.000.00~A ..............--- Natural gas• ".----- ....... ---~ ~--co 0 N v co co 0 NI'- co co co co co 0') 0')0') 0') 0') 0') 0') 0') 0') 0')T""" T""" T""" T""" T""" T""" T""" T"""--ElectricityResidential Water Use per Connection:American Water Works Service Company, Inc.(1980 to 1997}>. 220 --.-----~---------------------­C\3~ 215+-----------~~~----------­Q)c.. 210 --1"""'"-'-"'-------­c:0u 205+-~~-~~~~~----~-~~~--~-+--­Q)~ 200+---~----------~~~~-~-~-~-~o.~ 195 -1-------­Q)~ 190-t--------------------------c:0 185+-----------------------­a:s~ 180+-~~---.----~~---.----~~---.----~~---.----~~---.----~~--,co 1'-0')0')0')0')NAWC 34September 1998

Water ComparedIndustries ComparedTrends in PricesBy most accounts, water continues to be a "bargain" relative to other utility services. Evenwhen water, wastewater, and other public services (namely, refuse collection) are combined,the annual bill is less than what households pay,' on average, for natural gas, electricity, andtelephone services. 12 However, these gaps may close as the prices for some utility servicesdecline and the price of water rises. As costs rise and demand remains flat, rate increases inthe water sector are likely.One implication is that the affordability of water and wastewater services will emerge as animportant issue. Utility bills are regressive (taking a larger share of the lower-incomefamily's budget). Utility usage increases with consumer income levels, as does the ability topay. However, because water for basic needs is generally price-inelastic, rate increases willlead to higher utility bills. The ability-to-pay problem for low-income households is distinctfrom the general willingness-to-pay problem, which is partly a function of engrained customerperceptions that water expenditures should not be as high as other utility or householdexpenditures. Indeed, the water industry often contends will the perception that water is anentitlement that should be "free." 13Annual HouseholdExpenditures for Utilities:Family of Four (1995)Other householdexpenditures93.6%Water and otherpublic services($344)0.8%Electricity($1 '120)2.6%Natural gas andfuel oil ($432)1.0%Telephone ($839)2.0%12These data, however, include zero values for households that do not pay directly for water service.13To some extent, public ownership and government subsidies have promoted the idea of water service as a"public" or "worthy" good.NAWC 35 September 1998

Water ComparedIndustries ComparedUtilities as a Percentage of Total·Household Expenditures: Family of Four(1995)4.5%4.0%3.5%3.0%2.5%2.0%1.5%1.0%0.5%0.0%.9omomom_-m~N(;R-0;;momcO!.-m0""'"~c::me.cO-aQ) - .._oo~"-­:2:wAnnual Household Expenditures forUtilities by Income: Family of Four(1995)$1 ,400 .,----------------·········-·-··-------------------------------·· -------------··· -------······---- --~Ill ElectricityIIIII TeiephoneIIIII Natural gasand fuel oill§!llWater andother publicservices$1,200$1,000$800$6001IIIII ElectricityIIIIIITelephone':!$400$200$00-m00)om0-"'t-o...-..... (;R-(;R-0 0-m -mom 00)00) 00)0 - 0 --m _0)1.0 ..... ON..... (;R- N W(;R- (;R-0 0-m -mom 0 0)00) 00)0 - 0 --m -mOM O"'t(\') (;R-(;R- (;R- """" (;R-0-m0 0)00)0 _0)-0 co1.0 (;R-(;R-coroo:5o.._o Q) -o~"--:2:(;R-IIIII Natural gas andfuel oil~Water and otherpublic servicesNote: Legends correspond to grouped bar values from left to right.NAWC36 September 1998

Water ComparedIndustries ComparedLike trends in demand, trends in prices are very revealing of industry directions. Inflationadjusted(real) prices for most utility sectors are declining. Achievement of economies andadvances in technology, along with competition restructuring, are credited with decliningprices in the telecommunications and energy sectors. In the energy sectors, forecasts indicatethat electricity prices will continue to drop and that gas prices will stabilize but eventuallybegin a gradual rise in the long term.Once again, water does not enjoy the same situation. Rising costs associated with an aginginfrastructure, compliance with standards, and meeting demand growth are placingconsiderable pressure on water rates. Historic underpricing of water by some utilities(perhaps particularly in the public sector), exacerbates the pricing problem.275.0250.0225.0XQ)"0200.0c:Q)175.00·;::a..150.0....Q) 125.0E:::::1U) 100.0c:0 75.0(.)50.025.00.00.......(J)..-Consumer Price Indexes for Utilities(1970 to 1996, 1982-1984=1 00)Nr!

Water ComparedIndustries Compared..c ......c0E.....Q)c........c::J0E

Water ComparedIndustries Compared ·-Historical and Forecast Trends inReal Electricity Prices by Sector(1970 to 2020, $1996)12.00 -,-----------------------11.00 +------=-::----------------~ 10.00 +-----------~c----------------0);; 9.00 +-,-----,,.,.~----->a:~~~------------ 8.00 --t.::.::.::ff--------..-------=,.__~~--,-------­~ 7.00 +---------;;;.,._~;----------'--~-...::;;;~----'--'~ .... ~(i; 6.00 +---~L__---=4:,------------=-~-.. ...c.1/) 5.00 +-------.~------~--------------_.ID 4.oo --+--=~---------------=~~ .... --=-=--­(.)3.00 +------------~---------2, 00 --h-m---.-rm---.-rm---.-rm---.-r-.--r-;c-r-r--.--r-;c-r-r--.--.--c-r-r---.-.--m--.-.-m--.-.-.--.---.--.---- Residential---- Commercial--- IndustrialHistorical and Forecast Trends inReal Gas Prices by Sector(1970 to 2020, $1996)-co~ $10.00 --,----------------------.....~ $9.00 -1------~--------------­Q)~ $8.00 +----------:r~---~~;:-'lo--------------­o:0 $7.00 +---------Jq--------~-o-----­:::l~ $6.00 +----------~~--t=--~'----___.._.~--=-------­c:m $5.oo 1 -7..----;~~-~___.._____...-;.......iiHj: ... j:j:i:j ......:::l_g_.$4.00 _,_ ...... ~------,lb'"---~.--:------~-------m. $3.00 ~..-71'~-----=~~~r,--!!!:mfi:i~.,..,. ......... ~~ $2.00 -t-----,f*-------------'11-------------.!!!0 $1 . 00 --tei"'i"'i'T--,-rr-m--,--r-r-r,-,---,-,-m-,--,r-r-r,-,--,-,--m--,-rr-m--,--,-,-,--,0 0 M W m N ~ ~ ~ ~N ~ ~ ...- ~ ~~ ~ ~ ~ ~ ~ ~ o~ ~ ~ Nm m m m m m m m m m o o o o o o o~ ~ ~ ~ ~ ~ ~ ~ ~ ~ N N N N N N N---- Residential---Commercial--Industrial-+- ElectricNote: Legends correspond to end-year graph values from top to bottom and breaks intrend lines separate historic from forecast data. Values are in 1996 dollars.NAWC 39 September 1998

fS:Water ComparedIndustries ComparedTrends in CostsThe energy industries are experiencing declining costs, particularly with respect to trends inthe cost of fuel. However, trends in real costs also indicate that the industry has made gains invarious expenditure categories (with the exception of power purchases).For the water industry, costs are rising. The need to replace and upgrade the deliveryinfrastructure will continue to -be a driving force over the coming decades. As mentionedpreviously replacement costs far exceed original installation costs. The U.S. EPA estimatesthat the total20-year infrastructure need for the water industry is $138.4 billion; the majorityof expenditures are needed for transmission and distribution facilities. An investment of$34.4 billion is needed for SDWA compliance and SDWA-related improvements. One of themost striking findings in this area is that the total20-year infrastructure need ($138.2 billion)is more than the entire estimated current assets ofthe water industry ($131.9). 14 Rising fixedcosts, coupled with flat demand, translates to higher costs per customer or delivered gallon.Another relevant issue for water is future supply costs. Because water is a constrainedresource, the marginal cost of new sources of supply is expected to rise. Over time, however,the cost of conventional water supplies will be compared with conservation, reuse, anddesalinization. This points to a striking difference between electricity and water: the marginalcost of electricity supply (in the middle and possibility long term) is expected to be relativelylow; the marginal cost of water supplies is expected to rise steadily because of resourceconstraints.Trends in Real Electricity Costs(1986 to 1995)4.54.0lD~ 3.5e5 3.00.s::::~ 2.5,g 2.0:;;:8. 1.52~ 1.000.51111198612l19950.0-r--------,-----,-----r------,----------------(O&M with fuel O&M without Power Salaries and Administrativefuel purchases wages and general14U.S. Environmental Protection Agency, Community Water System Survey (1997) and Drinking WaterInfrastructure Needs Survey (1997). Governmental grants and loans (such as the State Revolving Fund) willcover only a small portion of this total investment need.NAWC 40 September 1998

Water ComparedIndustries ComparedTotai20-Year Infrastructure Need(1995)Transmissionand distribution($77.2 bil:)56%Treatment($35.2 bil.)26%Source ($11.0bil.)Other ($1.9 bil.) 8%1%Storage ($12.1bil.)9%Current SDWA and SOW A-Related Need(1995)Distributionimprovementsto meet totalcoliform rule($22.3 bil.)64%Microbiological($10.2 bil.)30%Nitrate ($0.2bil.)1% contaminants($0.8)2%Current Assets and Projected Need for theWater Industry (1995)$140$135$130~ $125~ $120a $115$110$105$100~--------------~-------------.Current assets of community Projected 20-year investmentwater systems ($1995) need ($1991))/NAWC41 September 1998

jWater ComparedIndustries Compared! ! 'Institutional CharacteristicsTable 2-4 compares the utility industries in terms of a number of institutional characteristics.Institutions often reflect the technical and economic features already explored. Theinstitutional dimension is very important to understanding how utilities are organized,managed, and regulated.·· IA number of institutional traits distinguish the water industry from other utility industries, asthe following observations suggest:·I,iIj,,, ::1':II'.1'·'' .,.viI· ·,II,,,,~1,ooo0oWater systems are very numerous. The presence of so many systems argues forrestructuring to achieve economies of scale and scope, and also presents a significantbarrier to implementation.The prevailing ownership form in the water industry is public; most larger water systemsare municipally owned, which places much control over water resources and the structureof the industry in the hands oflocal government. Publicly and privately owned utilitiesperform similar services, but under very different systems of accountability.The water industry is not subject to federaleconomic regulation, as is the telecommunicationsand energy industries. Although it does not exerteconomic regulation, the U.S. EnvironmentalProtection Agency, through standards establishedunder the Safe Drinking Water Act, is a formidableinfluence on the water industry.State commission regulation is limited mostly toinvestor-owned utilities, which in turn serve lessthan 20% of the population served by communitywater systems. Regulation of publicly owned andnonprofit water systems is very limited and fivestates exert no economic regulation over the waterindustry. Commission regulation of the other utilitysectors, which are dominated by private firms, ismore comprehensive.In most states, water utilities can be subject to threedifferent kinds of regulation, often imposed by threedifferent agencies--economic regulation(commissions), quality regulation (primacyInstitutionsInstitutions shape how the utilityindustries are organized,managed, and regulated. Theinstitutions governing waterrange from the U.S.Environmental ProtectionAgency, to state economic,water quality, and waterquantity regulators, to localgovernments. The prevalence ofpublic ownership of the waterindustry and the presence of somany small systems are leadinginstitutional features. Another isthe relative complexity of thepolicy agenda for water.agencies), and quantity regulation (resource agencies). Regulation often is neither wellcoordinated within states, nor uniform across states. In the past, water quality regulationwas not extended to the bottled water and horne treatment industries. 1515The 1996 Safe Drinking Water Act provides for regulation of the bottled water industry and also recognizesthe potential use of point-of-use and point-of-entry devices for compliance.NAWC 42 September 1998

Water ComparedIndustries ComparedooooooooooAs a natural resource, water raises substantial environmental issues. Water utilities areexpected to serve as environmental stewards by providing source protection andconserving water resources.Because the service population is physically exposed to water, through ingestion andinhalation, water also raises substantial public health issues related to drinking waterstandards, as well as wastewater management and fire protection.Culturally, water issues are taken very personally. Constituents sometimes view water asan entitlement and the process and cost of safe, adequate, and reliable water service iseasily unappreciated.The corporate culture in the water sector is not highly competitive, but rivalrous in termsof ownership form (public v. private). Entrepreneurial opportunities are limited.Managers tend to be cautious and place a high emphasis on safety and reliability.The economic development interests associated with water are highly localized. Localgovernments often use water and wastewater systems as tools of growth and development.Water resources are controlled through complex but often disjointed systems of rights,permits, and markets. Markets and market-based pricing for water resources are highlyimperfect, mainly because of historic distortions in water development.The technical, economic, and institutional barriers to market entry are substantial.Drinking water regulations constitute a formidable market barrier. Political barriers toentry (namely opposition to privatization) are very prevalent, particularly with regard tochanges in ownership; the barriers are less substantial for contract operations.For the water industry, the playing field for competition is uneven due to the currentstructure of the industry, the competitive advantages of public ownership in terms oftaxation and financing options, and wide variations in jurisdiction and application of stateand local regulation.For the telecommunications and energy industries, the movement toward competitionprovides a relatively cohesive policy paradigm. For the water industry, no unifyingparadigm for restructuring has emerged.Policy goals for the water industry are diverse and complex. Leading goals on the policyagenda include compliance with drinking water quality standards, replacement of theinfrastructure, regionalization to achieve economies of scale, and resource protection andconservation.In the following analyses, data are used to highlight differences among the utility industriesalong the following key institutional dimensions:o System sizeo Ownership structureo Economic regulationo Public policiesNAWC 43 September 1998

Water ComparedIndustries ComparedlTable 2-4Institutional CharacteristicsUtility Sector.1'!TraitSize of providersOwnershipstructureFederaleconomicregulationState economicregulationNoneconomicstate regulationEnvironmentalissuesPublic healthissuesConstituentcultureCorpomte cultureTelecommunicationsGenerally large.Private ownershipdominates.FederalCommunicationsCommission.Public utilitycommissions;emergingderegulation ofcompetitive services.Generally none.Limited.Limited.Genemllyimpersonal.Competitive andentrepreneurial.ElectricityGenerally large.Private ownershipdominates.Federal EnergyRegulatoryCommission.Public utilitycommissions;emergingderegulation ofcompetitiveservices.Powerplant siting.Federal standards,as well as marketsfor emissiontrading.Air quality andelectromagneticfields.Generallyimpersonal.Increasinglycompetitive andentrepreneurial.Natural GasGenerally large.Private ownershipdominates.Federal EnergyRegulatoryCommission.Public utilitycommissions;emergingderegulation ofcompetitiveservices.Gas safety.Limited.Pipeline safety.Generallyimpersonal.Somewhatcompetitive andentrepreneurial.WaterLarge systems servelarge cities; manysmall systems.Public ownershipdominates (morethan 80% ofpopulation served);strong rivalry.EnvironmentalProtection Agencyplays a limited datacollection role;some uniformity viaNARUC (i.e.,uniform accounts).State commissionregulation is limitedmostly to investorownedutilities; fivestates do notregulate. Regulationof municipals islimited.Separate regulationof quantity, quality,and price, butregulation is notcoordinated oruniform from stateto state.Significant in termsof regulations,expectations ofstewardship, andmounting pressureto conserve.Significant issuesrelated to drinkingvvater, vvastevvatermanagement, fiTeprotection.Water issues arehighly personal;water often viewedas an entitlement.Rivalrous forownership andgenerally cautious.NAWC44September 1998

Water ComparedIndustries ComparedTable 2-4 (continued)Utility SectorTrait Telecommunications Electricity Natural Gas WaterEconomic National and National and National and Local.development international. international. international.interestControl over Market-based. Market -based. Market-based. Complex systems ofresourcesrights, permits, andhighly imperfectmarketsBarriers to Markets have opened Markets are Unbundling opened Considerablemarket entry to many new opening, especially markets to some technical, economic,participants. to brokers and new participants; and institutionalaggregators; some some persistent barriers, includingpersistent barriers barriers to entry. SDW A standards;to entry.political barrierssignificant; entrantsinclude nonutilityoperations firms.Level playing Generally a level Market rules are Generally a level Very uneven due tofield for playing field. under playing field. fragmentation of thecompetition development. industry, advantagesof public systems,and variations instate and localregulation.Public policy Strong national role Strong national Strong national role Fragmented andand policy is role and policy is and policy is pluralistic.generally cohesive. generally cohesive. generally cohesive.Prevailing policy Competition, Market Unbundling and Compliance withgoals technological restructuring, open retail customer treatment standards,advancement, and transmission, and choice. replacement of theuniversal service. customer choice. infrastructure,regionalization, andresource protectionand conservation.,Source. Author s construct.System SizeIn the United States, for public health regulation purposes, water utilities are organized intotransient, noncommunity systems (106,436), nontransient noncommunity systems (23,639),and community water systems (50,289). Of the community water systems, about one-thirdare privately owned Utilities. Many water systems are very small in size, measured in termsof customers served, water sales, and revenues. A profile of small water systems appears inTable 2-5. Small systems (serving populations between 501 and 3,300) and very smallsystems (serving populations fewer than 500) account for 85 percent of all water systems;they serve less than 15 percent of the population served by community water systems.NAWC 45 September 1998

Water ComparedIndustries ComparedrTable 2-5Profile of Small Community Water SystemsPopulation servedTrait 25 to 100 101 to 500 501 to 1,000 1,001 to 3,301 to Total3,300 10,000 (50,000pop.)IIIII Medium (3,301 to50,000 pop.)r:ll Small (501 to3,300 pop.)•Very small (

-----------~~~-Water ComparedIndustries ComparedHistorical Pattern of Ownership in theWater Industry (1800 to 1896)1,800-,-----~enQ)E:.;:::::;1,6001,400::> 1,200.....2co 1,000~800-0.....Q).0E:::Jz600400200--Public-a-Private0- --r --T- --r-------T--r----1~---~1----,--~-~ ----~~--10 LO 0 LO 0 LO 0 LO 0 LO 0 LO 0 LO 0 LO 0 LO 0 co0 0 ...... ...... N N (") (") 'vvnership StructureThe prevailing mode of ownership in the telecommunications and energy fields is privateownership. Although the water industry also began with a strong private role, publicownership eventually prevailed. Water supply traditionally has been viewed by many as aPrivately Owned Water Systems by Type(1995)Other (2,613)16%association(5,723)35%Investor-owned,dependent onparent company(6,814)41%Investor-owned,not dependenton parentcompany(1,389)8%more of function of local government (aspart of "public works") than other utilityservices. The strong linkage betweenwater service and local economicdevelopment, and the strong desire ofcities to control water supply, explains therelatively parochial nature of water systemownership.Most larger communities in the UnitedStates are served by municipally ownedwater systems. By contrast, mostmunicipal electric and natural gas systemsare relatively small in size when comparedto the industry's investor-owned giants.NAWC47September 1998

Water ComparedIndustries ComparedElectric Utilities:Ownership, Sales, and Revenues (1996)Utilities (n) Sales (kWh) Revenues ($)§I Federal (1 0)llllll Cooperatives(932)~Publicly owned(2,01 0)1111 Private/investorowned(243)The contrast between theelectric industry and thewater industry in terms ofthe role of the privatesector is striking. Private,investor-owned electricutilities number about243, which accounts forless than 1 0 percent of thetotal number of electricutilities in the UnitedStates (3,195). Yet theseinvestor-owned utilitiesaccount for a clearmajority of electricitysales and revenues.Almost the opposite picture emerges in the water industry. Private water systems account forabout one-third of all community water systems (or about 40 percent of community watersystems when ancillary systems are excluded). However, private systems only account for 10to 15 percent of population served, assets, revenues, and expenditures of public and privatecommunity water systems. This relatively large number of small, privately owned systemsexplains this finding.The larger private water utilities, represented by the National Association of WaterCompanies (NA WC), total about 132.Community Water Systems:Public v. Private Ownership (1995)Annual expenses($22.1 bil. total)Annual revenues($25.9 bil. total)Utility assets($131.9 bil. total)Annual production(62.3 tril. gallons)Population served(240 mil. total)Water systems(38,329 total)0% 20% 40% 60% 80%100%IIIII Private::~.::PublicNote: Ancillarysystems areexcluded from thetotals.NAWC48September 1998

Water ComparedIndustries ComparedThe prevalence of public ownership presents a significant barrier to structural change in thewater industry. Although some water markets are "contestable," many communities arereluctant to surrender local control to a regional utility, including a privately owned utility,even though doing so might help accomplish a number of goals. Local politics andparochialism present a significant barrier to market entry and structural change in the waterindustry.In addition, the rates charged by privately owned water utilities generally are much higherthan the rates charged by publicly owned utilities. Surveys indicate that on average, privatelyowned utilities charge about $3.00 per thousand gallons, as compared to about $2.00 perthousand gallons for municipal systems. This difference can be explained by:o External subsidies (grants, loans, and transfers) available mainly to public-sector utilities.o Internal subsidies in the form of property tax revenues (assessments) used to offset costs.o Ability of municipalities to share labor, administrative, and other in-kind resources.D The lower cost of capital for the public sector.o Taxes paid by privately owned utilities.o Rates of return that must be earned by privately owned utilities.D A greater reliance by municipalities on upfront capital contributions and connection fees.o Municipal revenues from sales outside of city boundaries at artificially higher rates.o Public sector control of rights of way needed for maintenance and service extension.o Underpricing by municipal utilities and postponement of costly improvements.o Economies of scale enjoyed by larger public systems relative to many private systems.Publicly and privately owned water utilities provide similar systems, but they often use verydifferent methods in finance, ratemaking, and other areas. More importantly, publicly andprivately owned utilities are subject to different systems of accountability in the form ofeconomic regulation.Economic RegulationA striking difference among the utilities is theconfiguration of economic regulation. As alreadynoted, most of the larger telecommunications andenergy companies are privately owned. Asinvestor-owned utilities, most also fall under thejurisdiction of federal and state regulators.Federal economic regulation historically providedregulated utilities with a common set of groundrules for operations. Good examples are thesystems of accounts imposed by the FederalCommunications Commission and the FederalEnergy Regulatory Commissions.No federal economicregulatory presenceAn important institutional differenceamong the industries is the presenceof a federal economic regulatoryforce for the telecommunications ,electricity, and natural gasindustries. Water utility regulationis highly fragmented and pluralisticand the federal role is limited mainlyto public health protection.49September 1998

Water Compared· Industries ComparedrTable 2-6State Commission Regulation of Public UtilitiesTotal Utilities Regulated Approximate PercentUtilitiesRegulatedTelecommunications I ,458 1,393 96Electric: private 342 265 78Electric: public 2,244 707 32Electric: cooperatives 970 713 74Natural 730 660 90Natural 819 364 44IWater: private na 4,520 >90%Water: public · na 1,861 < 10%Water: otherna756 < 10%.All water utilities na 7,137 ~20%.. . .Source: NatiOnal AssociatiOn of Regulatory UtJhty CommJsswners, [/tzllty Regulatory Palzcy m theUnited States and Canada (1994/1995). For water utilities, estimating the percentage regulated ismade less precise by the disparity between utilities (counted by regulators) and water systems (countedby the U.S. Environmental Protection Agency).Today, federal regulators are leading the way toward restructuring and competition. Thestrong federal presence in the telecommunications and energy industries not only provides aunifYing paradigm for change; it also provides authoritative ground rules for competition andaccess to national transmission markets.State public utility commissions have played a strong role in regulating the predominantlyprivate telecommunications and energy utility industries. State regulation also extends tonearly half of the publicly owned utilities in these sectors, as seen in Table 2-6. Commissionjurisdiction for water utilities is limited. Forty-five states regulate investor-owned waterutilities; about a dozen states have some jurisdiction for publicly owned or nonprofit systems.Regulation of publicly owned systems is relatively comprehensive in a few states; in others,regulation is conditional. Public utility commissions in five states (Georgia, Michigan,Minnesota, North Dakota, and South Dakota) regulate no water utilities.The National Association of Regulatory Utility Commissions (NARUC) provides someconsistency in regulatory standards, at least for the investor-owned industry. The NARUC· uniform system of accounts is widely used by privately and publicly owned utilities.However, the limited jurisdiction ofNARUC-member commissions for the water industry asa whole constrains the ability of regulators to shape the entire water industry in the samemanner as other utility industries. As a result, the playing field for competition in the waterindustry is very uneven.NAWC 50 September 1998I

Water ComparedIndustries ComparedPublic PoliciesThe utility industries also vary in terms of a variety of other policy issues. For thetelecommunications and energy sectors, public policy is relatively cohesive. Even in thecontext of fundamental structural and regulatory change, there appears more generalagreement than disagreement (despite disputes about the federal v. state jurisdiction, the paceof implementation, or the appropriateness of specific approaches). Federal and statelegislation and regulations (discussed in the next section) have set the stage for competition.Telecommunications and energy also have been wellrecognized for their role in the national economy.Water utilities are recognized as having an economicdevelopment role as well, but at the local level. Localcontrol of water resources and utilities is highly politicaland often presents a formidable obstacle to change.The public policy goals for the water industry areparticularly diverse and complex. Although the 1996amendments to the Safe Drinking Water Act provided adegree of policy clarity on some issues, the Act does notconstitute a national blueprint for the water industry(despite several important references to restructuring).Federal legislation for the water industry is focusedmainly on public health protection and many of thedetails of implementation are left to the individual states.Water goalsThe policy agenda for the waterindustry is not as cohesive as forthe telecommunications andenergy industries. Leadingpolicy goals for water include:o compliance with treatmentstandards,o capital investment to replacethe infrastructure,o regionalization to achieveeconomies of scale, ando environmental stewardshipthrough source protection andconservation.Policyrnaking institutions, even within statejurisdictions, do not always send water utilitiesconsistent signals about expected performance. The institutional fragmentation of theindustry means that change will come at a much slower pace. Moreover, proposals for change·must be adapted to the unique institutional character of the industry.SummaryAs these overviews demonstrate, the water industry exhibits several characteristics thatdistinguish it from the telecommunications, electricity, and natural gas industries. In a forcedchoice, a dozen key traits are identified in Table 2-7 (five technical, four economic, and threeinstitutional). Some are composites of very interrelated characteristics. These traits areconsidered particularly important for understanding and evaluating options for industry andregulatory restructuring.NAWC 51 September 1998

Water ComparedIndustries ComparedTable 2-7A Summary of Selected Characteristics ofthe Water IndustryRelative to the Other UtilityCharacteristic I Water ComparedTechnicalCapital intensityand longevityEconomies of scaleProduction-costprofileRationale andpotential forwheelingPhysical propertiesEconomicMarket power ofnoncore customersTrends in demandTrends in pricesTrends in costsWater is among the most capital intensive of the utility industries; percustomerinvestment is rising; water assets also tend to have very long servicelives, making long-term planning and investment essential.Water supply and treatment demonstrate substantial economies of scale, yetthese economies are not realized across the industry due to fragmentation.Water delivery requires substantial investment in transmission and distributionfacilities; in the energy sector, generation costs (including fuel) dominate thecost jlfofile.Water generally cannot be wheeled through long-distance networks because oftechnical, economic, and institutional constraints; transmission costs relative toproduction costs are much lower in the other sectors.Water is a natural resource with unique physical properties (heavy weight,incompressibility, and capacity to corrode); water is the only utility resourcethat consumers ingest.The water industry is very dependent on residential customers; the marketpower ofnoncore (nonresidential) customers (who desire competition) isgreater in the other utilitysectors.Water demand (aggregate and per capita) is very stable and opportunities forgrowth are limited; demand for other utility services is rising.Water prices are rising at a pace faster than inflation due to rising costs and, insome cases, historic underpricing; the other sectors can offer price stability ordecreases.Water costs are rising to meet the needs of an aging infrastructure, comply withpublic health standards, and expand service territories.InstitutionalOwnershipstructureRegulation,accountability, andcompetitive fieldPolicy goalsSource: Author's construct.Public ownership (water supply as "public works") and the desire for loc.alcontrol characterize the water sector; private ownership and the regionalpresence of utilities with large market shares characterize the other sectors.For the water industry, quality regulation is high but economic regulation islimited and uneven, most publicly owned systems are not regulated, and nofederal economic regulatory presence exists (compared to the other sectors);the playing field for com_petition is highly uneven.Policy goals for the water industry and for water resources are complex andless cohesive than for the other public utility sectors; water is intrinsicallyrelated to other public health and environmental concerns.NAWC 52 September 1998

Water ComparedStructural Change3. Structural Change in the Utility SectorsStructural change, or restructuring, is affecting all of the utility industries. To one degree oranother, all are becoming more competitive and (hopefully) more efficient and effective inserving customers. But while the underlying paradigms of restructuring are common to all ofthe industries, change is being manifested in very different ways. Each industry must followits own course to the future.Restructuring in the energy and telecommunications sectors largely has meant a process ofbreaking up vertically integrated monopolies (although the recent trend of mergers provides anotable counterpoint), and opening access to transmission facilities. Restructuring in thewater industry, by contrast, involves consolidation and regionalization. As already noted,long-distance transmission of water resources is constrained for economic, environmental,and health reasons. Thus, restructuring will not take the form of creating a national watermarket. Nonetheless, competition is making its way into the water industry in other forms.The forces behind restructuring can be organized into the trilogy of concepts already used:technical, economic, and institutional. Together, these forces are transforming public utilities.Restructuring in thetelecommunications, electricity,and natural gas industries ...Restructuring in the waterindustry ...Technical FactorsFrom a technological standpoint, restructuring is the functional transformation of thetraditional, vertically integrated utility monopoly. The integrated monopoly provided all ofthe basic utility functions-generation (production), transmission (including storage asappropriate), and distribution. Under restructuring, different providers provide differentfunctions on an unbundled basis. In the telecommunications field, many new market entrantsreflect new services and technologies. In the energy sector, brokers and "aggregators" havebeen interjected between producers and customers. Under restructuring, utilities are"networked" competitors and customers have choices.NAWC 53 September 1998

Water ComparedStructural ChangeGenerationDistribution~Producers,,Transmission.._ .Jio~CompaniesAggregators,,,. Brokers,MarketersDistribution ... ...... ...Companies J~J~RatepayersResidentialCommercialIndustrial,Customers,,ResidentialCommercialIndustrialFigure 3-1Integrated Functions in aTraditional UtilityMonopolyFigure 3-2Competitive Relationshipsfor a Modem NetworkService ProviderIn very fundamental ways, transmission technologies make possible this transformation.However, advanced information and communications technologies that reduce transactioncosts play an equally important role in the emergence of competitive markets.The telecommunications and energy industries are highly interconnected. A long-distancetransmission network makes it possible to move a uniform product long distances at arelatively low cost:o The telecommupications industry utilizes a national network of 5.8 mil sheath km ofcopper wire and 568 thousand sheath km of fiber optic cable (total fiber deployed totalsmore than 20 mil. km). 16o The electric transmission grid consists of more than 672,177 circuit miles of lines. 17o The natural gas transmission system is composed of over 300,000 miles of pipes, notincluding local distribution lines. 1816 Federal Communications Commission, Statistics of Communications Common Carriers, 1996/1997 (1997).NAWC 54 September 1998

Water ComparedStructural ChangeObservations on restructuringIn describing regulated industry restructuring, so much emphasis is placed on legal andregulatory events that it would be easy to imply that restructuring is, at its heart, a regulatory[phenomenon]. In most cases, however, this is an illusion. Restructuring usually is not set inmotion by changes in regulation. Rather, economic and technological forces that driveindustries to change also, by necessity, cause regulation to adapt. This is because under thetraditional command-and-control regulation, public utility industries are molded and shaped tofit a regulatory process. When a regulated industry comes under sufficient pressure fromeconomic growth and technological improvement, it tends to become very inefficient.Growing inefficiencies build forces for change in the industry, but the required changesfrequently conflict with the existing regulation. This conflict forces regulation to adapt.Changes in regulated industries are driven by the same basic forces that cause change in theeconomy as a whole. Because regulation is the platform that shapes these industries, however,changes in regulation are effectively driven by the same forces that pressure the industry itself.In tightly controlled industries, it may not even be possible to assess the true character of theunderlying developments until after the regulatory evolution begins to unfold.Restructuring is often a lengthy process. Indeed, one of the first lessons to be learned fromstudying other industries in the process of restructuring is just how extended the process islikely to be. For example, the disparity between interstate and intrastate gas prices thatsignaled the beginning of the need for restructuring in the natural gas industry was firstobserved more than 25 years ago. But, only now are the outcomes of that restructuring processbeing translated into direct measures of action for smaller consumers in retail markets. Otherrestructurings in telecommunications, airlines, and railroads show similar lengthy periods ofdynamic readjustment. It is unlikely that the electric power industry will achieve a newintegrated structure more quickly than was the case in other industries.In general, restructurings improve economic efficiency because they grow directly out ofopportunities to lower costs. In addition, restructurings that substitute market discipline, whencompetition is viable, for command-and-control regulation can usually result in improvedincentives for efficient behavior that will bring additional pressures to lower prices. Therefore,restructurings generally hold the promise of overall benefits for the economy. Even if thebenefits of restructurings are not distributed in the ways that society might prefer, the net gainscan then be rearranged without giving up the newly gained efficiency improvements.Source: Margaret Jess, "Restructuring Energy Industries: Lessons from Natural Gas," Energy InformationAdministration, Monthly Special Report (http://www.eia.doe.gov/oil_gas/natgas/peg.html).17Edison Electric Institute (http://www.eei.org/Industrv/structure/powerS.htm).18International Centre for Gas Technology Information (http://www.naturalgas.org/Trans.html.NAWC 55 September 1998

~-·;Water ComparedStructural ChangerTelecommunications restructuring hinged on the highly national network for sending andreceiving messages (voice and data). Natural gas restructuring hinged on the unbundling ofproduction, transmission, and distribution facilities. Electricity restructuring hinges onopening the national and regional grids to retail "wheeling," or transmission of power fromproducers other than the local electricity provider.Trends in "gas delivered for the account of others" illustrate the transformation of the naturalgas industry. Access to transmission (pipeline) facilities came first to the industrial sector(including electricity utilities). Increasingly, commercial customers can choose their naturalgas supplier and choice for residential customers is on the horizon. Of course, restructuringalso has introduced a degree of volatility in gas prices--particularly for the core residentialmarket. Seasonal fluctuations appear to reflect the benefits of volume sales during the peakheatingseason. For noncore customers, prices are somewhat more stable."' Q)-~1009080Gas Delivered for the Account of Others(1986 to 1995)-~ 70ai0 60----::r~-------- -+-Industrial~0 50 ----=--""---------·---ElectricI-0 40----- --commercial'E 30Q)~Q)c...20100coco.....cococoC)~C)~ ~C)coC)~0C) c;;C) C)~ ~NC)~Monthly Natural Gas Prices(1994 to 1997)Note: Legendscorrespond to endyeargraph valuesfrom top to bottom.- $10.00Q)~ $9.00 +-----~ $8.00 +-----l'="'-a-----...-"'c------:t'--1r-----f--8 $7.00 -t------r--~---f-----'1---- -.1---+-~:---~­-g $6.00-ro~ $5.00 +---0~ $4.00lii $3.oo ~~~~t:fi;~.._-=::ttp,~~~H~~0..--Residential---Commercial....... Industrial......_City Gate--,--I() I() I() ([) ([) ([) ([)m q> q> m m q> m.!. C: .!.0.:; ...., 0

Water ComparedStructural ChangeIndustrial Sales on Account of Others0 to 19.9 percent20 to 39.9 percent 40 to 59.9 percent60 to 79.9 percent80 percent or moreVermont (0%)Maine (9.0%)South Carolina (14.2%)Connecticut (15.4%)Alaska (35.7%) North Carolina (40.6%)New Hampshire (44.6%)New Jersey (46.4%)Tennessee (53.0%)Massachusetts (58.1%)Mississippi (58.3%)Minnesota 58. 7%)Delaware (62.7%)Wisconsin (63.6%)Georgia (67.8%)Kentucky (72.9%)North Dakota (73.5%)Missouri (75.3%)South Dakota (75.4%)Washington (75.6%)Alabama (77.4%)Nebraska (79.6%)Texas (79.8%)Arizona (80.3%)Pennsylvania (81.5%)Oregon (82.0%)Virginia (82.0%)Rhode Island (83.1 %)Indiana (83.4%)New York (85.3%)West Virginia (85. 7%)Illinois (86.3%)Florida (86.6%)Arkansas (86. 7%)Michigan (87.5%)Maryland (88.3%)California (88.8%)Louisiana (89.4%)Iowa (91.0%)Utah (91.0%)Kansas (92.3%)Colorado (92.6%)Ohio (92.6%)Nevada (92.8%)Oklahoma (93.4%)New Mexico (96.5%)Montana (96.6%)Wyoming (97.1%)Idaho (98.6%)Commercial Sales on Account of Others0 to 9.9 percent10 to 19.9 percent 20 to 29.9 percent 30 to 39.9 percent40 percent or moreVermont (0%)Maine (0%)Delaware (0%)Hawaii (0%)South Carolina (1.0%)Oregon (1.7%)Louisiana (1. 7%)Mississippi (2.6%)Florida (2.9%)New Hampshire (3.1 %)North Carolina (3.5%)Indiana (3.7%)Minnesota (3.8%)Arkansas (5.0%)Tennessee (5.7%)Georgia (5.9%)Colorado (6.8%)Maryland (8.1 %)Rhode Island (8.2%)Wisconsin (8.4%)Montana (8.5%)Kentucky (9.2%)North Dakota (12.0%)Iowa (12.3%)Connecticut (13.0%)Idaho (13.4%)Washington (14.1%)Wyoming (14.1 %)Virginia (14. 7%)Arizona (14.8%)Oklahoma (15.5%)Texas (16.5%)South Dakota (17.3%)Missouri (17.8%)Utah (18.1 %)Alabama (18.9%)New York (23.0%)Massachusetts (25.3%)Nevada (25.8%)New Jersey (26.7%)Ohio (28.2%)Kansas (28.3%)D.C. (29.5%)Pennsylvania (29.6%)Nebraska (30.0%)Michigan (33.1 %)New Mexico (35.3%)Alaska (36.6%)West Virginia (43. 7%)California (45.1 %)Illinois (46.1%)Note: Gas delivered for the account of others (or sales not "on system") represents transactions between gasproducers and end users (through direct or indirect marketing), where the distribution company providesdelivery service.NAWC 57 September 1998

Water ComparedStructural ChangerA similar restructuring of the electricindustry is now underway.Interconnected grids make it possible tounbundle power generation fromtransmission and transmission fromdistribution. The capacity to wheelpower long distances at a relatively lowcost is an essential part of the emergingcompetitive paradigm for the electricityindustry. The rationale for openingtransmission markets is to expandconsumer choice at the retail level.Because implementation isunprecedented, notes an NRRI study,the potential benefits and costs ofwheeling are largely theoretical.Barriers to water wheelingo High transmission costs in absolute terms.o High transmission costs relative toproduction costs.o Physical barriers, including terrain,obstacles, and gravity.o Inability to compress or transform.o Depletion of local resources and potentialdegradation of quality.o Problems with mixing water from differentsources.o Catastrophic risk of contamination in a largenetwork.o Preference for local control of waterresources.Table 3-1Potential Benefits and Costs of Retail Electricity WheelingPotential Benefitso More efficient utility pricingo More efficient utility operations andinvestmentso More efficient industry structureo Reduced price differentials amongelectric utilitieso Stronger U.S. economyo More appropriate "regulatorycompact"Potential Costso Lower electric power system reliabilityo Uneconomic bypass under existing retail pricingprocedureso Stranded-investment costso Large distributional effecto Lost economies of scopeo Incremental costs for upgrading or expandingtransmission network to accommodate retailwheelingo Jurisdictional disputeso Higher prices to core customerso Discriminatory pricingo Abolition of the integrated resource planning(IRP) processo Breakdown of "regulatory com act"Source: Kenneth W. Costello, Robert E. Bums, and YousefHegazy, Overview of Issues Relating to the RetailWheeling of Electricity (Columbus, OH: The National Regulatory Research Institute, 1994), 95.NAWC 58 September 1998

Water ComparedStructural ChangelMany of the perceived benefits and costs of retail electricity wheeling also might apply towater. However, as discussed in Section 2 of this report, the technical, economic, andinstitutional barriers to water wheeling (particularly for retail, "treated" water) are substantial.Water cannot be transformed (like electricity) or compressed (like natural gas). 19 Not only istransporting water very expensive, it also disrupts local water ecologies and can jeopardizefuture quality and availability.The economics of wheeling are a function of the tradeoff between the cost of production (orcommodity costs) and the cost of transmission. Low transmission costs relative to commoditycosts suggest that interconnected utility markets can cover a larger area. High transmissioncosts relative to commodity costs, given locally available resources, favor local productionand distribution. For the water industry, particularly in contrast to the telecommunicationsand energy industries, transmission costs are very high relative to the cost of extracting andtreating water.The economics of water wheeling also are in large part a function of the number of customersto which the water is wheeled. Transporting water to only a few connections introducesadditional diseconomies. The high cost of transmission is a barrier to establishing waterservice to remote and thinly populated areas.Table 3-2Illustration of Comparative Transmission CostsNatural Gas Electricity WaterWholesale cost of production $2.20/mcf $30.00/mw $1.40/k:galTransmission cost per I 00 $0.06 $1.66 $3.49milesTransmission cost as a 2.72% 5.53% 249.57%percentage of wholesale costfor a I 00-mile distanceDistance at whichtransmission cost equal3,676.1,808 40wholesale cost (miles)Source: Estimates prepared by Eugene H. Owen, Baton Rouge Water Company (Presented at theAnnual SEARUC Conference, June 1998).19Electricity, which follows the path of least resistance, can be transported long distances by boosting voltage atthe transmitting end and lowering it at the receiving end; compressed gas can be transported through highpressure,small-diameter pipelines and decompressed for local distribution.NAWC 59 September 1998

Water ComparedStructural ChangeEconomics of Wheeling:Illustration of Transmission Costs as a Percentage ofWholesale Commodity Costs by Sector1 00-mile transmission)Water249.57%Electricity5.53%• 2.72%Natural gas IJIIIEconomics of Wheeling:Illustration of Distance at Which Transmission CostsEqual Commodity Costs(miles)Water '40Electricity1,808Natural gas3,NAWC 60 September 1998I

Water ComparedStructoral ChangeDespite the barriers to water wheeling on a national scale, some examples have emerged inthe form of regional wholesale water markets. The Metropolitan Water District of SouthernCalifornia (MWD) provides the most prominent example of unbundled transmission for watersupply. As the largest water system in the nation, MWD supplies wholesale water to twentysevenmember agencies that in tum provide retail service to nearly 60 percent of the region'spopulation of 16 million. Several agencies in the region have asked to use MWD's extensiveconveyance system to wheel non-MWD water. California law, as discussed below, addressesthe conditions under which water wheeling can occur.Water supply technologies are highly stable and the physical properties of water constraintechnological innovation. The core methods of water delivery-pipes, pumps, gravity-havenot changed dramatically since the earliest origins of the industry. At the margin, however,technological advances have increased the efficiency and performance of the industry.Supervisory Control and Data Acquisition (SCADA) systems have advanced the ability of thewater and wastewater industries to manage operations through remote sensors that monitorpumps, valves, pressure readings, switches, alarms, flows, temperatures, and other variables.Many of these automation methods are promoted in the context of privatization and otherstructural options for the industry.In the near term, the water industry also will benefit from electricity restructuring. As a majorenergy consumer, water utilities will have substantial buying power on more open markets.This will become a strategic issue for water managers, as addressed in Section 5 of this report.In the longer term, other technological developments will affect the water industry.Technologies to watch include those related to:o Recycling and reuseo Desalinationo Point-of-use and point-of-entry treatmentFinally, unbundling of some water utility functions is technically feasible. Potentialopportunities for unbundling include the separation of:o Wholesale water supply and retail water distributiono Customer services and water delivery serviceso Ownership and operations (which occurs with contract operations)However, as highlighted in the previous section, the arguments for unbundling in water areless clear than for telecommunications and energy services. In particular, unbundling couldundermine the water industry's ability to exploit much-needed economies of scale and scopein management and operations. However, cost pressures probably will induce water utilitiesto explore opportunities for change, including technical innovation and service options.61 September 1998

Water ComparedStructural ChangeEconomic FactorsThe economic rationale for restructuring centers on the desire to provide incentives forefficiency through competition v. regulation. Transforming traditional utility monopolies is anecessary, but not a sufficient step, toward competitive markets100%90%80%Market Share of Toll Service Revenues(1984 to 1996)----=~------.. .....70%--------+-AT&T60%50% -+-MCI40%30%20%10%0%~~--+-All othercarriers-+-SprintThe telecommunications industryset the precedent for the evolutionfrom monopoly to competition.Since the divestiture of AT&T in1984, that quintessentialmonopoly gradually has lostmarket share to upstarts MCI,Sprint, and now others. 20A factor that all of the utilityindustries have in common is theentrance of new market:; ~ :8 :;; :8 ~ g ;;; ~ ~ ~ ~ ll: _.,._ Worldcom participants. As barriers to entry~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~fall and services are unbundled,the number and scope of participants appear to expand. This trend is most apparent for thetelephone industry. In the telecommunications field, substantial diversity and growth hastaken place in the long-distance and wireless service areas. Deregulation and the dismantlingof entry barriers have paved the way for new services and new providers. The growth incellular service providers has been particularly striking.Interstate Telephone Service Providers(1997)Cellular, personalcommunicationsservice andspecialized mobileradio (853)22%Pay telephoneprovider (533)14%Paging and othermobile servicecarriers (364)9%Local exchangecarrier (LEC) (1,376)----37%Prepaid calling cardprovider (16)0%Operator serviceprovider (27)1%Toll reseller (345)9%lnterexchangecarrier (149)4%Competitive accessproviders andcompetitive LECsOther toll (50) (119)1% 3%20In 1998 MCI merged with Worldcom.NAWC 62September 1998

Water ComparedStructural ChangeRestructured markets alter the composition of utility revenues. In the telecommunicationsindustry, restructuring is reflected in the reduction of toll-service revenues and the rise inaccess charge revenues. Transmission charges for energy commodities can be substantial,particularly if used to help utilities recover stranded investment costs.In the energy realm, both for the electricity and natural gas markets, the newest players are the"aggregators, brokers, and marketers" (ABMs), who are interjecting a role between buyersand sellers in the new marketplace for utility produces and services. Aggregation might bethe only realistic opportunity for core customers (that is, individual residential customers) toexert purchasing power.In the water industry, new players also have emerged. ~e most significant trend in this areaprobably is the quiet emergence of unregulated nonutility contract providers, who haveanswered the call to privatize operations and management for many municipal water andwastewater facilities. Some investor-owned water utilities (or their parent managementcompanies) also offer contract services.$60Telecommunications Operating Revenueby Service Category(1970 to 1996)1/)c:.Q:0f>4c:1/)G):::lc:G)>G)0:::$50$40-$30$20$10--Local servicerevenues+-----------ft--.?--+---=----------,...,..,_ ---Accessrevenues--Toll servicerevenues$0~~~~~~~~~~~~~~0I'-­m0(X)mN(X)m(0(X)m(X)(X)m0«> --Miscellaneousm ~ revenuesNote: Legends correspond to end-year graph values from top to bottom.NAWC 63 September 1998

Water ComparedStructural ChangerUnbundling in the natural gas industry involves disaggregating a number of functionsprovided by local gas distribution systems, including? 1o Providing retail distributiono Arranging pipeline transportationo Arranging storageo Procuring gaso Providing balancing serviceso Offering financial instruments to "hedge"o Forecasting loads and nominationso Providing on-system peakingo Providing back-up services and interruptionmsuranceo Conducting metering, accounting, and billingo Providing maintenance contractsCompetition is slower to come to the water industry.The industry remains largely monopolistic in terms ofownership and operations. Even the very smallestwater utilities are monopolies if the customers theyserve do not have feasible supply alternatives, whichoften is the case. However, water utilities increasinglyare expected to behave less like monopolies in termsof responding to customer needs. Many observersbelieve that the water industry will be pressured tounbundle certain services, particularly metering andbilling.Competition in watero Extending service to unservedor underserved areas.o Engaging in acquisitions andmergers (voluntary).o Bidding for operationscontracts (involving utilities aswell as private contractors).o Bypassing the utility Oargevolumecustomers, includingself-supply).o Purchasing water on wholesalemarkets.o Trading water rights (includingalternative water uses).o Competing with bottled waterand home treatment methodsfor service quality and image.o Promoting public versusprivate ownership.o Contesting markets or utilityownership (includinginvoluntary acquisitions).o Participating in convergenceacquisitions.In some areas of water supply, competition can bedetected. For water utilities, the competition betweenthe public and private ownership forms (both of which are monopolistic) and the very relatedidea of contestable markets are perhaps the most significant manifestation of competition forthe industry. Overall, the competition has had positive effects in terms of focusing attentionon opportunities for efficiency, innovation, and structural change. Emotions continue to runhigh on which ownership form is best suited to providing water service.Some water service territories are contestable to the extent that an alternative provider is ableand willing to enter the market. Many water utilities do not have exclusive service territories,which would limit market entry by competitors. Contestibility has been proven in caseswhere publicly owned utilities have been privatized and, perhaps more dramatically, whenprivately owned utilities have been condenmed and operations have been assumed by local21Indiana Utility Regulatory Commission, Regulatory Flexibility Report (Chapter 8).http://www .ai .orgiiurc/reoort/regflex!gas/ -8 .html#FNAWC 64 September 1998

--lWater ComparedStructural Changegovernments. The threat of municipal takeover can provide powerful performance incentivesfor many water utilities; in some cases, the takeover threat may be at least as effective aseconomic regulation (see Section 4).Contract operations also can be highly competitive at the time of bidding. Utilities oftencompete with engineering and management firms for the chance to operate utility facilities.However, the lengthy terms of many contracts (now ten to twenty years), along with the localgovernment ownership of assets, tend to be more characteristic of monopoly thancompetition. Long-term contracts for operations might prove contestable if the contractordoes. not meet performance standards.Although contestable market theory is useful forunderstanding the water sector, the technical,economic, and institutional features described inSection 2 limit competition in the industry. At thisjuncture, competition is not sufficient to supplantvital societal oversight mechanisms, such aseconomic regulation.Another important structural trend in the waterindustry is regionalization. Regional water utilitiescan achieve economies of scale, not only in wateroperations but also in environmental protection.ContestabilityWater supply is the most"monopolistic" of the utilities.However, water markets also canbe described as "contestable"because of the competition amongthe public and private ownershipforms, as well as the potential fora "takeover" of a smaller utilityby a larger one.Water does not respect local political boundaries; utilities organized along these boundariesgenerally are suboptimal. Water and wastewater utilities could be organized around largeenvironmental units (namely watersheds) that also correspond to local economic activity. Thebarriers to regionalization are substantial; most relate to the desire for local governmentalcontrol over water utilities.Aggregate national trends in employment in the utility sectors are revealing of the changing .economic character of the industries. In the telecommunications area, the divestiture ofAT&T triggered a decline in employment. Not surprisingly, the highly service-oriented(versus production-oriented) telecommunications sector continues to be a substantialemployer. In the past few years, the slight increase (based on more detailed statistics) isassociated with the surge in cellular services. The energy sectors indicate declines inemployment. Further declines in employment could occur with electricity restructuring, asutilities downsize in order to become more efficient and more competitive.;; Between 1986 and 1995, the electricity industry workforce declined by 100,000; real salariesand wages declined by 28 percent. 22 This translates to a reduction in wage costs from about0.7 cent per kWh in 1986 to about 0.5 cent per kWh in 1995. Electricity utilities also arepreparing for competition through mergers and acquisitions. Between 1986 and 1985, the22Energy Information Administration, The Changing Structure of the Electric Pawer Industry: An Update(Washington, DC: EIA) (http://www.eia.doe.gov/cneaf/electricitv/chg str/chapter9.htrnl).NAWC 65 September 1998

Water ComparedStructural Changernumber of investor-owned electric utilities declined from 282 to 244; the number of majorinvestor-owned utilities declined from 182 to 179. 23Although the water and wastewater industries as a whole employ a much smaller workforce,they appear to be the only public utilities for which clear and steady growth can be detected.The 1986 Safe Drinking Water Act may have triggered the upward slope in employment; timewill tell whether the 1996 Act will have a comparable effect.On the other hand, the quest for efficiency in the water sector also has the potential tosuppress labor force growth to some extent. Consolidation and automation, for example, canhelp utilities reduce labor costs. The desire to streamline the workforce also has been a keyrationale for privatization in the water and wastewater sectors.1,200Employment by Utility Sector(1947 to 1997). ··--·- ··- ... -- --- ----~- ---~000-~800c:Q)E>-00..EQ)1,000__ _ _ _--·-· -600 -----·---------··---·-400 +--·-··- ---+-Telephone---Electric--o- Combinationutilities2000-:;:::::::ueeau:m::::::::::::::~:;:::::»•t-+-- Natural gas--water andwastewaterNote: Legends correspond to end-year graph values from top to bottom.23Ibid.NAWC66 September 1998

lWater Compared Structoral ChangeInstitutional FactorsPolicymaking institutions, particularly at the federal level, have had a strong hand inrestructuring the telecommunications and energy industries. Institutional change goes hand inhand with technical and economic factors. In soine cases, public policy has led the way; inothers, policy has had to "catch up" with movements already underway.Restructuring of the utility telecommunications and energy industries is clearly a "top down"proposition. Congress and federal agencies, generally followed by states legislatures andregulatory commissions, have provided the catalysts, as well as the blueprints, forrestructuring. Federal initiatives also have dominated the policy agenda and provided thestates with a set of issues to which to respond. Table 3-3 summarizes the critical timelines offederal restructuring policy for the telecommunications and energy sectors. (See Appendix Bfor detailed information.)The telecommunications industry provides a rich history of change, culminating in thepassage of the 1996 Federal Communications Act (summarized in Table 3-4). The JusticeDepartment paved the way for long-distance competition. Congress and the FederalCommunications Commission (FCC) have paved the way for local competition. The 1996Telecommunications Act constituted an historic overhaul of the U.S. telecommunications lawand policy, including a framework for local competition and universal service. The FCC'sfairly aggressive approach to implementation also provoked a legal challenge by the states.Electricity restructuring is a work in progress. In 1998, the Clinton Administration issued aComprehensive National Energy Strategy as well as a Comprehensive Electricity CompetitionPlan (Table 3-5). The plan calls for retail choice for consumers by January I, 2003, but alsopermits "States and unregulated utilities to opt-out of the competition mandate if they findthat consumers would be better served by an alternative policy." The National Association ofRegulatory Utility Commissioners previously spelled out a number of principles forelectricity restructuring (Table 3-6). Many of these principles address fundamental issues thatare common to all of the utility sectors. Approximately sixteen states were implementingelectricity restructuring policies by early 1998. 24 By May 1, 1998, all but two states (Floridaand South Dakota) had adopted or were considering electricity-restructuring strategies. 25 Mostof the states are addressing a very similar set of restructuring issues.Natural gas industry restructuring has taken place through a series of orders by the FederalEnergy Regulatory Commission (PERC) that provided for deregulation of wellhead prices,unbundling of services, and open access to transmission facilities. Contemporary policydevelopments are focused on introducing choice to the retail market. As noted, most24Edison Electric Institnte, "Electric Utility Restructuring/Competition Issues: State Activities on ElectricUtility Restructuring/Retail Competition (http://www.eei.orgilndustry/structore/statesad.htrn). The states are:'Arizona, California, Illinois, Maine, Maryland, Massachusetts, Michigan, Montana, Nevada, New Hampshire,~-New Jersey, New York, Oklahoma, Pennsylvania, Rhode Island, and Vermont.25U.S. Energy Information Administration "Status of State Electric Utility Deregulation Activity as of May I,1998" (http://www.eia.doe.gov /cneaf/electricity /chg__str/tab5rev.htrnl).NAWC 67 ·September I 998

Water ComparedStructural Changeindustrial and many commercial customers can choose their gas provider; gradually,regulators are introducing retail choice to the residential market through pilot programs andother initiatives.As already noted, no economic regulatory presence exists for the water industry. Stateregulation also is highly uneven. Because of the local character of water services,restructuring of the water industry as a whole is more of a bottom-up than a top-downproposition. That is, restructuring will require initiatives by public and private utilities (forexample, mergers and partnerships), as well as state and local policymakers (who can create afavorable environment for change). However, a potentially significant federal message aboutrestructuring was sent in the form of the 1996 amendments to the Safe Drinking Water Act(SDWA). As summarized in Table 3-7, six different parts of the statute refer to waterindustry restructuring.Much of the burden of responsibility for implementingthe SDW A rests with the states. The states mustensure that new systems have adequate technical,financial, and managerial capacity and assist existingsystems in achieving capacity. Structural solutions,such as acquisitions of smaller utilities by larger ones,are widely viewed as a means of improving andensuring capacity. Systems also must have adequatecapacity in order to qualify for funding under the StateRevolving Fund. The provisions for variances andexemptions also reference structural options. Apotentially important incentive is the chance to avoidan enforcement action if a plan for restructuring isunderway. Finally, the Act also provides for researchfunding related to restructuring. Insufficient tirue haspassed to evaluate the effects of these provisions.AffordabilityPursuant to the 1996 SDW A,affordability of water servicecan be considered when theEPA identifies appropriatetreatment technologies and thestates consider variances, andapprove loans to communities.However, the SDW A does notprovide the broad mandate foraffordable universal service asprovided under the 1996Telecommunications Act.Although the SDW A gave water restructuring an important measure of credibility, it hardlyconstitutes a mandate for restructuring in the same manner as federal policies in thetelecommunications and energy sectors. Most meaningful restructuring decisions must bemade at the state level. Some examples of restructuring policies can be cited: 26ooSeveral public utility commissions have formal or informal policies on water systemacquisitions; a few states (such as Pennsylvania) provide explicit incentives for larger,viable systems to acquire smaller, troubled systems.A few states (including Connecticut, New Jersey, and Pennsylvania) allow for themandatory takeover of water systems.26See National Association of Water Companies, Sourcebook of Regulatory Techniques for Water Utilities(Washington, DC: NAWC, 1997). Compiled by Janice A. Beecher.NAWC 68_______________________September 1998_.

Water ComparedStructural ChangeoooA few states have allowed water utilities to use flexible pricing methods for large-volumecustomers; an Iowa water utility gained approval for flexible pricing by invokingregulatory provisions designed for the natural gas industry.Several states (including New Jersey, Florida, and Utah) have enacted legislation tofacilitate and oversee privatization activity in the water and wastewater industries.California has a policy, although conditional, on water wheeling.Despite these prominent examples, state and regulatory policy regarding the structure of thewater industry remains highly fragmented. The states are not addressing a homogeneous setof issues or adopting a consistent set of policies. Even well intentioned regulators cannotovercome the limitations of their jurisdictions without broader institutional reforms. Ingeneral, restructuring of the water industry will be a more painstaking process without aninevitable outcome.Restructuring IssuesRestructuring public utilities raises a host of issues that are beyond the scope of this paper.Many issues are common across the industries, including:..._,,.:_ >D Introducing retail choice to corecustomersD Unbundling and rebundling ofsome servicesD Deregulation of select functions(such as production)D Stranded investment andtransition costsD Mergers and convergence (crossownershipof utilities)D Sustaining competition with thetendency toward mergerD Risk management and risksharingD Ensuring performance andconsumer protectionD Achieving universal service andother policy goalsConvergence is a particularlyinteresting restructuring issue.While the convergence of electricityand telecommunications providersConvergenceWhen mergers, joint ventures, or strategic alliancesbetween an electric utility and a telecommunicationscompany take place they might at first seem to fall inthe category of being a conglomerate merger; at firstglance the products and services that the firms providedo not seem to be closely related in either production,distribution, or consumption. However, another way isto view these mergers as convergence mergers, wheretwo previously unrelated markets for services orproducts are brought together through advances intechnology. The synergies brought about by newlyavailable technology can lead to new products andservices as well as the availability of traditionalservices at a lower cost. The argument here is thatthere might be significant economies of scope to berealized; that is, two or more products or services canbe produced more cheaply together than they canseparately on a stand-alone basis. In addition, newproducts and services could be developed that might beof value to the consumer.Source: Robert E. Bums, Exempt TelecommunicationsCompanies (NRRI, 1997): 2-3.has been considered, convergence of water utilities and other utilities has received lessattention. Anecdotal evidence suggests a high interest in water utilities on the part of someNAWC 69 September 1998

Water ComparedStructural Changercash-rich energy firms as these firms position themselves for competition. Water companies,with their long standing in some communities, can provide out-of-town companies with anentree into valued local distribution markets.In the context of restructuring, a fundamental issue is how to regulate utilities in a marmer thatfacilitates and encourages the development of beneficial competition while providingadequate controls or incentives for the elements of service that remain monopolistic.Regulatory alternatives are considered in the next section.IIIII.Table 3-3Restructuring TirnelineTelecommunicationsFCC grants MCI petitionFCC's Computer I decisionFree entry decisionJustice files AT&T antitrust suitFCC's Computer II decision (unbundling)Modified Final Judgment approvedFCC's Computer /II decision (open network)1969197019711972197319741975197619771978197919801981198219831984198519861987198819891990199119921993199419951996EnergyPublic Utility Regulatory Policies Act (QFs)Natural Gas Policy ActFERC Order 380 (gas take or pay)FERC Order 436 (gas open access)FERC Order 451 (gas market pricing)Natural Gas Wellhead Decontrol Act.FERC Order 500 (amends Order 436)Clean Air ActFERC Order 537 (gas transmission)Energy Policy Act modifies PUHCA andauthorizes FERC to order wheelingFERC Order 636 (gas unbundling)FERC Orders (gas gathering policy)Local competition begins to emergeTelecommunications Act (competition)First residential gas choice pilotsFERC Orders 888 & 889 (electricity access)FERC allows recovery of wholesale stranded costStates begin electricity restructuringNARUC files suit against FCC 1997Many states continue to move toward local 1998 Electric restructuring implemented or undercompetition and performance-based regulationreview in almost all statesSource: Author's construct based on summaries provided in Appendix B.NAWC 70 September 1998

Water ComparedStructural ChangeTable 3-4Highlights of the Telecommunications Act of 1996Local Telephone Competitiona Prohibits state or local barriers to market entry.a Allows competitively neutral management of rights-of-way.a Defines rural telephone company and addresses rural market entry.o Requires all telecommunications carriers to interconnect directly or indirectly with other carriers.Universal Serviceo Defines universal service as an evolving level of telecommunications services that the FCC determines areessential, have been subscribed to by a majority of customers, are being deployed in public networks bycarriers and are consistent with the public interest, convenience, and necessity. States may add to thedefmition, provide they meet specified requirements.a The FCC is directed to base its universal service policies on the principle that specific, predictable, andsufficient federal and state mechanisms to preserve and advance universal service should be provided.a The FCC and the state are required to ensure that universal service is affordable.o Specifies eligibility criteria for a carrier to receive universal service support.a Provides that rates for interexchange services shall be no higher for subscribers in rural and high-cost areasthan in urban areas; interstate interexchange rates shall be no higher in one state than another (toll rateaveraging).o Provides for extending lower cost and affordable telecommunications services to schools, libraries, and ruralhealth-care providers.a Local exchange carriers will be required to make facilities and functions available to eligible carriers lackingeconomies of scale or scope.Bell Operating Company Entry into Long Distance and Manufacturinga Bell Operating Companies (BOC) can offer inter-LATA services originating outside their in-region States.a BOCs will be authorized to offer in-region inter-LATA services as soon as they comply with networksharingprovisions of the law.o BOCs must provide long-distance, manufacturing, inter-LATA, and other services through a separateaffiliate for a minimum of three years.a Places conditions and limitations on implementation of joint marketing, toll dialing parity, and alannmonitoring services.Telephone Company Providing Video Programminga Telephone companies may offer video programming directly to subscribers under regulations that varyaccording to the video service provided.a A telephone company may own more than I 0 percent interest in a cable company, and vice versa, underspecified conditions.Deregulationa The FCC must review regulations every two years and discontinue applying unnecessary regulations.a Specifies other tariff and filing changes.Indecencya Prohibits the use of computers and other telecommunications devices to transmit obscene material with theintent to annoy, abuse, threaten or harass, or to convey indecent material to a minor.a Carriers are not liable unless they knowingly and intentionally penni! a facility under their control to beused for these prohibited purposes.Source: U.S. Telephone Association, "Summary of Telecommunications Act of 1996"http://www.usta.org/billsurnm.html.NAWC 71 September 1998

Water ComparedStructural ChangeTable 3-5Highlights of the Clinton Administration's ComprehensiveElectricity Competition Plan (March 1998)The Administration's plan. The Plan is built upon the principle that customers should be allowed to benefitfrom the ability to choose their own electricity supplier. It advances the legislative changes necessary toprovide customer choice, enhance competition, and diversity generation sources. Key components of theplan include:I. Retail Competition - Flexible Mandate. The flexible mandate would require that all consumers be ableto choose their electricity supplier by January I, 2003, but would permit States and unregulated utilities toopt-out of the competition mandate if they find that consumers would be better served by an alternativepolicy. This approach strikes a balance between the need to spur competition and the importance ofpreserving State flexibility and authority.I, 1.2. Environmental Provisions. Environmental Provisions --The plan includes a range of provisions toprotect the environment through cleaner air and reduced greenhouse gas emissions while saving consumersmoney. These include a $3 billion Public Benefits Fund, to support conservation and energy efficiencymeasures, research and development into clean and efficient technology, and deployment of renewableenergy technologies; a Renewable Portfolio Standard, to require that at least 5.5 percent of electricity salesbe generated from non-hydroelectric renewable sources, subject to a cost cap; trading authority for nitrogenoxide emissions to facilitate cost-effective, market driven pollution reductions; and consumer informationrequirements to ensure that consumers can choose to purchase power from cleaner sources. We estimatethat the plan will reduce greenhouse gas emissions by an estimated 25 million to 40 million metric tons in2010. The Administration will monitor emissions by coordinating data received from utilities by thevarious agencies and such data will be provided in annual reports to the President, and will worlc with theCongress to ensure that any unanticipated consequences are addressed quickly and in keeping with theAdministration's climate change policies.3. Stranded Cost Principle. We support the principle that utilities should be able to recover prudentlyincurred, legitimate, and verifiable retail stranded costs arising from the transition to competition if thesecosts cannot be mitigated. States would continue to determine stranded cost recovery under State law.4. Consumer Information. Uniform and easy to understand labeling similar to the Food and DrugAdministration's nutritional labeling system will ease customer choice and facilitate the sale ofenvironmentally responsible green power. The Department of Energy would develop a system forrequiring all electricity sellers to disclose the price and environmental attributes of their power supply.5. Strengthen Electric System Reliability. Reliability and competition can-- and must-- go hand in hand.To ensure reliability in the new market we propose to build upon the industry's tradition of self-regulationby requiring key market participants to join an organization which would establish reliability standards andenforce those standards subject to the oversight of the Federal Energy Regulatory Commission.6. Cost Savings for Consumers and the Government. The typical family of four is expected to save over$230 per year from this plan: $I 04 per year directly -- in lower electricity bills -- and another $128 per yearindirectly-- in lower costs for goods and services that use electricity. Federal, State and local governmentswill also save close to $2 billion per year.Source: White House Press Release, March 25, 1998.NAWC 72 September 1998

Water ComparedStructoral ChangeTable 3-6NARUC Principles to Guide the Restructuring of the ElectricIndustry (1996).,'"·'ReliabilityCustomerChoiceUniversalServicePublic BenefitsStranded CostsConsumerProtectionState DecisionsEnvironmentPUHCAPURPAShared BenefitsPublic ParticipationSafety, reliability, quality, and sustainability of electric service should bemaintained or improved in a restructured electric system.Consumers should have the opportunity to make informed choices amongproviders and services. It is for the States to determine the extent of and pacefor expanding choice for consumers under their regulatory oversight.Universal service at reasonable rates, including adequate protections for lowincomecustomers, should be maintained.The public benefits of energy efficiency, renewable resources technologiesand research and development should be maintained through existing or newmechanisms.Existing commitments of utilities arising from past decision made pursuant tohistorical regulatory and legal principles should be addressed in a fair andreasonable manner by States.Consumers should be protected from anti-competitive behavior, unduediscrimination, poor service, and unfair billing and disconnection policies.States and State commissions should determine retail electric policies,including restructuring policies.Structural changes to the electric industry should maintain or improve thequality of the environment.Changes to PUHCA should be maintained in the context of broader industrychanges. Regulation should be reduced only as competition becomeseffective at preventing monopoly abuses.PURP A should be reformed generally consistent with the following: goals ofPURP A should be affirmed; mandatory purchase requirements not applicablefor utilities in a State that has determined acquisition of generation is subjectto competition.All classes of customers should benefit from improvements due to structuralchanges in the industry.Industry restructuring policies should be developed in public processes withparticipation open to all.Source: National Association of Regulatory Utility Commissioners (July 1996).73 September 1998

Water ComparedStructural ChangeElectric Restructuring PolicyInitiated or Pending (1997)Natural Gas Unbundling Initiatives (1997)NAWC 74__..September 1998I

Water ComparedStructural ChangeTable 3-7Water Industry Restructuring Pursuant to the1996 Safe Drinking Water ActCapacity Assurance: New SystemsSection 1420 (a) State Authority for New Systems.-A State shall receive only 80 percent of the allotment that the State is otherwise entitled to receive under section1452 (relating to State loan funds) unless the State has obtained the legal authority or other means to ensurethat all new community water systems and new nontransient, noncommunity water systems commencingoperation after October 1, 1999, demonstrate technical, managerial, and financial capacity with respect toeach national primary drinking water regulation in effect, or likely to be in effect, on the date ofcommencement of operations.Capacity Assurance: Existing SystemsSection 1420 (c) Capacity Development Strategy.-[Subject to SRF withholding States must develop and implement] a strategy to assist public water systems inacquiring and maintaining technical, managerial, and financial capacity [including](A) the methods or criteria that the State will use to identifY and prioritize the public water systems most in needof improving technical, managerial, and financial capacity;(B) a description of the institutional, regulatory, financial, tax, or legal factors at the Federal, State, or local levelthat encourage or impair capacity development;(C) a description of how the State will use the authorities and resources of this title or other means to-­(i) assist public water systems in complying with national primary drinking water regulations;(ii) encourage the development of partnerships between public water systems to enhance the technical,managerial, and financial capacity of the systems; and(iii) assist public water systems in the training and certification of operators.Consolidation Incentive: EnforcementSection 1414 (h) Consolidation Incentive.-(!) In generaL-An owner or operator of a public water system may submit to the State in which the system islocated (if the State has primary enforcement responsibility under section 1413) or to the Administrator (ifthe State does not have primary enforcement responsibility) a plan (including specific measures andschedules) for-(A) the physical consolidation of the system with I or more other systems;(B) the consolidation of significant management and administrative functions of the system with I or more othersystems; or(C) the transfer of ownership of the system that may reasonably be expected to improve drinking water quality.(2) Consequences of approvaL-If the State or the Administrator approves a plan pursuant to paragraph (I), noenforcement action shall he taken pursuant to this part with respect to a specific violation identified in theapproved plan prior to the date that is the earlier of the date on which consolidation is completed accordingto the plan or the date that is 2 years after the plan is approved.VariancesSection 1415 (e) (3) Conditions for granting variances.-A variance under this subsection shall be available only to a system-NAWC 75 September 1998

Water ComparedStructural ChangeTable 3-7 (continued)Variances (continued)(A) that cannot afford to comply, in accordance with affordability criteria established by the Administrator (orthe State in the case of a State that has primary enforcement responsibility under section 1413), with anational primary drinking water regulation, including compliance through:_(i) treatment;(ii) alternative source of water supply; or(iii) restructuring or consolidation (unless the Administrator (or the State in the case of a State that has primaryenforcement responsibility under section 1413) makes a written determination that restructuring orconsolidation is not practicable); and(B) [the variance will not pose an unreasonable risk to health.]ExemptionsSection 1416 Exemptions.-( a) [An exemption may be granted upon a finding that--](!) due to compelling factors (which may include economic factors, including qualification of the public watersystem as a system serving a disadvantaged community pursuant to section 1452( d), the public water systemis unable to comply with such contaminant level or treatment technique requirement or to implementmeasures to develop an alternative source of water supply,(2) the public water system was in operation on the effective date of such contaminant level or treatmenttechnique requirement, a system that was not in operation by that date, only if no reasonable alternativesource of drinking water is available to such new system,(3) the granting of the exemption will not result in an unreasonable risk to health, and management orrestructuring changes (or both) cannot reasonably be made that will result in compliance with this title or, ifcompliance cannot be achieved, improve the quality of the drinking water.State Revolving Fund (SRF)Section 1452 (B) (3) Limitation.-(A) In generaL-Except as provided in subparagraph (B), no assistance under this section shall be provided to apublic water system that-(i) does not have the technical, managerial, and financial capability to ensure compliance with the requirementsof this title; or(ii) is in significant noncompliance with any requirement of a national primary drinking water regulation orvariance.(B) Restructuring.-A public water system described in subparagraph (A) may receive assistance under thissection if-(i) the use of the assistance will ensure compliance; and(ii) if subparagraph (A)(i) applies to the system, the owner or operator of the system agrees to undertake feasibleand appropriate changes in operations (including ownership, management, accounting, rates, maintenance,consolidation, alternative water supply, or other procedures) ifthe State determines that the measures arenecessary to ensure that the system has the technical, managerial, and financial capability to comply with therequirements of this title over the long term.ResearchSection 1420. (g) Environmental Finance Centers.-(3) Capacity development techniques.-The Administrator may request an environmental fmance center fundedunder paragraph (I) to develop and test managerial, fmancial, and institutional techniques for capacitydevelopment. The techniques may include capacity assessment methodologies, manual and computer. basedpublic water system rate models and capital planning models, public water system consolidation procedures,and regionalization models.Source: Safe Drinking Water Act Amendments of 1996.NAWC 76 September 1998

Water ComparedStructural ChangeTable 3-8Water Wheeling: The California Water CodeSection 1810. Notwithstanding any other provision of law, neither the state, nor any regional or local public agencymay deny a bona fide transferor of water the use of a water conveyance facility which has unused capacity, for theperiod of time for which that capacity is available, if fair compensation is paid for that use, subject to the foHowing:(a) Any person or public agency that has a long-term water service contract with or the right to receive water from theowner of the conveyance facility shall have the right to use any unused capacity prior to any bona fide transferor.(b) The commingling of transferred water does not result in a diminution of the beneficial uses or quality of the waterin the faci1ity, except that the transferor may, at the transferor's own expense, provide for treatment to prevent thediminution, and the transferred water is of substantially the same quality as the water in the facility.(c) Any person or public agency that has a water service contract with or the right to receive water from the owner ofthe conveyance facility who has an emergency need may utilize the unused capacity that was made available pursuantto this section for the duration of the emergency.(d) This use of a water conveyance facility is to be made without injuring any legal user of water and withoutunreasonably affecting fish, wildlife, or other instream beneficial uses and without unreasonably affecting the overalleconomy or the environment of the county from which the water is being transferred.[Section 1811. Definitions]Section 1812. The state, regional, or local public agency owning the water conveyance facility shall in a timelymanner determine the following:(a) The amount and availability of unused capacity.(b) The terms and conditions, including operation and maintenance requirements and scheduling, quality requirements,term or use, priorities, and fair compensation.Section 1812.5. (a) The Legislature finds and declares all of the following:(1) This section is an extraordinary measure being taken only because the proposed transfer of conserved water fromthe Imperial Irrigation District to the San Diego County Water Authority is a matter of statewide interest in that itaddresses a significant need for water in the southern state through the conservation of water now being consumedthere. The Legislature further finds and declares that this section is not to be regarded as setting a precedent for anyother legislative action.(2) California's use of Colorado River water is limited to its basic annual apportionment of 4.4 million acre-feet, plusone-half of any excess or surplus water from the Colorado River. However, California continues to use up to 5.3million acre-feet by relying on surpluses and apportioned, but unused water within the Colorado River Basin, which isnot a reliable water supply. The Secretary of the Interior has strongly urged California to develop a plan to enable it tolive within its basic apportionment of 4.4 million acre-feet from the Colorado River.(3) It is of vital state interest that every effort be made to ensure that the Colorado River Aqueduct continues to operateat its full capacity at fair and reasonable terms in order to minimize statewide disruptions from diminishing ColoradoRiver supplies.(4) Negotiations assisted by the director are underway in 1997 between the Metropolitan Water District of SouthernCalifornia and the San Diego County Water Authority for the development of a long-term wheeling agreementwhereby the San Diego County Water Authority would use the Colorado River Aqueduct to wheel conserved waterfrom the Imperial Irrigation District. (Section continues](e) This section shall remain in effect only until January I, 1999, and as of that date is repealed, unless a later enactedstatute, that is enacted before January I, 1999, deletes or extends that date.[Section 1813. Judicial considerations.]Section 1814. This article shall apply to only 70 percent of the unused capacity.Source: California Code. Note that the Courts continued to be involved in interpreting this statute.NAWC 77 September 1998

Water ComparedStructural Change[blank page]I;,IIIII' II;III IIil,,INAWC 78 September 1998

Water ComparedAlternative Models4. Alternative Models of EconomicRegulationRegulation has played a fundamental role in determining, maintaining, and changing thestructural character of the utility industries. For nearly one hundred years, one size seemed tofit all in terms of the basic paradigm of economic regulation. The traditional model is widelyimplemented and well known both for its strengths and weaknesses. The model was premisedon the idea that economic regulation is necessary when markets fail to be competitive, as isthe case with the monopolistic public utility. The theory also implies that markets provide asuperior form of social control and that when competition is feasible and sufficiently robust toprotect consumers, regulators should step aside.With the advent of competition in the telecommunications and energy sectors, alternatives tothe traditional model are under consideration for regulating utilities during the period of·transition to competition and for regulating services for which competition will continue to beconstrained for technical or economic reasons.As this section will explore, the differences among the industries, and their distinctive paths torestructuring suggest that one regulatory approach may not fit all. Variations among theutility industries affect the validity of assumptions behind the models, as well as the efficacyof the model in achieving performance goals for any particular utility industry.Under restructuring, some utility functions may be deregulated (Table 4-1 ). Remainingfunctions may be regulated by methods other than the traditional rate base/rate-of-return mode.In the telecommunications sector, prices for long-distance telephone services are competitive;competition is being introduced to markets for local services as well. In the natural gassector, wellhead prices are not regulated; local distribution markets are increasinglycompetitive. In the electricity sector, current restructuring policies are focused on thederegulation of the power generation function and the formation of a competitive wholesalepower market.When and how competition can supplant regulation is a function of the degree to whichservices can be unbundled and choice can provide adequate protection of customers andincentives for utility performance:The precise path taken by regulators towards a more competitive retail gas industrywill vary by State and market conditions. The economics of building a retaildistribution system to serve small commercial and residential customers probablyprecludes a competitive market developing for the local transportation of gas.Therefore, States would probably want to continue to regulate this segment of theindustry to ensure service and rates to remaining customers. However, should [localdistribution companies] abandon their merchant role as interstate pipeline companiesIIIIlI79 September 1998

Water ComparedAlternative Modelshave at the wholesale level, even the smallest consumers could potentially gain accessto competitively priced natural gas supplies. 27Assuming that not all utility functions can become sufficiently competitive to achieve desiredgoals, particularly in the short run, regulation can and should be sustained. However, thetraditional model of economic regulation deployed in the United States (namely, ratebase/rate-of-returnor cost-of-service ratemaking) no longer enjoys the favor of many analystsand regulators. Support for traditional regulation probably remains highest with regard towater utility regulation, which is understandable given the water industry's basiccharacteristics and the corresponding assumptions behind the traditional model. In thecontext of restructuring, and in light of general concerns about the limitations of thetraditional model, regulatory alternatives are being explored.Table 4-1Regulated and Unregulated Functions by SectorSector Functions that are Transition to Functions that areregulated competition and not regulatedderegulationTelecommunications o Access to local o Local services 0 Long-distancenetworkservices0 Wireless services0 Other servicesElectricity o Transmission o Power generation 0 Some publiclyo Local distributionowned distributionsystemsNatural gas o Local distribution o Local distribution o Wellhead(most residential) (industrial and (wholesale) gaso Interstate commercial; some 0 Intrastatetransmission residential) transportation (nofederal jurisdiction)0 Some publiclyowned distributionsystemsWater o Privately owned and o Not applicable o Most publiclySource: Author's construct.vertically integratedsystems(production,treatment,transmission, anddistribution)owned systemso Most wholesalewater transactionso Most contractoperations0 Many anciilaryservices27Energy Information Administration, Natural Gas 1996: Issues and Trends (Washington, DC: EIA, 1997): 117.NAWC 80 September 1998

Water ComparedAlternative ModelsRegulatory AlternativesEconomic regulation has three critical dimensions: jurisdiction (who gets regulated),authority (what activities gets regulated), and methods (how regulatory oversight isimplemented). For the water industry, jurisdiction tends to focus on investor-owned utilities,authority is concentrated on rates, returns, and finances, and the ratebase regulation is theprevailing method of oversight. Jurisdiction, authority, and methods can be combined tocreate a variety of regulatory models.The available approaches to economic regulation are expanding. Included among the manypolicy options is deregulation. In the interest of making basic comparisons, five generalalternatives are considered here.o Traditional regulation. Regulation ofratebase, rate-of-return, and rate structures;emphasizes cost -of-service ratemaking; designed to prevent abuses of monopoly power;oriented toward larger, investor-owned utilities.o Structured competition. Regulation of returns with opportunities for competition andmodified or more flexible regulation under some circumstances; introduces incentives forperformance and restructuring; regulatory jurisdiction could be extended to level theplaying field for competition (including regulatory review of privatization contracts).o Contract-based regulation. Regulation through municipal contracts for utility services;establishes or maintains local governmental control; provides a degree of competition forcontracts among alternative vendors.o Performance-based regulation. Price caps, indexes, benchmarking, profit-sharing, flexiblereturns, and various other alternatives to traditional regulation; shifts the emphasis fromcost to performance.o Deregulation. Elimination of traditional state economic regulation; promotes reliance oncustomer choice at the retail level and competitive markets.These five general approaches can be compared along several dimensions, including theprincipal mode of social control (Table 4-2).The traditional method is based on regulation by state commissions. Traditional regulation iswell justified when monopoly power is substantial and costs are rising. Although highlyeffective in controlling utility profits and promoting compliance with service standards, themodel by itself-absent other incentives or modes of social control-may provide inadequateincentives for certain kinds of performance, as well as innovation. 2828For a discussion, see Kenneth Rose, "Regulated Utility Pricing Incentives with Price Cap Regulation: Can itCorrect Rate of Return Regulation's Limitations?" Forum on Alternatives to Rate Base/Rate of ReturnRegulation Michigan Public Service Commission, Lansing, Michigan, May 1990.NAWC 81 September 1998

Water ComparedAlternative ModelsrI\! I:I 1·''Under structured competition, an emerging concept, the commissions would continue to playan active regulatory role. However, the ratebase/rate-of-return approach would be modifiedto enhance performance incentives (and remove disincentives). Commission jurisdictioncould be extended in order to level the playing field for competition and encouragerestructuring. Uniform regulation ofpublicly and privately owned utilitieswould facilitate comparisons of financialand other performance measures.Privatizers could be subject to certification(or precertification) by the commissions toensure technical, managerial, and financialcapacity or overall fitness to serve;contracts also could be reviewed to ensurethat the public and the public interest arewell served by the agreement over the longrun. Commissions also could serve adispute resolution role when conflicts overprivatization agreements arise.Structured competition might encouragewholesale markets that help captureregional economies of scale in production.Regulated water utilities might also beallowed to enter into ancillary servicemarkets under specified conditions,Potential elements of structuredcompetitiono Modified or more flexible regulation toachieve policy goals.o Promotion of wholesale water markets.o Approval of negotiated rates.o Consistent policy on franchises andexclusivity of service territories.o Allowance of unregulated affiliates andserv1ces.o Profit-sharing for ancillary services inwhich utilities engage.o Certification of privatizers, regulatoryreview of operations contracts, anddispute resolution.o Extension of regulatory jurisdiction tolevel the playing field.including regulatory oversight, financial controls, and a profit-sharing or other mechanism toprovide benefits to ratepayers. Regulators also could recognize that some utilities operate incontestable markets, where underperforming systems might be taken over by other systemsthrough acquisitions or condenmation; ifthe potential for takeover is great enough toconstitute contestability, and therefore provides sufficient incentives for performance,traditional regulation might be relaxed.Contract-based regulation is a model that has more relevance for water than the other utilitysectors. Contracts for operations can be highly competitive, but the competition can befleeting. Contract operators can behave monopolistically. Social control remains in the handsof local governments that own municipal waterworks, which may preclude regionalization.Performance-based regulation revamps the commission form of regulation, supplantingtraditional cost-of-service methods with methods that are considered more effective inpromoting performance through systems of incentives. Price caps, profit sharing, and relatedtechniques can be used when a degree of competition exists to motivate utilities to controlcosts, innovate, and otherwise improve performance. 2929Ibid.NAWC 82 September 1998

Water ComparedAlternative ModelsFinally, deregulation surrenders state control to the marketplace, based on the belief thatconsumer choice and other market forces will discipline the economic behavior of the utility. provider. Deregulation presumes that market failures (such as imperfect information) will beminimal. Deregulation places a high value on consumer choice, but the model also canappear to undervalue some traditional policy goals (such as reliability).General advantages and disadvantages of each approach, based on contemporary regulatorytheory, are compared in Table 4-3. This analysis generally does not consider methods ofsocial control outside of the general economic regulatory paradigm, some of which might berelevant in the context of deregulation. These methods include antitrust litigation, generalconsumer-protection regulation, and general certification or licensure.Table 4-2Regulatory Models and Modes of Social ControlModel Public ownership Economic regulation by state Competitive marketpublic utility commissionsTraditional -- Ratebase/rate-of-retum --regulationregulationStructured -- Modified ratebase/rate-of- Competitivecompetition return regulation, attention to incentivesdisincentives and incentives,and possible extension ofjurisdiction to all water utilitiesto level the playing fieldContract- Contracts with -- Competitivebased local incentivesregulation governments; canbe highlycompetitive attime of biddingPerformance- -- Performance-based Competitivebased ratemaking, including price incentivesregulationand revenue caps, etc.Deregulation -- -- Competition andnoneconomicregulatory,Source: Author s construct.mechanisms83 September 1998

Water ComparedAlternative Models,.II1.IIIITable 4-3Comparing Regulatory AlternativesModel Theory General Advantages General DisadvantaEOSTraditional Utilities are capital- D A balancing of 0 Historic and reactive.cost-of- intensive monopolies competing interests in 1:1 Incentives for overinvestment.service/ that are granted an the public interest. D Distorts timing of financialratebase/rate- exclusive franchise in o For capital-intensive decisions.of-return exchange for accepting industries, regulation D Inadequate incentives for costregulation of rates, protects ratepayers and control because rate adjustmentsreturns, and other shareholders. allocate savings to ratepayers.standards of service; o Reasonable and D Inadequate incentives forcustomers are captive; institutionally valid. innovation.the regulated service is D Well-known and D Inadequate attention to social oressential to customers; familiar (100+ years). environmental costs and benefits.competition would be D Produces relatively D Inflexible with regard to"ruinous." stable results. responsiveness to market changes.Structured Markets may be D Can help utilities think D Model is immature, fragmented,competition contestable but technical and behave more and generally untested.barriers to competition competitively. D May produce limited results inare significant; the D Regulation can be terms of performanceuneven playing field also modified to promote improvement.justifies continued or performance improve- D Institutional barriers toexpanded economic ment, beneficial implementation are significant.regulation.restructuring, andsocial goals.Performance- Utilities can achieve D Expected to improve D Uncertainty as to implementationbased efficiency and other efficiency and other and results.(incentive) goals, if the focus of aspects of performance. D Requires development of reliableregulation regulation is shifted from D Useful as a transitional methods and indicators.costs to performance. mode of regulation. D Potential disagreement overD Global experience. performance goals.Contract- Local oversight will be D Introduces competition. D Lack oflocal gnvemment capacitybased adequate to protect D Expands the private- to oversee contracts.regulation consumers from abuse of sector role in water D Limits to competition andmonopoly power. service. monopolistic long-term contracts.D Inconsistency of performance andratemaking standards.D Potential for arbitrary and politicaldecisions. ·D Lack of long-term investment.D Failure to achieve regionaleconomies of scale and scope.Deregulation Competition will be D Reduces regulatory D Puts consumers at risk for abusesadequate to protect costs (utilities and of monopoly power.consumers from abuse of states). D Fails to promote social andmonopoly power.environmental goals.D Ignores market failures (such asimperfect information).D Might overvalue customer choiceand undervalue other goals (suchas reliability.Source: Author's construct.NAWC 84 September 1998

Water ComparedAlternative ModelsIn terms of the current regulatory agenda, performance-based regulation clearly has capturedthe attention ofpolicymakers. Performance-based regulation (or ratemaking) encompasses awide range of methods. The many techniques of performance-based regulation have beenstudied extensively; a recent report of the Energy Information Administration provides auseful description of four basic approaches: cost indexing, price caps, flexible returns, andprofit sharing (Tables 4-4). Variations in the approach also have distinct advantages in termsof achieving policy goals (Table 4-5).Table 4-4Performance-Based RatemakingRegulators have proposed and implemented a variety of rate structures that move away fromtraditional cost-of-service rates and provide incentives for firms to lower costs and operate moreefficiently. Incentive rates provide opportunities for firms to earn and keep profits in excess of theirallowed rate of return as long as prices to consumers do not increase too much or more than theywould otherwise. The Federal Energy Regulatory Commission (FERC) has asked [gas] pipelinecompanies to file incentive rate proposals for transmission and other regulated tariffs, while severalStates have established incentives for local distribution companies (LDCs) to lower their gas purchasecosts.Traditional cost-of-service rates do not promote innovation and efficiency by regulated firms. Simplystated, cost-of-service rates are based on a "snapshot" of a firm's total cost of providing service plus a"fair" profit. Once rates are set by the regulator, there is no incentive for a company to try and reducecosts or operate more efficiently since in the long run they could not keep any additional profits inexcess of the allowed return. In fact, cost-of-service rates can have the perverse effect of providingincentives for a firm to operate less efficiently. For example, since the rate of return is based on thecost of capital, firms could increase revenues by increasing their invested capital. Also, most day-todayoperating costs, such as the cost of gas for a LDC, can be passed straight through to customers,providing no incentive for firms to seek cheaper gas supplies. To address these issues, several types ofincentive rate schemes have either been implemented or are under consideration, including costindexing, price caps, flexible rate of return, and profit sharing.Cost indexing is similar to traditional cost-of-service based rates, but firms are allowed to keepadditional profits resulting from cost reductions. A target rate for a service is established based on afirm's cost-of-service. The target rate is then indexed to a widely available price. For example, aLDC's gas purchase costs might be indexed to the price of gas on the spot market. Profits or lossesresulting from deviations from the target are then shared between shareholders and customers. Amajor drawback to cost indexing is that a traditional rate review proceeding is required to establishcosts in the base year. Regulators rely on data provided by the firm and there is an incentive for firmsto overstate their costs in order to earn greater returns. Cost indexing is very similar to traditionalcost-of-service rate regulation, and although it provides incentives for firms to operate moreefficiently, it does not necessarily lead to an equitable solution or a more efficient market. However, anumber of other incentive rate schemes have been proposed and implemented that provide incentivesfor firms to operate more efficiently and also lead to a more equitable solution for customers.NAWC 85 September 1998

Water ComparedAlternative ModelsrTable 4-4 (continued)Price caps are one of the most widely used forms of incentive rate regulation and are used worldwidein the gas, electric, and telecommunications industries. Under price cap, changes in the price of aservice are constrained by indices that reflect overall industry cost trends adjusted for productivityimprovements rather than costs for individual firms. This provides an incentive for the individual firmto try to reduce total costs and to exceed productivity growth of the industry average so that they canearn higher profits. Many price cap proposals share the higher profits between shareholders andcustomers, while other proposals allow the firm to retain all incremental profits. Allowing the firm toretain all incremental profits maximizes the incentive for a firm to cut costs, while the benefits accrueto consumers when the price cap is reduced at the next rate review.Regulators must address a number of issues before price caps can be successfully implemented. Forexample, should price caps be placed on all services provided by a finn, or just on monopoly services?In competitive segments of an industry, firms already have a market incentive to reduce their costs.Placing price caps on monopolistic services would make it difficult for a firm to subsidize lower rates,in markets where it faces competition, by raising prices in the monopoly market. However, firmscould potentially circumvent this aspect of price caps by reducing quality of service to their monopolycustomers. A major disadvantage to price caps is that under favorable conditions a utility couldpotentially earn large windfall profits. Recent windfalls to electric utilities in Britain resulted in apublic outcry and government review of utility price cap mechanisms. Several incentive rateproposals attempt to remedy [these] problems by placing a cap on profits rather than on prices.Flexible rates of return place limits on the size of a firm's profits. "Dead bands" are developedaround a predetermined rate of return in which the firm can operate and make a greater or lesser profit.For example, a regulator might establish a dead band between a rate of return of II and 14 percent, oneither side of 12.5 percent, the firm's cost of capital determined in a conventional cost-of-service ratecase. Between 12.5 percent and 14 percent, the LDC would retain all the profits. Profits exceeding 14percent would be shared between the LDC and its customers. Likewise the LDC could add a charge tocustomers if the rate of return falls below II percent. Flexible rates of return are easier to implementthan price caps, requiring less information about costs and indexes. However, the dead bands must bebroad enough to provide sufficient incentives to the firm, while at the same time not resulting inunreasonable windfalls. Another variant of incentive rates, profit sharing, eliminates dead bands, withall profits shared between firm shareholders and customers.Profit-sharing schemes are easier to implement than price caps or flexible rates of return, requiringless information by regulators. Under profit sharing, consumers and firm shareholders split profitsover and above a specified level according to a predetermined share.Source: Energy Information Administration, Natural Gas 1996: Issues and Trends (Washington, DC:EIA, 1997).NAWC 86 September 1998

Altematlve ModelsTable 4-5: Regulatory Objectives and Variations of Performance-Based RegulationRegulatory ObjectivesQ)"0 Q) Q~.£"'"0 "'(,)a fa "' .9 ·- Q)~. s 0(,)Q) ~~ a"Oag .~ fa "'(,) Q) (,)1d .::: ;.·c~ N;:I Q)t) Q) !a Q)Q)t;:ie~i$·~Q (,)~5.~;>-.Q) Q)!.:;::Q)._.s a 0 I 1-< (,) Q)N~~ J::·- 0~E-< .s d:: > I: Q) .....~~~;E~J(,)...... Q);:::l"):lQ Q)0 §~ 1d (,) ~.§~ '€ .g] Q) > ·~ Ill ~ 8 e ;g(,)~ £c3 s ..... "' tl·-~ 0 ·c Cl~ 3"g~IllPrice stability ./ ./Lower prices ./ ./Price flexibility ./ ./ ./Pricing equity ./ ./Durable incentives ./Improved power plant performance ./ ./Lower purchased power costs ./ ./ ./Balance of shareholder and ratepayer interests ./Maintain quality of service ./ ./Maintain universal service ./ ./Reliability of supply ./ ./Support utility-run demand-management programs ./ ./ ./Limit utility sales promotion ./ ./Utility support for energy efficiency vendors ./ ./Promote distributed generation ./ ./ ./ ./Reduce transmission and distribution losses ./ ./ ./Improve power quality ./ ./ ./Promote renewable resources ./ ./Promote environmental protection ./ ./Totals 10 8 6 4 3 2 2 1 1 1 1 1 1 1 1Source: Based on Bruce Biewald, et al., Performance-Based Regulation in a Restructured Electric Industry (Washington, DC:National Association of Regulatory Utility Commissioners, November 8, 1997, p. 6.NAWC 87 September 1998

Water ComparedAlternative ModelsEvaluating the AlternativesEach ofthe regulatory alternatives can be evaluated and compared in terms of relevance toand appropriateness for the water industry. Two dimensions are used for this purpose, asillustrated in Figure 4-1. The first is the extent to which the assumptions underlying themodel (as generically constituted) are valid relative to the technical, economic, andinstitutional characteristics of water utilities identified in Section 2 of this report. The secondis the anticipated efficacy of the model relative to performance goals that are particular to thewater industry. In this context, performance goals are defined from a societal standpoint.Under traditional regulation, state public utility commissions would be responsible forensuring utility performance. Under the regulatory alternatives, some of the responsibility forensuring performance can be shifted to the market or to other institutions.Utility --....characteristicsValidity ofassumptions~ Relevance ofstructural andvregulatory• •alternativesPerformance -.. ... Efficacy ofgoalsmodelFigure 4-1. Conceptual Approach to Evaluating ModelsNAWC88September 1998

Water ComparedAlternative ModelsTable 4-6 summarizes goals for public utilities, grouped into three categories. First aregeneral or generic goals that apply to most utilities. Regulators traditionally have hadsignificant responsibility for ensuring utility performance in keeping with these goals. Thesecond set of goals relates to the contemporary transition to a more competitive utilityenvironment. The third set of performance goals has specific relevance for the water sector.Alternative regulatory models can be assessed in terms of whether and how the specificmechanisms of the models would address these goals.Table 4-6Performance Goals for Public UtilitiesGeneric Goalso Just, reasonable, stable, and equitable priceso Safe, adequate, high-quality, and reliable serviceo Reasonable returns on an appropriate level of capital investmento Pricing flexibility to achieve appropriate social goalso Operational innovation and efficiencyo Environmental protection and resource preservationo Universal and affordable utility serviceo Integrated planning and balanced supply and demand managemento Minimal environmental externalitieso An appropriate balance of ratepayer and shareholder interestsTransitional Goalso Management of transition costs, including stranded investment costso A reasonable framework and ground rules for competitiono Durable incentives for utility performanceo Discouragement of reconstituted utility monopolieso Price stability or reductions in rateso Expanded service options and service unbundlingo A relatively seamless or nondisruptive transition to competitionWater-Sector Goalso Adequate and timely investment in an aging infrastructureo Compliance with public health, safety, and environmental regulationso Environmental stewardship for natural water resourceso Extension of service to unserved or underserved areaso Efficiency and innovation under technical constraints0 Consolidation to achieve economies of scale and other performance goals0 Industry responsiveness to a dynamic structural and regulatory environmentSources: Author's construct. For a similar listing of generic goals, see Bruce Biewald, et al.,Performance-Based Regulation in a Restructured Electric Industry (Washington, DC: NationalAssociation of Regulatory Utility Commissioners, November 8, 1997). ·NAWC 89 September 1998

Water ComparedAlternative ModelsrTable 4-7 reports a comparative analysis of the assumptions that underlie each model and theefficacy of the model relative to water-sector performance goals. As in the previousassessments, the analysis is organized loosely around the technical, economic, andinstitutional categories.The two dimensions of the analysis-assumptions and efficacy-also can be combined for anoverall assessment, depicted in Figure 4-2. Although this analysis is highly subjective, it canbe used to evaluate the relative position of the regulatory options. Based on the analysis,traditional regulation fits well with the water industry; deregulation appears to be the leastfavored option. The remaining alternatives-structured competition, performance-basedregulation, and contract-based regulation-have somewhat mixed results. While theassumptions associated with these models may not be perfectly consistent with the waterindustry, each has the potential to promote performance. Of course, the analysis is highlysubjective and modifications could easily change their relative position in the assessment.Table 4-7Validity of Assum tions and Efficacy of ModelAlternative Assumptions ModelTra d". 1t10na Re1 ulat1onTechnical Technology creates a High. Ensure petformancetendency toward monopoly Assumptions through economicand precludes effective are consistent regulation and standards.competition.with water'sEconomic Economic regulation is highly Regulation of monopolyneeded to prevent monopolistic profits; cost-of-servicemonopoly exploitation. character. ratemaking.Institutional Economic regulation by Control monopoly powerindependent commissionsthrough regulatoryprevents abuse andoversight.balances interests.Efficacy of themodelModerate tohigh. Canpromote neededcapitalinvestment; maynot provideadequateincentives in all ·areas or recognizeforms ofcompetition.IStructure d CompetitionTechnical Technology limits Moderate to Ensure performancecompetition but some high. through economicmarkets are contestable. Acknowledges reguJation and standards.Economic Costs, prices, and profits limits to Modify economicmust be regulated or competition and regulation to removemonitored. need for disincentives, providerestructuring. incentives.Institutional Regulation can be Increase regulatorymodified or relaxed underoptions and flexibility;some circumstances toadopt policies that helppromote performance andlevel the playing field forbeneficial restructuring.competition.Moderate tohigh. Canpromoteperformancewhile maintainingregulatoryprtltections; canbe combined withperformancebasedregulation.NAWC 90September 1998

Water ComparedAlternative ModelsTable 4-7 (continued)Regulatory AssumptionsalternativeContract-Based RerulationTechnical Technology limits Moderate tocompetition but operations high.are separable fromRecognizesownershio.monopolyEconomic Contracts can be bid character ofcompetitively; contractors water andhave adequate incentives dominance offor cost control.pubicInstitutional Local governments can ownership.provide adequateoversight; contractsprovide effective oversightvehicles.Performance-Based RegulationTechnical Technology allows Moderate.substantial service Requires aunbundling anddegree ofcompetition; performance competition (orbenchmarks can be contestability);established.establishingEconomic Competitive markets and performanceconsumer choice will benchmarks canexpand and drivebe difficult.investment and prices forsome services.Institutional Regulation should focus onperformance rather thancosts; incentive regulationcan ensure performance,and protect consumers.ModelEnsure performancethrough contract-basedincentives.Manage costs throughcontract provisions andperformance rewards andPenalties.Maintain localgovernmental controland oversight; does notrequire commissionregulation.Ensure performancethrough benchmarkingand a system ofregulatory incentives.Allow markets to shapeutility investment andpricing decisions;provide efficiencyincentives.Shift focus of regulationand replace traditionalmodel with one or moreof many availableincentive mechanisms(such as price or revenuecaps, indexing, profitsharing).Efficacy ofthemodelModerate.Competition is notsustained andcontractors can bemonopolistic;model fails topromote longtermprivateinvestment orconsolidationbeyond localgovernmentboundaries.Moderate tohigh. Clearer andenhancedperformanceincentives may beappropriate; canbe combined withstructuredcompetition.Dere~ulationTechnical Technology allows full Low.competition for unbundled Inconsistentservices.with persistentEconomic Competition will drive monopolydemand, investments and power of waterprices for all services and utilities (marketprices will fall.failure issues).Institutional Competitive markets and~onsumer choice willflourish; economicregulation will not beneeded.Ensure performancethrough competition.Allow market-basedinvestment and pricingdecisions.Eliminate economicregulation. Defer toother institutions forconsumer protection.Low.Would notadequately protectratepayers orinvestors, orpromote watersectorgoals (suchas safety, quality,and reliability).NAWC 91September 1998

Water ComparedAlternative ModelsHiPerformancebased·regulationLoTraditionalregulationDeregulationContract -basedregulationValidity ofassumptionsEfficacy ofmodelFigure 4-2. Evaluation of Regulatory AlternativesNAWC 92September 1998

Water ComparedAlternative Models;iThis analysis generally reflects a societal perspective; that is, the efficacy of the model isassessed in terms of achieving societal goals (such as efficient performance, appropriateinvestment, consumer protection, and environmental stewardship). Another perspective thatcan enter the mix is that of the utility company. Thus, another basis for comparing themodels is the risk/reward dimension. This is a highly subjective analysis. Each utility mustassess for itself whether one model or another offers more or less potential for risk andreward. As depicted in Figure 4-3, traditional regulation provides the lowest risk and rewardpotential; deregulation offers the highest. Deregulation is considered risky because of theuncertainty it would bring, particularly given the relatively politicized nature of water and thesubstantial amount of needed capital investment.Generalizedpotential for riskLoGeneralized potentialfor rewardHiFigure 4-3. Risks and Rewards of Regulatory AlternativesNAWC 93 September 1998

Water ComparedAlternative ModelsObservationsThe restructuring of the telecommunications and energy utilities has brought about theconsideration of an expanding range of regulatory alternatives. When choosing among thealternatives, care must be taken to recognize how well the model fits with the characteristicsand performance goals of each utility industry. This analysis suggests that the assumptionsand efficacy of the prevailing models size up differently in these regards.The assumptions that underlie traditional economic regulation, and the efficacy of thisapproach in achieving utility performance goals, suggest that the model fits the water industryquite well. One of the chief advantages of traditional regulation is that it protects bothconsumers and investors during periods of rising costs, which is especially problematic whendemand is relatively flat. The advantages of the traditional model may be particularlyimportant in light of the substantial investment needs of the water industry. Specific policyand ratemak:ing tools within traditional regulation also can be used to encourage cost-effectiverestructuring through the formation oflarger utilities that can exploit economies of scale andscope and help lower costs over the long term.Structured competition offers a conservative approach to improving the economic regulatoryenvironment and promoting some forms of competition. Structured competition might beuseful in recognizing that some water utilities operate in contestable markets. Performancebasedregulation is a less conservative approach. To be effective, however, performancebasedregulation requires the development of industry-specific performance measures.Contract -based regulation is used widely in the water sector and its assumptions are generallyvalid, but it may tend to reinforce monopolistic behavior and inadequately promote thebroader social goals of performance improvement, investment, and restructuring. Based onthe analysis of underlying assumptions and the model's efficacy, deregulation is particularlyunattractive for the water industry,Regulatory alternatives are being advanced through statutory and regulatory channels (Table4-8). States have begun to craft performance-based regulation of the telecommunications andenergy industries. These developments constitute a significant step forward in the evolutionof the utility industries and the agencies that regulate them, and a special challenge to thewater industry.By the middle of I 998, the road to restructuring turned a bit bumpier. Mergers in the varioussectors (including the water sector to a degree) continue to create larger providers with moreconcentrated market power. Consumer advocates have voiced concern about the cost of localtelephone service, as well as access and other charges. Uncertainty about the implications ofelectricity deregulation for service quality, reliability, and prices (especially for residentialconsumers) remains high. Although the momentum toward restructuring remains forceful,some observers are predicting that the states will begin to maneuver the course morecautiously.NAWC 94 September 1998

Water ComparedAlternative ModelslITable 4-8Washington State's Alternative Regulation Policy(Telecommunications)RCW 80.36.135. Alternative regulation of telecommunications companies.(I) The legislature declares that: (a) Changes in technology and the structure of thetelecommunications industry may produce conditions under which traditional rate of return, rate baseregulation of telecommunications companies may not in all cases provide the most efficient andeffective means of achieving the public policy goals of this state as declared in RCW 80. 36. 300, thissection, and RCW 80.36.145. The commission should be authorized to employ an alternative form ofregulation if that alternative is better suited to achieving those policy goals.(b) Because of the great diversity in the scope and type of services provided by telecommunicationscompanies, alternative regulatory arrangements that meet the varying circumstances of differentcompanies and their ratepayers may be desirable.(2) Subject to the conditions set forth in this chapter and RCW 80.04.130, the commission mayregulate telecommunications companies subject before July 23, 1989, to traditional rate ofreturn, rate base regulation by authorizing an alternative form of regulation. The commission maydetermine the manner and extent of any alternative forms of regulation as may in the public interest beappropriate. In addition to the public policy goals declared in RCW 80.36.300, the commission shallconsider, in determining the appropriateness of any proposed alternative form of regulation, whether itwill:(a) Reduce regulatory delay and costs;(b) Encourage innovation in services;(c) Promote efficiency;(d) Facilitate the broad dissemination of technological improvements to all classes of ratepayers;(e) Enhance the ability of telecommunications companies to respond to competition;(f) Ensure that telecommunications companies do not have the opportunity to exercise substantialmarket power absent effective competition or effective regulatory constraints; and(g) Provide fair, just, and reasonable rates for all ratepayers.The commission shall make written findings of fact as to each of the above-stated policy goals inruling on any proposed alternative form of regulation.(3) A telecommunications company or companies subject to traditional rate of return, rate baseregulation may petition the commission to establish an alternative form of regulation. The company orcompanies shall submit with the petition a plan for an alternative form of regulation. The plan shallcontain a proposal for transition to the alternative form of regulation. The commission shall reviewand may modify or reject the proposed plan.The commission also may initiate consideration of alternative forms of regulation for a company orcompanies on its own motion. The commission may approve the plan or modified plan and authorizeits implementation, if it finds, after notice and hearing, that the plan or modified plan:(a) Is in the public interest;(b) Is necessary to respond to such changes in technology and the structure of the intrastatetelecommunications industry as are in fact occurring;(c) Is better suited to achieving the policy goals set forth in RCW 80.36.300 and this section than thetraditional rate of return, rate base regulation;IINAWC 95 September 1998

.'"'"Water ComparedAlternative ModelsrTable 4-8 (continued)(d) Ensures that ratepayers will benefit from any efficiency gains and cost savings arising out oftheregulatory change and will afford ratepayers the opportunity to benefit from improvements inproductivity due to technological change;(e) Will not result in a degradation of the quality or availability of efficient telecommunicationsservices;(f) Will produce fair,just, and reasonable rates for telecommunications services; and(g) Will not unduly or unreasonably prejudice or disadvantage any particular customer class.(4) Not later than sixty days from the entry of the commission's order, the company or companiesaffected by the order may file with the commission an election not to proceed with the alternative formof regulation as authorized by the commission. If a company elects to appeal to the courts the finalorder of the commission authorizing an alternative form of regulation, it shall not change its electionto proceed or not proceed after the appeal is concluded. The pendency of a petition by a company forjudicial review of the final order shall not serve to extend the sixty-day period.(5) The commission may waive such regulatory requirements under Title 80 RCW for atelecommunications company subject to an alternative form of regulation as may be appropriate tofacilitate the implementation of this section: PROVIDED, That the commission may not grant theauthority to price list services except as provided in RCW 80.36.300 through 80.36.370, the regulatoryflexibility act, nor may it waive any statutory requirements or grants of legal rights to any personcontained in this chapter and chapter 80.04 RCW as amended, except as otherwise expressly provided.The commission may waive different regulatory requirements for different companies or services ifsuch different treatment is in the public interest.'! '( 6) Upon petition by any person, or upon its own motion, the commission may rescind its approval ofan alternative form of regulation if, after notice and hearing, it finds that the conditions set forth insubsection (3) of this section can no longer be satisfied. The commission or any person may file acomplaint alleging that the rates charged by a telecommunications company under an alternative formof regulation are unfair, unjust, unreasonable, unduly discriminatory, or are otherwise not consistentwith the requirements of chapter I 01, Laws of 1989: PROVIDED, That the complainant shall bear theburden of proving the allegations in the complaint.[1995 c 110 § 5; 1989 c 101 § 1.]Source: State of Washington revised code.NAWC 96 September 1998

Water ComparedStrategic Issues5. Strategic Issues for the Water IndustryThe substantial amount of utility industry and regulatory restructuring raises a number ofstrategic issues for consideration by the water industry. Changes in the other utilities arerelevant for water in a number of specific ways.One reason for water utilities to think about restructuring is theoretical. Restructuring signalsfundamental changes in how utility services are understood. Public utilities no longer areviewed as monopolies. This transition was signaled several years ago, when it first becamepasse to refer to utilities as "natural monopolies." If utilities hold monopolies, the argumentwent, it was for institutional not natural reasons. Economies of scale in production alone nolonger swayed economists to consider monopoly as the default means of organizing utilityactivities.In the larger scheme of things, the theory of monopoly and the rationale for economicregulation are being rather quickly replaced by a market-based theory of utility service. Thus,one reason for water utilities to think about restructuring is that restructuring is a central partof modern theories used to understand public utilities.A second reason is more practical. As already mentioned, the water industry may bemonopolistic but the industry also is not immune from the forces of competition. Waterutilities compete for new customers; even existing markets can be contested. Customers alsoexpect more from their utilities in terms of service. Regulators expect utilities to beresponsive to customer needs. Regulators also might expect more in terms of justification forcost and prices increases. For survival and success, water utility managers need to think andact competitively, even under conditions of limited competition.A third reason for water utilities to think about restructuring is political. Restructuringultimately is played out in a political context. If change is perceived as "good" for thetelecommunications and energy industries, change will probably be perceived as "good" forthe water industry. Regulatory change may occur for political reasons, regardless of whetherthe theory behind the alternative approach is entirely sound. Water utility managers shouldbe prepared to have a dialog with regulators and politicians about their industry and itsdistinguishing characteristics.Restructuring is reshaping the institutional environments in which utilities operate. Thechanges in regulation occurring at the federal and state levels are very fundamental. It isunrealistic to expect that the currents of change in the telecommunications and energy sectorswill not have rippling effects on the water industry. State public utility commissions, givenconstraints in staffing and other resources, are not likely to sustain entirely differentparadigms for regulating the different utility sectors.NAWC 97 September 1998

Water ComparedStrategic IssuesrINaturalmonopoliesInstitutional~ monopoli~e•s• .. ---•Network~ companie,.Js• .. ••••lUnbundledserviceproviders~ CompetitorsFigure 5-l. Evolution of Public UtilitiesStrategic IssuesRestructuring raises a number of issues for water utility managers to contemplate (Table 5-l ).The changes in the industry will put water managers under a certain degree of pressure.Water utilities may be seeking regulatory approval for capital projects, and rate increases topay for them, at a time when other regulated industries are holding down costs and rates.Gaining approval for new facilities might be particularly difficult. While the trend inelectricity is to use smaller, cost-effective increments of capacity, most water utilities fmdsubstantial economies of scale in building larger facilities.A number of other interesting issues arise as well: how to innovate within the confines ofwater technologies, how to flex the purchasing power of high-energy use water utilities in.competitive electricity markets, and how to respond to convergence overtures. These andmany other strategic issues are sure to keep water managers busy.NAWC 98 September 1998

Water ComparedStrategic IssuesTable 5-lA Sample of Strategic Issues for Water ManagersDimension IssueTechnical o Product differentiation and implications for service qualityo Environmental stewardship role (source protection and conservation)o Engineering-economics and the treatment-transport tradeoffo Economies of scale in construction and incentives to buildo Capturing economies of scale and scope in operationso Alternative technologies and innovation under constraintsEconomic o Flat and constrained demand for watero Emerging competition and marketso Disaggregation and unbundling of serviceso Cross-ownership of utility services and convergence of utilitieso Flexing energy purchasing powero Mergers, acquisitions, and consolidationo Wholesale water markets and other regional opportunitiesInstitutional o Continuity of economic regulation under changing conditionso Appropriateness of alternative modelso Distinction between regulated and unregulated serviceso Constraints on full and fair competition (playing field)o Pricing flexibility for noncore (nonresidential) customerso Means of achieving universal water serviceo Affordability and competing policy goalsSource: Author's construct.lIIStrategic ActivitiesWater utility managers can participatein a number of strategic activities.For industry-relevant options toemerge, water utilities will need to beproactive and engage regulators andpolicyrnakers in an ongoing dialogabout the industry and industryspecificissues.Monitoring legislative and regulatorydevelopments will continue to beimportant. The presence of theinvestor-owned water industry in theUnited States corresponds generallywith some of the most significantdevelopment in restructuring andregulatory change. Water utilitiesStrategies for watero Follow trends across the various utility sectors.o Monitor federal and state legislative andregulatory developments.o Evaluate propensity to and capacity for change.o Explore opportunities for innovation, andexperimentation.o Form partnerships that present strategicadvantages.o Establish benchmarks for service and productperformance.o Recognize the strategic implications of thetiming and content of regulatory filings.o Formulate industry-specific regulatory models.o Serve as an information resource to allinterested policymakers.o Engage regulators and other policymakers in adialog about the water industry.NAWC99 September 1998

Water ComparedStrategic IssuesrIsituated in particularly active states might want to participate in the formulation and ongoingrefinement of restructuring policies.Water: utilities also should be prepared for a number of other potential changes andchallenges. Water utilities might be expected to implement corporate restructuring prior todiversifying into operations contracts and other ancillary services. Water utilities also mightbe pressured to unbundle certain services, especially metering and billing, in keeping withtrends in the electricity sector. Water utilities are becoming attractive targets for takeover byenergy companies seeking to enter new markets as multisector service providers. Waterutilities will want to assert their purchasing power in more competitive electricity markets.Some water utilities might even want to venture into the role of energy aggregator forcustomers within their service territories. Each of these activities, however, must be balancedagainst the water utility's traditional service obligations.Presence of Investor-Owned WaterUtilities by State (NAWC 1997)··~·~I'.JP• ~,~-~.-"''oe:q:1 /""'J':e-~'1'Annual RevenuesMore than $1 00 millionBetween $10 and $100 millionBetween $.1 and $10 millionLess than $100,000NAWC100September 1998

Water ComparedStrategic IssuesTable 5-2Presence of the Investor-Owned Water Industry andState Restructuring ActivityStates [a] Telecommunications [c] Electricity [ d] Natural gas [ e]California Local comp. by 1996; PBR 1994 Legislation Noncore unbundling; some PBRNew Jersey PBR 1993 Order Noncore unbundling requiredPennsylvania PBR 1994 Legislation Unbundling considered; some PBRIndiana PBR 1994 Investigation PBR plan approvedConnecticut Local comp. by 1996; PBR 1996 Statute/order pending Noncore unbund.; investigationNew York Local comp. by 1996; PBR 1995 Order Noncore unbundlingIllinois Local comQ. by 1996; PBR 1995 Legislation Investigation; some PBRMissouri PBR 1997 Investigation PBR consideredFlorida Local comp. by 1996; PBR 1995West Virginia PBR 1995 Statute/order pendingOhio Local comp. by 1996; PBR 1996 Investigation Comprehensive legislationDelaware PBR 1994 InvestigationLouisiana Local comp. by 1996; PBR 1996 InvestigationKentucky PBR 1995 Investigation InvestigationVirginia Local comp. by 1996; PBR 1995 Statute/order pendingTennessee Local comp. by 1996; PBR 1995 InvestigationIdaho Deregulation except basic local InvestigationNew Hampshire Legislation Transportation servicesIowa Local comp. by 1996; PBR 1995 Investigation Statewide choice plannedMassachusetts Local comp. by 1996; PBR 1995 Legislation Some unbund.; investigation; PBRNorth Carolina Local comp. by 1996; PBR 1996 Investigation Limited; investigationArizona Local comp. by 1996 Order ProceedingNew Mexico Investigation Full unbundlingMontana Legislation Legislation; investigationMaine PBR 1995 Legislation InvestigationArkansas PBR 1997 InvestigationMaryland Local comp. by 1996; PBR 1996 Order Unbundling required (larger LDCs)Texas PBR 1995 Investigation Transportation only serviceHawaiiInvestigationSouth Carolina PBR 1996 Statute/order pendingRhode Island PBR 1996 Legislation SomePBRAlaskaStatute/order pendingWashington Local comp. by 1996 Investigation UnbundlingGeorgia Local comp. by 1996; PBR 1995 Investigation Noncore unbund.; marketers reg.Michigan Local comp. by 1996; PBR 1995 Order InvestigationUtahInvestigationMississippi PBR 1996 InvestigationVermontOrderNevada PBR 1995 Legislation Investigation; PBR StatuteOregon Local comp. by 1996 Investigation InvestigationNebraska PBR 1987 Investigation All local distribution municipalColorado Local comp. by 1996; PBR 1995 Statute/order pending RulemakingAlabama[b] PBR 1995 InvestigationKansas PBR 1990 Statute/order pendingMinnesota PBR 1996 Investigation InvestigationNorth Dakota PBR 1993 InvestigationOklahomaLegislativeSouth DakotaWisconsin PBR 1996 Investigation UnbundlingWyoming PBR 1996 Investigation InvestigationSource: See Appendix A.101 September 1998

Water Compared.Strategic IssuesrNotes to Table 5-2Blank~ no significant activity reported[a] Listed in descending order of presence ofNAWC water companies measured according to gross waterrevenues.[b] Italics indicate state with no NA WC members.[c] Local competition by 1996 indicates that rules were in place and competition was emerging by March 21,1996. PBR indicates adoption of performance-based regulation based on a survey in 1997.[ d] Status of state restructuring policy as of March 2, 1998.[e] Status of state restructuring policy as of late 1997.ConclusionsMuch can be gained from an understanding of the similarities and differences among theutility industries. By comparison to the water industry, the public utility industries that aremoving toward competition and deregulation;o are considerably less capital intensive,o do not depend on a constrained natural resource that consumers physically ingest,o have exploited economies of scale,o can market their product at a relatively low cost through massive transmission grids,o have an adequate (or more than adequate) infrastructure in place,o are not facing rising capital and operating costs,o are experiencing rising demand,o can offer price freezes or decreases or can offer more services at the same price,o can compete on the basis of alternative technologies and services and customer choice,o are primarily privately owned and uniformly regulated,o present reasonable risks in terms of reliability and related concerns, ando provide services that arguably are less "essential" for meeting basic human needs.None of this is to suggest that structural and regulatory change is not possible or desirable forthe water industry. To the contrary, structural change in the water industry to achieveeconomies of scale and various performance goals is highly desirable. Economic regulationcan promote beneficial structural change in the water sector. Whether traditional economicregulation, a modified version, or a new model is needed will be a continuing matter ofdebate. The current policy environment suggests that the water utility managers should beprepared for inevitable changes in the broader system of economic regulation that will affecttheir industry indirectly or directly. The current climate also presents opportunities forexperimentation and innovation to utilities interested in promoting change.However, given the unique characteristics and challenges of the water sector, it makesexceedingly more sense to craft unique structural and regulatory models for the water industryrather than try to adapt the water industry to models designed for and perhaps better suited toother utility industries.NAWC 102 September 1998

Water ComparedAppendix AAppendix A:Chronology and Status of Utility IndustryRestructuring Activity by StateState Telecommunications Electricity Natural Gas[a] [b] [c]Alabama 1995. Alternative 5/96. SB 306 enacted; allows No activity reportedregulation begins. recovery of "reasonable" strandedcosts through exit fees.3/97. Stranded costs statutechallenged in Federal court.12/97. PSC adopted a phased studyof restructuring in the "Report andPolicy Development Plan of the StaffElectric Industry Restructuring TaskForce."Alaska 5/91. IntraLATA toll 10/97. Public meeting to discuss, No activity reportedcompetition allowed. "Future Market Structure of Alaska'sElectric Industry" held.6/25/91. IntraLATA toll.Adopted full 2-PIC i/98. Two bills concerning retaildialing arrangement for competition were introduced in 19971+. NDCs have full session and held overto the 1998pricing flexibility. Rules session. Utility urged PUC anddon't distinguish IXCs legislators to allow retail competitionfrom resellers.in Anchorage and surrounding areas.Bill introduced to prohibitretail wheeling failed.NAWC 103 September 1998

Water ComparedAppendix AState Telecommunications Electricity Natural Gas[a] [b] (c]Arizona 7/1/95. Local exchange 1/97. Final order issued to phase-in 1997. Rate case settlementcompetition allowed. retail access beginning 1/99 with resulted in an unbundling20% of a utility's load, 50% by initiative and generic1/200 I and all consumers by 1/2003. unbundling proceeding.2/97. Order challenged by twoutilities.4/97. Bills to establish studycommittee and retail pilot failed.9/97. Work groups submitted reportsre: stranded costs, legal issues, andcustomer selection. Stranded costsrecovery supported but securitizationdeferred.10/97. Work groups submittedreports to the Joint Legislature StudyCommittee re: phase-in dates,taxation, roles of legislature andACC.2/98. Legislative committeeapproved a legislative-sponsoredderegulation plan that would allowfull retail competition by 12/99. Thesec chairman warned that iflegislature enacts its plan, it wouldwind up in court, as the secmaintains that it has exclusiveauthority over utilities.Exit fees for stranded costs withmitigation measures mandated.NAWC104September 1998

Water ComparedAppendix AState Telecommunications Electricity Natural Gas[a] [b] [c]Arkansas 1997. Alternative 4/97. Legislative Study Group No activity reportedregulation begins. established; report due 1999.9/30/97 and 10/17/97. PSC heldpublic hearings utility's plan forderegulation. On I 0/7 preliminarydeal announced.12/97. PSC agreed to utility'srestructuring plan, including ratereductions, $200 million over 2years; debt reduction of$165 millionover 5 years; creation of a specialTransition Cost Account to be usedto collect funds for stranded costsrecovery (funded by excess earningsabove I% return on equity during therate freeze period); and calls for ahearing in 1998 to address numerousrestructuring issues. The PSC wouldprovide guidance on the issues to theArkansas Legislature for its 1999session.12/97. PSC established 4 dockets toinvestigate specific restructuringissues."Transition-to-competition" planproposed for dealing with strandedcosts.105 September 1998

Water ComparedAppendix ArState Telecommunications Electricity Natural Gas I[a] [b] [c]California 2/93. lnterLATA. PUC 9123196. AB 1890 enacted to No legislative activityallows AT&T pricing restructure electric power industry, reported.flexibility of W A TS, allowing retail access to allMTS, private line, and consumers to begin simultaneously 1984. Began process of800 services. More by 111/98 (delayed to 3/31); allows comprehensive unbundling;limited oversight of recovery of stranded costs through adopted gas-cost incentivenondominant carriers. Competitive Transition Charges mechanism for a utility.(CTC).1994. Alternative 1986. Defined core andregulation begins. 5/97. PUC set 111/98 competition noncore segments; noncorestart date for all customer classes. allowed to buy unbundled111195. Full intraLATA supply and transportation.toll competition allowed 6197. Amendments submitted by(IOXXX). consumer coalition addressing 2/91. Created anstranded cost and rate reduction experimental transportation-1/97. Interim rules issues. only service for corethrough 1996 becamecustomers (core aggregationpermanent. 8/97. Utility announced open auction transportation CATof three generating plants in 9/97 and program).five plants in 1998.11191. Statewide capacity9/97. SB 90 provides administrative brokering plan for allocationguidelines for the Renewables of interstate capacity toProgram under AB 1890. SB 1305requires utilities to disclosenoncore customers.information about the sources of the 1993. Approvedpower they are selling. Securitization performance-basedof $7.3 billion in stranded costs ratemaking for oneapproved.company.I 0/9/97. PUC announced that 7/95. Adopted rules for acustomer electricity usagepermanent core customerinformation will beaggregation transportationmade available to both utility (CAT) program.customers and to energy serviceproviders to facilitate development of Unbundling expected tothe state 1 s competitive electricity begin 1/1/98 for one utilitymarket in 1998, but confidential and 1/1/99 for two others.customer information is only releasedwith customers' consent.Law lowers rates for consumers by10%.NAWC 106 September 1998

Water ComparedAppendix AStateColoradoTelecommunications[a]7/2/87. PartialintraLA TA tollcompetition allowed (dialupbasis only).1995. HB 1335 allowedfull local exchangecompetition by 7/1/96.Alternative regulationbegins.Electricity[b]12/96. PUC conducted a survey of360 stakeholder re: retail competitionand released a report on electricrestructuring.1997. All 8 restructuring bills failedto pass.1/98. Legislature debated severalrestructuring bills.PUC has no authority re: industryrestructuring without a legislativemandate, so no docket or formalinvestigation has been initiated.Natural Gas[c]No legislative activityreported.1991. Gas Transportationrulemaking opened accessfor all gas utilities.3/97. PUC held hearing toreview the processes andissues surrounding customerchoice options. Specificservices to be unbundledmust be determined.8/97. Tentative unbuudlingstructure for utilitiesproposed and commentsrequested.Connecticut7/1/94. PA 94-83 allowedintraLATA toll and localexchange competition(opened all markets).5/95. TCG granted localexchange authority.1996. Alternativeregulation begins.7/14/95. PUC issued a final reportthat calls for deregulating generationand gradually moving to retailcompetition.2/98. Raised Bill 5005, An ActConcerning Electric Restructuring,referred to legislative committee.Proposed partial recovery of strandedcosts.Performance-basedratemaking is underconsideration.No legislative activityreported1994. Required firmtransport service tocommercial customers andservice unbundling by11/95.11/95. Order addressingcost-of-servicemethodologies and proposedtariffs for unbundledservices; small customerswill not need real-timemetering and will be able tochoose the level of backupservice.1997. Opened anunbundled docket. Firstphase examined the impactof gas utilities exiting themerchant function andcompetition for billing andmeteringNAWC107September 1998

Water ComparedAppendix AState Telecommunications Electricity Natural Gas[a] [b] [c]Delaware 5/8/91. lntraLATA toll 6/97. HR 36 calls for PSC to report No activity reportedcompetition allowed by onSB 129 (dial-up basis). restructuring alternatives by 1198.1993. SB 115 allows 8/97. Draft of staff report onalternative regulation.restructuring alternatives released,calling for 4-year phase-in beginning1994. Alternative 4/1/99. Final draft due 11/97 forregulation begins. Commission review.1/98. Final report on electricindustry restructuring withrecommendations and alternativesadopted. The recommendations callfor competition in generationservices to become available for allconsumers 12 months afterrestructuring legislation is enacted.Recommends that utilities have anopportunity to recover stranded costs.The PSC is to determine themagnitude of reasonable strandedcosts for each utility.Proposed, retail wheeling with 6-8year phase-in. Proposed exit fee, tax,or nonbypassable wires charge.District of 1996. Alternative No legislative activity reported. Utility sought permission toColumbia regulation begins. implement a two-year pilot9/97 .. PSC studied restructuring and program in which up tohas issued a notice of inquiry for 3,000 residential customersissues to investigate on retail could purchase their gascompetition.supplies from third parties.Florida 1982. lntraLA T A and No regulatory activity reported. No activity reported.intraLATA toll (dial-upbasis) competitionallowed.10/97. House Committee on Utilitiesand Communication held informalhearings on electricity restructuring1995. lntraLATA toll issues.competition (I+) allowed.Alternative regulation Special legislative sub-committeebegan.tracks restructuring developments inother states.111/96. 1995 law openslocal loop.NAWC 108 September 1998

Water ComparedAppendix AState Telecommunications Electricity Natural Gas[a] [b] [c]Georgia 3/10/92. DKT 3995-U 4/97 - 7/97. Public hearings held on 5/96. PSC issued a policyallowed intraLAT A toll restructuring; 5 reports issued. statement including:competition (dial-up Results incorporated in 12/97 Staff unbundling of interruptiblebasis). Report. service to non-corecustomers and the7/1/95. Full local 11/97. Docket opened to review establishment of a pilotexchange competition issues re: potential stranded costs. program for unbundledallowed.service to core customers;12/97. PSC issued a Staff Report on gradual movement to1995. Alternative Electric Industry Restructuring that incentive rates; transitionregulation began. "does not constitute a fmal decision costs should be charged toon the part of the Commission or its parties benefiting the mostStaff but are initial thoughts on how from competition; no crossto address the relevant issues prior to subsidfes between utilitiesany move toward restructuring the and their marketingelectric industry."affiliates.SB 456 mandating retail wheeling 3/97. Natural gaswas introduced. deregulation bill (S.B. 215)passed and signed.9/97. Regulations onmarketer certification anddefault providers proposedby PSC. Marketers wouldhave to demonstrate theircreditworthiness throughfinancial statements andplans.Hawaii 1995. HB 471 allowed 5/97 and 8/97. International No activity reportedfull local exchange workshops held on identifYingcompetition.restructuring issues.1997: PUC began to develop a draftrestructuring plan and a formalinvestigation into the issues. Billsintroduced, failed to nass.NAWC 109 September 1998

Water ComparedAppendix AState Telecommunications Electricity Natural Gas[a] [b] [c]Idaho 711/88. lnterLATA 3/97. Pilot project ordered. No activity reportedservice deregulated. PUChas authority to resolve 4/97. Two utilities begin pilotcomplaints. Optional programs.deregulation of LECs(intraLATA toll8/97: Public hearing held on strandedcompetition).cost issues.9/29/97. PUC hosted technicalworkshop to discuss public purposecosts as part of unbundling7/97. Proceedings on electricrestructuring began (Order No.26995; Case No. GNR-E-97-1).1997: HB 399 passed, directscommission to establish a committeeto obtain information on the costs ofsupplying electricity to consumersand analyze effects of restructuring.Pilot programs underway andproposed, including "Market-basedpricing service program" for largecustomers.NAWC 110 September 1998

Water ComparedAppendix AStateIllinoisTelecommunications[a]1987. IntraLATA tollcompetition allowed.5/14/92. PUA 13-404 and13-405 allowed localexchange competition.7/2/94. Local Exchange.MFS request granted.1995. Alternativeregulation began.9/1/95. Competitionbegan.Electricity[b]2/96. Two utilities conducted retailwheeling pilot programs.8/97. ICC took a position against SB55 as anti-competitive on thegrounds that the stranded costrecovery mechanism is flawed andthe rate reduction is insufficient.9/10/97. ICC approved merger oftwo utilities (Docket 95-0551). On10/15/97, FERC approved themerger.11/97. HB 362 enacted providing forrate cuts for two utilities and accordsresidential customers full choice fortheir generation supplier by 2002.Customers who choose an alternatesupplier will pay an exit fee until2006. Allows for recovery of asubstantial amount of the utilities'stranded costs through exit fees andfor a portion of the stranded costs tobe securitized.Natural Gas[c]5/95. Legislation allowedutilities to presentperformance-basedratemaking proposals.5/97. Utility's customerchoice pilot program forsmall commercial,industrial, and largerresidential customers wasannounced.7/97. ICC opened aresidential unbundlinginquiry requestingcomments on obligation toserve, marketerresponsibilities andobligations, consumerprotection, affiliatecompany regulations, ]owincomecustomers,performance-based rates,taxation, pace ofimplementation, strandedcosts, and other issues.8/97. Workshops held.10/97. Workshop finalreport concluded significantdifferences of opinion onmost of the unbundlingissues. No consensusreached. Utility's three-yearcustomer choice pilotapproved. Unbundlingavailable for several years.Four utilities offertransportation service forindustrial and commercialcustomers.IllSeptember I 998____________________________ j

Water ComparedAppendix AState Telecommunications Electricity Natural Gas[a] [b] [c]Indiana 111/92. InterLATA. No regulatory activity reported. 8/96. Utility's customerAT&T substantiallychoice pilot program filed asderegulated and given 1997. Bill(s) introduced but failed to part of their Alternativesame flexibility as pass. Further legislative initiatives Regulatory Plan.nondominant carriers. All expected. SB427 created arate changes in 14 or legislative study committee that met 3/97. A utility filed anfewer days. File tariffs through November on electric agreement on their proposedfor information only. restructuring issues. Alternative Regulatory Plan.1994. Alternative 2/98. Deregulation bill (SB 431 to 9/97. Five large marketersregulation began (caps). deregulate the industry by 2004) was proposed an alternative draftdefeated. IN's major utilities and order for immediateother groups promised to beginmeeting in spring to work outdifferences.unbundling systemwide.10/97. AlternativeRegulatory Plan approved.Lawmakers will revisit restructuringissue in 1999 when new draft Aggregation program forlegislation is expected.small commercial customersIowaunder consideration.1983. Law allows 7/97. Proposal by utility to use No legislative activityderegulation of excess profits to write off stranded reported.competitive services. costs approved.1986. Small customer1995. Alternative 8/18/97. IUB reopened restructuring (residential) unbundlingregulation began. docket (NOI-95-1), adopting adopted. Previously,restructuring plan principleseffective choice prevented3195. Local exchange proposed in 1996. by the requirement forcompetition allowed.telemetering and standby9/97. Utility proposed a wheeling service and a lack ofpilot for commercial and industrial marketers willing to ente_rcustomers for 60 MW ofload in firstyear and an additional 15 MW eachfollowing year.the market11/95. A utility conducted asmall residential pilot9/10/97. IUB adopted "Action Plan program to unbundle serviceto Develop a Competitive Model for to all customers.the Electric Industry in Iowa"(NOI-95-I) in order to prepare forFederal mandates. Legislativedeliberations on restructuring areexpected to pick-up over the next 12months.1/97. IUB opened arulemaking to increasecustomer choice.I 0/97. IUB issued an orderrequiring statewidecustomer choice by 2/1/99.Flexible rates and antibvoassrate provisions.NAWC 112September 1998

Water Compared AooendixAlState Telecommunications Electricity Natural Gas[a] [b] [c]Kansas 1990. Alternative No regulatory activity reported. No activity reportedregulation began (freeze).1996. Retail Wheeling Task Force4/93. IntraLATA toll established with passage of HB 2600,competition allowed (dialupbasis).which prohibits the Commissionfrom authorizing retail competitionprior to 7/1/99.9/97. Legislative Task Force issuedreport setting retai I competition for200 I. Legislation is being preparedfor 1998 session.I 0/97. Legislature Retail WheelingTask Force issued draft restructuringbill that calls for retail access after7/2001, due to development of taxpolicy. Draft legislation is beingprepared for 1998.12/97: Retail Wheeling Task Forceissued final report and draft ofrestructuring bill. The draftlegislation affords all consumers ofparticipating utilities on or after7/1/01 the right to purchase electricpower from competitive generationproviders. Recommends that theKCC quantify each company'sstranded costs and set cost recoveryat a maximwn of 12 years.1/98: Restructuring bill is scheduledfor introduction in 1998 session.Draft legislation requires strandedcosts to be recovered through a unitcharge per kilowatt-hour ofelectricity delivered.Current law prohibits retail wheelinguntil 1999.113 September 1998

Water ComparedAppendix AStateKentuckyTelecommunications[a]5/91. IntraLAT A tollcompetition allowed (dialupbasis).1995. Alternativeregulation began.1997. lntraLATA toll.SC Bell and GTE S toimplement full2-PICequal access.Electricity[h]9/97. Interim Joint SpecialSubcommittee on Energy sponsoreda two-day workshop on restructuring.9/12/97. PSC approved mergerbetween two utilities.Utility asked the PSC to "scrap" theIntegrated Resource Planning filingrequirement.Natural Gas[c]No legislative activityreported.7/97. ''Natural GasUnbundling in Kentucky:Exploring the Next StepToward Customer Choice,"summarizing commentsfrom local gas utilities,consumer groups, andmarketers issued.Louisiana1996. Alternativeregulation began.3/97. Bill(s) introduced. Proposedretail choice by l/99.8/97. Hosted an informalmeeting on unbundling withconsumer groups, local gasutilities, and marketers.No activity reported5/97. All bills that were introducedin 1997 session failed.6/97. Bill created study committeewith reports due in 1998. Legislationdeferred until 1998 session.8/20/97. PUC opened docket U-21453 on whether electricrestructuring is in the public interest.9/97. Utility submitted plan seeking6-year transition to retailcompetition.12/97. PSC voted to accept a staffreport recommending further studyon issues surrounding electricityden,~lation.NAWC114September 1998

Water ComparedAooendix AState Telecommunications Electricity Natural Gas[a] [b] [c]Maine 1995. Alternative 5/29/97. LD 1804 enacted, will allow No legislative activityregulation began. retail competition by 2000. The law reported.features a market share cap of33% inold service area, terms for divestiture 1997. Utility's settlementof generation assets, and the nation's offering unbundled servicesmost aggressive renewablesto all of its customers byportfolio, requiring 30% of11/99 filed.generation from renewable energysources.5/97. PUC initiated aninquiry regarding gas utilityRestructuring implementation details unbundling.are being worked out; others havealready been implemented.PUC considering proposalfor unbundling {industrialPUC will determine "how de- and commercial) by aregulation will effect the consumer" utility.by public rule-making hearings.The law allows recovery of strandedcosts, but deferred decisions to 1998session.Maryland 5/6/93. InterLATA 5/97. Staff report recommended No legislative activitycompetition. Short-term phasing in retail choice beginning reported.price cap on residential 4/99 through 4/200 I.services by PSC order.11/94. PSC recommended12/97. PSC order issued establishing to unbundle retail sale4/94. Local exchange a framework for restructuring. A service into supply andcompetition allowed subsequent order, also in 12/97, delivery services for all(switched local). revised the time frame for phasing-in customers (residential andretail competition. A third of the small commercial).1996. Alternative state's consumers will have retailregulation began. access by 7/00; another third by 7/01; 1995. Performance-basedand the entire state by 7/02. Utilities ratemaking undermust file plans for stranded cost consideration.recovery by 3/98. CTCs andsecuritization are being considered. 8/95. Unbundling filingsLegislative Task Force held hearings approved for a utility.and issued conclusions andrecommendations.7/96. Utility's two-yearresidential transportationprogram approved6/97. Utility's two-yearResidential Delivery ServicePilot Program approved.Three largest LDCs requiredto unbundle services forlarge customers by 11/95,for small commercialcustomers by 11/96.NAWC 115 September 1998

Water Compared. Appendix AState Telecommunications Electricity Natural Gas[a] [b] [c]Massachusetts 12/86. DPU Order 1731 1996. Utilities began pilots. No legislative activityallowed inter LATAreported.competition for 2 LA TAs, 5/96: DPU issued an order !batintraLA TA toll included Model Rules for 11/95. Order details filingcompetition and full local restructuring the industry and requirements forexchange competition. legislative proposal. DPU established perfonnance-based1995. Alternative1/1/98 as tbe target date for retail ratemaking.competition.regulation began.12/95. PUC approved1/97. Utility began a !-year pilot proposal for a pilotprogram in four communities. Oftbe residential unbundlingpilot participants, 96% oftbe program before 1996business and 66% ofthe residential heating season.consumers chose supplier based onprice, 31% of residential consumers 7/96. A utility receivedchose "green power" supplier. approval to launch tbePioneer Valley Customer9/97. Supreme Court upheld DPU Choice program, tbe firstjurisdiction in MIT case, but did not residential unbundlingconfirm percentage or amount of program in New England.stranded cost recovery.11/96. Utility's commercial11/19/97. Bill passed allowing for and industrial transportationrate cuts of I 0% by 3/98 and another program approved.5% I 8 months later. The legislationalso encourages divestiture of 3/97. A joint motion filedgeneration assets.to address tbe establishmentof unbundled rates and2/98. State will officially open services for all customermarket to competition by 3/1/98. classes on a statewide basisand examine issues relatedFull recovery of stranded costs over to developing competitionI 0-year transitional period; costs and restructuring.must be prior to 3/15/95. DPU has Unbundling for someapproved 2 utilities' plans for transportation services andstranded cost recovery.Agreement with utility allows 2.8cent per kilowatt-hour access charge.Utility will minimize stranded costsby selling its generation assets andpower contracts.interruptible transportationis allowed.NAWC 116 September 1998

Water ComparedAppendix AState Telecommunications Electricity Natural Gas[a] [b] [c]Michigan 1991. P.A. 179,303 6/97. PSC order set forth the No legislative activityallowed local exchange framework for electric industry reported.competition.restructuring. The action opens themarket to retail competition, phasing- 2196. PSC requested1992. Law provided in 2.5% of consumers in 1997 and comments from LDCsalternative regulation for 2.5% each year thereafter until2002, concerning theall non-basic services. when all consumers will have open implementation of smallaccess.customer unbundling,1995. Alternative specifically offeringregulation began. 8/97. A consumer group initiated transportation-only service.litigation to see if the PSC can111196. JntraLA T A toll determine if it has the authority to 11196. A utility began acompetition allowed (I+ order retail wheeling; allow stranded two-year experimental pilotgoes to LECs ). Dialing cost recovery. program that will allow itsparity ordered effective.customers to purchase gas10/97. PSC issued six orders that supplies from alternativecontinue the process of introducing providers.competition. In November, partiesasked these orders be reheard. Staff 12196. Utility's two-yearreport, "Electric Restructuring- pilot program for residentialCustomer Focus Issues andand commercial customersRecommendations" discusses to purchase gas fromcustomer protectionalternative supplierrecommendation: supplier and approved.aggregator licensing; rights ofprivacy; low-income protection; and 4197. A utility became theuniversal service. Full recovery of first in state to offer choicestranded costs through exit fees, to residential customers.through 2007.1997. PSC held formal1/98. PSC completed fmal action on proceedings to assess therehearing orders required toappropriateness of allowingintroduce competition into the state's all customers access to theelectric utility market. Phase-in competitive gas market.schedule was adopted allowing 2.5%of two utilities' customers retailaccess as early as 3/98, addinganother 2.5% on 6/98, 1/99,1/00,and110 I and all consumers retail accessby 2002. Bill introduced to provide a3-year phase-in for retail access,stranded cost recovery, and majorcustomer protections.NAWC 117 September 1998

Water Compared Aooendix A~I.IState Telecommunications Electricity Natural Gas[a] [b] [c]Minnesota 1993. Legislation 1/96. Governor issued a No legislative activityderegulated all restructuring proposal. reported.interexchange carrierrates. 2/96. PUC established a workgroup. 4/95. A utility filed aproposal to unbundle811/95. SF 752 allowed 1997. Bill(s) introduced. HB services (industrial andfull local exchange 2149 calls for electricity large and smallcompetition. deregulation by 1/2000. commercial); it wouldunbundle long-haul pipeline1996. Alternative 5/97. A legislative study group was transportation from localregulation began (freeze). renewed with a report due 1/98. delivery; establish a 3-yearexperiment for the111/97. IntraLATA toll. 9/97. MPUC suggested that all aggregation of smallEqual access for all LECs. parties share in transition costs and transportation customers;that unbundling is the path to and, in case of shortage,competition.utility will make efforts tosupply gas to transportation-10/97. PUC issued a report that only customers at specialreflects the discussions held by the rates.PUC Electric Competition WorkGroup from 2/96 to 10/97. The 1997. PUC called for thereport identifies restructuring issues formation of workingand is intended as a starting point for groups to investigatestate policy makers and stakeholders unbundling issues.to restructure the electric industry.8/97. Utilities petition to11197. PUC commented that full- establish rules andscale retail competition will be regulations that wouldconsidered only afterprovide supplier choice towholesale competition is in place. all customers by 2003.1/98. The Legislative ElectricEnergy Task Force recommendedagainst acting on electric industryrestructuring in 1998. Itrecommended further study with areport due I /99.NAWC 118 September 1998

Water ComparedAppendix AStateMississippiTelecommimications[a]1992. 90-UA-0280allowed intraLATA tollcompetition (I OXXXbasis).!996. Alternativeregulation began (freeze).Electricity[b]1997. PSC opened docket 96-UA-389 to consider retail wheeling.Hearings held 4/97 and 7/97.1/97: Bill introduced that proposedretail choice by 7/2003. Bill failed.7/97. PSC asked staff to draw up arestructuring plan by ll/97. Theplan, if accepted, will be a basis todraft legislation for 1999.Natural Gas[c]No activity reported.Missouri8/26/86. TC 85-126allowed intraLAT A tollcompetition (dial-upbasis).!997. Alternativeregulation began (PC).11/97. The PSC staff presented areport to the PSC proposing retailchoice to begin by 1/2001 and becompleted by 12/2004, unbundling ofservices and recovery of strandedcosts be determined by the PSC.Implementation ofthe plan requireslegislation to be passed by 1999.Recommends PSC have discretion inrecovery of stranded costs through awires charge. Exit fees andsecuritization were deemed anticomoetitiveand would not be used.1997. Restructuring bills fail to pass.3/97: PSC established the RetailElectric Competition Task Force toprepare report to and study retailwheeling and related issues. Fourworking groups were established andare to submit reports no later than4/98.No legislative activityreported.1995. Performance-basedratemaking underconsideration.11/97. Joint Interim Committee onTelecom and Energy scheduled ahearing re: poolco vs. bilateralcontracts.There is no statewide pilot program.PUC approved a limited program fortwo lOU'sPUC rejected utility's pilot industrialopen-access program (Case No. E0-97-491). The decision mayjeopardize the utility's proposedcompetitive market research projectfor residential customers.NAWC1!9September 1998

Water ComparedState Telecommunications Electricity[a][b]Montana 1985. Law permits 5/97. SB 390 Restructuring billderegulation ofenacted allowing large industrialcompetitive services. consumers retail access by 7/98 andall consumers by 7/2002. Bill also1986. InterLA TA and includes a 2-year rate freezeintraLAT A tollbeginning 7/98. PSC to implementcompetition allowed. SB 390.Resellers deregulated.7/97. Two utilities submitted plan tothe PSC in accordance with SB 390.One plan calls for choice to begin by7/98 for 7 5 to I 00 of its largestcustomers, and for a pilot programfor supplier choice to begin in 7/98for small customers.8/97 and 9/97. PSC rejected twoutilities' restructuring plan and askedfor resubmission.Large industrial customers to choosesupplier by 7/1/98; all customers by7/1/2002; 2-year rate freeze.Securitization of stranded costs, witha rate freeze; bonds secured throughnonbypassable customer transitioncharge.Nebraska 1986. Legislature (86- 6/96. 3-year study approved with a80 I) deregulated report due in 1999.inter LATA competition;reseller rates notI 0/97. Legislative Task Force re:regulated. All but basicEfforts of Restructuring on Electriclocal exchangeIndustry is at work with assistancederegulated.fromMSU.1987. Alternativeregulation allowed.Bill to prohibit retail wheeling failedpassage.1/1/87. IntraLATA tollcompetition allowed (VIAUnder study, report due in 1999.lOXXX).Little interest due to low rates.Appendix ANatural Gas[c]7/96. A utility filed to fullyunbundle its system over afive-year period.5/97. PSC initiated aninformal proceeding todevelop proposed rules forrestructuring.1997. Natural GasRestructuring and CustomerChoice Act passed, allowinggas utilities to open theirsystem to competitionPUC ordered a utility to filea gas-unbundling plan forall customers by 7/1/96(date not available).No legislative activityreported.1997. Utility's proposahostart a customer choiceprogram by 4/98 announcedLDCs not regulated by thestate; all are localmunicipalities.rINAWC120September 1998

Water Compared Appendix Al),•State Telecommunications Electricity Natural Gas[a] [b] [c]Nevada 1985. lnterLATA 6/96. PSC committee adopted ten 1997. State law passedcompetition allowed principles. segregating transportation(DKT 84-758) for tworegulation from the PSC.LATAs. 8/97. PUC Order opened Docket to Commission encouraged byinvestigate issues to be considered as law to initiate alternative5/7/93. lntraLATA toll a result of restructuring. regulations of the gas andcompetition allowedelectric utilities.(partial dial-up).7/17/97. AB 366 enacted directingthe PUC to establish a market in Unbundling activity focused1994. Local exchange. which customers have access to on workshops and issueLegislation allows CATV potentially competitive electric statements.to offer switched local. services from alternative sellers nolater than 12/31/99. A provision is1995. Alternative expected to phase-in a requirementregulation began (CAPS). that I% of all electricity consumedannually be produced by state'srenewable energy producers.The PUC is authorized to determinerecoverable costs associated with theassets and obligations of electricutilities, and may impose a procedurefor the direct and unavoidablerecovery of allowable costs from theratepayers. The 8/97 PUC orderidentifies the issue of recovering pastcosts to be addressed in itsinvestigation.11/97. As part of its ongoinginvestigation, PUC order requeststwo utilities to submit filings whichdemonstrate each distinct componentof electric service (unbundled costs).Hearings held beginning in 12/97.Legislative oversight committeespecified in EIR law is scheduled tobegin meeting quarterly. Retailcompetition bv 7/200 I.NAWC 121 September 1998

Water ComparedAppendix AState Telecommunications Electricity Natural Gas[a] [b] [c)New 1/91. DE 90-002 allowed 6/95. Legislation directed the PUC No legislative activityHampshire intraLATA toll to establish a pilot program for retail reported.competition (dial-up basis). competition for about 17,000customers.Transportation offered to1995. Law established customers who consumelocal competition 5/22/96. HB 1392 enacted requiring more than I 0,000 therms arulemaking. the PUC to implement retail choice month.for all customers of electric utilities12/31/96. Local exchange under its jurisdiction by 1/1/98, or atcompetition allowed (LECswith> 25,000 lines).the earliest date that the Commissiondetermines to be in the publicinterest, but no later than 7/1/98.States that utilities should be allowedto recover net unmitigatable strandedcosts, and are obligated to takereasonable measures to mitigate theirstranded costs throughnonbypassable charges to consumers(entry and exit fees are notpreferred). The PUC Final Plandiscusses stranded cost recoverythrough divestiture of generationassets and contracts andsecuritization of debts..2/97. PUC issued a Final Plan andLegal Analysis for restructuring.Issues addressed in the plan includeMarket Structure, UnbundlingElectric Services, Stranded Costs,and Public Policy Issues (such asuniversal service, renewable energy,and customer protections). Results ofpilot program available.1/98. PUC formally delayed the 1/98start of retail competition due to thecontinuing legal dispute between thePUC and PSNH.Full stranded cost recovery notguaranteed.NAWC 122 September 1998

Water ComparedAppendix AState Telecommunications Electricity Natural Gas[a] [b] [c]New Jersey 1/92. PL 199l,Ch.428 1/97. BPU released its Proposed No legislative activitydesignating interexchange Findings an.d Recommendations for reported.carrier servicespublic comment. The proposal callscompetitive, thus for a phase-in, beginning 10/98, of 1/93. PUC issuedderegulated. retail choice that would give all unbundling guidelinesresidents and businesses the option of (nonresidential customers).1992. Law deregulated choosing their supplier by 4/200 I.competitive services.3/95. LDCs required to file4/97. BPU issued Order Adopting plans to unbundle rates to1993. Alternative and Releasing its Final Report on nonresidential customers.regulation beganElectric Restructuring.1/97. Utility's residential7/1194. IntraLATA toll 7/97. The four investor-owned and small commercialcompetition allowed (dial- electric utilities in the state submitted unbundling programup basis and I OXXX). three filings each to the BPU designed to provide allconsisting of a rate unbundling filing, customers with range ofa stranded cost filing, and achoices approved.restructuring filing.2/97. A utility filed a two-7/97. Utilities submitted filings for year residential pilotstranded cost recovery, with an initial program.decision due before 5/98.1997. Utility's one-year9/97. Initial decision on utilities' pilot residentialfilings is set for 5/98.Energy Master Plan issued;proposing retail choice by7/2000 with phase-in approachstarting !0/98. Legislation approvalhas yet to be accorded. Allows forpotential recovery of stranded costs,but does not guarantee it.Securitization is being considered toassist in recouping stranded costs.Pending legislation includes AB1170, which would provide equalaccess for consumers and generatorsand AB 2263, which would direct theBPU to establish a pilot program.Legislation expected to be introducedin 3/98.transportation programapproved.123 September 1998

Water ComparedAppendix AState Telecommunications Electricity Natural Gas[a] [b] [c]New Mexico 6/85. lntraLATA toll 5/97. PUC ordered that "parties No legislative activitycompetition allowed should be afforded an opportunity to reported.(I OXXX basis; all 0+ and reach Consensus on restructuring ofI+ goes to USWC). electric industry regulation and any 1984. Transmission,necessary or appropriate legislation distribution, storage,to be proposed to the IWRP for standby service, andconsideration during the 1998 session emergency gas service areof the New Mexico Legislature." As fully unbundled.a result, draft legislation was submilled9/97 to the PUC. By order, 3/97. Utility filed reportutilities may file specific plans for outlining its plan to exit theopen access and customer choice. gas merchant function.PSNM filed plan 9/97.8/97. Stakeholder group to presentplan in 9/97 for handling PSNMstranded costs. On 9/12, the groupdiscontinued efforts due towrresolved issues.9/97. PSNM announced that itwould submit its own EIR plan sinceno consensus could be reached intalks with PUC. The plan propos.esopen access for all consumers by112001, unbundling of services, andrecovery of stranded costs usingnonbypassable wires charges, exitfees, and securitization.Pilot "community choice" plan tointroduce customer choice by 1998through a pilot program approved;utility seeking statewide retailcompetition by 112001.PSC proposal includes anonbypassable customer transitioncharge.Joint Legislative Committee issharing issues and will reportfindings in 1998.NAWC 124 September 1998

Water ComparedAppendix AState Telecoii11llunications Electricity Natural Gas[a] [b] [c]New York 1991. AT&T/OCCs Individual lOU's in the state No legislative activitycertificated to provide local are submitting pilot plans. reported.competition. Specificactions taken to support 5/96. PSC authorized retail choice 12/94. PSC issued generalcompetition in private line, starting in 1998; wholesale in 1997. guidelines and asked thespecial access, local non- It also states that utilities should have largest utilities to fileswitched, local loop. a reasonable opportunity to recover unbundling plans; LDCsstranded costs consistent with the must unbundle services to11/93. Full co-carrier goals of restructuring. Utilities are firm customers, includingstatus. expected to use creative means to access to upstream facilitiesreduce the amount of stranded costs such as pipeline capacity,1995. Alternative prior to consideration. storage, and receipt points.regulation began.7/96. PSC approved utility's pilot 3/95. PSC approved nineprogram, "Power Pick," that will plans.allow industrial consumers retailaccess to competitive generation 3/96. PSC approved ninesuppliers. The program will begin utilities' compliance filings5/98. that serve to increasecompetition.6/97. PSC approved a pilot for morethan 17,600 qualified farmers and 5/96. A utility offeredfood processors, beginning in II /97. transportation-only serviceto commercial and9/97. PSC approved a utility's residential customers.restructuring plan. The plan calls forretail competition to phase-inbeginning 6/1/98, with full retailaccess no later than the end of 200 I.Utility will file unbundled tariffs andplan to divest generation facilities12/97. PSC settled utility'srestructuring proposal, which willallow all customers full retail accessby 511/99. Utility will begin in 7/98with open access for I 0% of itscustomers and phase-in full retailaccess by 7/2001.Two bills deal differently withstranded costs; legislationdeadlocked.NAWC 125 September 1998

Water Compared Appendix ATState Telecommunications Electricity Natural Gas[a] [b] [c]North 6/84. InterLATA and 4/97. Restructuring legislation No legislative activityCarolina intraLATA toll (resale introduced that would have opened reported.only) competition allowed. retail competition by 10/98. The billwas not acted on in 1997.PSC filed a petition to1989. Law allows investigate gray market oralternative regulation. 9/97. "Statewide Summit" held. buy/sell transactions.Unbundling considered on a7/1/94. IntraLA TA toll 9/23/97. NCUC "reactivated" the case-by-case basis.competition allowed restructuring docket (E-100, Sub 78) Comprehensive unbundling(facilities-based 10XXX- concerning emerging issues in the regulation has not been1+). electric industry. passed.1996. Alternative I l/97: The General Assembly Studyregulation began.Commission on the Future of ElectricService commenced its work to7/l/96. Local exchange investigate restructuring in andcompetition allowed. determine whether legislation isneeded. Reports are due to theGeneral Assembly in 1998 and 1999.SB 38 established a member studycommission; renort due in 1999North Dakota 1989. HB 563 separated No regulatory activity reported. No activity reported.essential from nonessentialservices.3/97. HB 1237 enacted to createJoint Legislative Study Committee1993. Alternative on Restructuring.regulation began.7/97. First meeting of ElectricUtilities Committee. Final report isdue 11/98.NAWC 126 September 1998

Water ComparedAppendix AState Telecommimications Electricity Natural Gas[a] [b] [c]Ohio 1989. HB 563 allowed 1996. HB 653 Restructuring bill 11194. Utility'salternative regulation. failed to pass. transportation-only rate forschools approved.4/15/93. lntraLATA toll 2/96. PUC adopted "interruptiblecompetition allowed buy-through" allowing power 12/94. PUC issued a policy(IOXXX and 1+). purchases from another supplier to statement that expects largeavoid interruptions.LDCs to formulate and12/93. lnterLATA. New implement smallrules for competitive 12/96. PUC adopted guidelines for commercial and residentialservices streamlined Conjunctive Electric Services. The programs.certification; rates/tariffs 2-year pilot program would alloweffective upon filing. ratepayers to band together for 6/96. Alternative regulationDoes not separate collective billing under rates legislation signedinterexchange carriers and designed for the group. (This pilot is establishing customerresellers. an experiment in innovative pricing, choice as a state policy inand does not allow retail wheeling.) the supply of natural gas1995. Two utilities will services and allows theprovide intraLA T A 1+. 11197. HB 625 introduced to allow general public to utilize anutilities to manage stranded costs by array of suppliers.10/1195. Local exchange selling bonds. The PUC wouldcompetition allowed ensure the utilities charge rates 1/97. Utility's customer(MFS authorized). sufficient to pay off the bonds. choice program allowingSimilar legislation expected in the residential and small1996. Alternative Senate. commercial customers toregulation began.purchase gas from12/97. The Legislative Joint alternative suppliersCommittee on Electric Deregulation approved.failed to reach consensus on aderegulation plan. The co-chairs of 7/97. Utility's residentialthe committee presented thejr own and small commercialplan for restructuring Ohio's electric natural gas customer choicepower industry to the legislature. program approved.The plan calls for retail access tobegin by 112000 and allows for a 5-year transition period. Until12/2004, utilities may receive"transition revenues" in the form ofnonbypassable wires charged topartially recover stranded costs.Legislation is required to enact theplan and was introduced. HB 220was presented but not acted upon.Legislative retail wheelingreoort was due 10/97.NAWC 127 September 1998

Water ComparedAppendix AState Telecommunications Electricity Natural Gas[a] [b] [c]Oklahoma 7/1/94. lntraLATA toll 4/25/97. SB 500, The Electric No legislative activitycompetition allowed Restrocturing Act of 1997, is reported.(lOXXX basis).enacted.· The law directs the OCC tostudy and develop a framework for 2/97. OCC solicitedrestrocturing. The law requires that proposals on gasconsumers be allowed retail access deregulation.by 7/2002. Each entity must proposea recovery plan for stranded costs. 9/97. OCC issued proposedTransition charges can be collected rules regarding unbundlingover a 3-year to 7-year period and for local utilities.must not cause the total price toexceed the cost per kWh paid by Always allowedconsumers when the law was enacted transportation-only serviceduring the transition period.(industrial and commercial).4/97. The OCC is directed by SB500 to undertake a study of allrelevant issues relating torestructuring and to develop aframework. Four reports: ISOIssues, Technical Issues, FinancialIssues, and Consumer Issues are due2/9&, 12/9&, 12/99, and &/2000,respectively.11/97. OCC approved a ratedecrease of$35.9 million forPublic Service Companies'customers.l/9&. A bill is expected to beintroduced by the author of SB 500to begin restrocturing the industrythree years sooner than expected.2/9&. OCC issued final rule forunbundling. The rules now go to thelegislature and governor for review.NAWC 12& September 199&

Water Compared Appendix A lState Telecommunications Electricity Natoral Gas[a] [b] [c]Oregon 1/1/86. lnterLATA. HB 8/97. Public meeting held to No legislative activity2200 became effective; no discuss utility's "Customer reported.regulation of rates or Choice" pilot program. Restructoringfinancing. IntraLATA bill failed to pass 1997 session - 1997. PUC objectives statetoll competition allowed limited stranded cost they will work with utilities(dial-up basis). recovery and mandatory and other stakeholders topurchases from BP Adevelop pilot programs for7/93. HB 2203 allowed were key elements, expected to be unbundling.local exchangereintroduced for 1999 session.competition.9/97. PUC suspended utility's4/96. Price-cap plan pilot plan because of timeterminated because of constraints.poor service quality.10/97. PUC issued draft orderoutlining guidelines for transitioncost filings. PUC approved utility'spilot program that will allow 50,000customers in four cities to choosealternative generation suppliers.Large industrial customers couldbegin to choose immediately, andresidential customers by 12/97.1/98: Pilot program plan forresidential and small commercialcustomers filed by utility. Theprogram would allow customers toselect from a "portfolio" of pricingoptions for electricity and would gothrough 6/99. Another proposed pilotprogram would allow schools andcustomers with demands greater than5 MW in utility's service territory tochoose alternative generationsuppliers for up to 50% of their load.Additionally, all of their largecustomers would be allowed retailaccess.Four northwest governors to reviewproposals.NAWC 129 September 1998

Water ComparedAppendix AIStatePennsylvaniaTelecommunications[a]l/87. lntraLA TA tollcompetition allowed {I+,0+, 0- traffic goes toLECs).1993. Act 67 allowedPUC to authorize localcompetition.l/l/94. PUC lostauthority overinterexchange carriercompetitive service rates.1994. Alternativeregulation began.Electricity[b]11196. HB 1509, ElectricityGeneration Customer Choice andCompetition Act, enacted. Allowsconsumers to choose amongcompetitive generation suppliersbeginning with one-third of thestate's consumers by J/99, two-thirdsby l/2000, and all consumers byl/2002. Utilities required to submitrestructuring plans.7/10/97. Final orderre: guidelines formaintaining customer services at thesame level of quality underretail competition (Docket No. M-00960890 F. 0011).8/97. As required by HB 1509, PUCapproved statewide pilot programsfor 5% of each utility's load,beginning ll/97.Natural Gas[c]Falll995. Utility's plans toprovide customers in onearea access to alternativegas suppliers (smallcommercial and residentialwith volume and number ofcustomer requirements)filed.8/96. Utility's plan to begina residential gas supplierchoice program approved.2/97. Utility's marketingcampaign to make allcustomers aware of theiroptions announced.4/97. Utility's proposal fora customer choice pilotprogram filed.11/97. PUC ruled that none of theproposed pilots offered real savingsfor customers, and the utilities wereasked to re-submit more"meaningful" pilot programs.!997. Legislation is beingconsidered that wouldcompletely unbundle thestate's gas utility merchantfunctions by 1/l/99.12/97 and l/98. PUC approved itsown restructuring plan for one utility,considered a "benchmark" for utilityrestructuring plans in the state. Underthe plan, 66% of utility's customerswill have retail access by l/99 and allothers by l/2000. Utility would beallowed to collect $4.9 billion intransition costs.Performance-basedratemaking on a companyspecificbasis.2/98. Pilot programs completelotteries to select final pilotparticipants. The first portion of thestate's customers, chosen earlier, areactively participating in retail accesspilot programs since ll/97. Pilotparticipants should see a I 0% billreduction.Stranded cost recovery decisions leftto PUC; legislation encouragesmitigation; securitization underconsideration.NAWC130September 1998

Water ComparedAppendix AState Telecommunications Electricity Natural Gas[a] [b] [c]Rhode Island 2/1/92. IntraLATA toll 8/1/96. Utility Restructuring Act was No legislative activitycompetition allowed (dial- enacted allowing retail choice reported.up basis).beginning 7/97 and continuing inphases.No regulatory activity1996. Alternative reported.regulation began. 6/97. HB 6288, the VoluntarySecuritization Bill, was introduced. 4/97. Utility filed toUtilities may securitize subject toPUC approval.7/97. 97-H-7003 enacted;Securitization law whose processesmust be established by PUC by12/31/97. First state to allowstatewide retail wheeling.12/97. PUC issued an orderaccepting interim rates and approvingretail choice for all consumers on111/98.Direct access for I 0% of all classesof customers by 7/97; phase-in to allcustomers by 7/98.provide supplier choice tocommercial and industrialcustomers.9/97. Utility's regulatoryplan approved.Stranded costs to be recoupedthrougb customer transition charge of2.8 center per kilowatt-hour from7/97 through 12/2000, and at rates setby the PUC through 2009.South Carolina 8/93. IntraLA TA toll 5/97. House speaker requested PSC No activity reported.competition allowed proposal by 1/98 for restructuring(IOXXX basis).electric industry.1996. Alternative 1997. Legislation to restructure andregulation began. phase-in retail wheeling beginningl/98 and going through 1/99 wereintroduced, but have not yet beenacted on (current 2-year legislativesession runs through 6/98).2/98. PSC issued Proposed ElectricRestructuring ImplementationProcess as requested by HouseSpeaker. The plan calls for a fiveyeartransition period followingpassage oflegislation to deregulatethe electric industry. Recovery ofreasonable verifiable stranded costsis allowed. Utilities would submitrecovery plans for approval by PSC.NAWC 131 September 1998

Water ComparedAppendix AState Telecommunications Electricity Natural Gas[a] [b] [c]South Dakota 1988. Law provided for No regulatory activity reported. No activity reported.alternative regulation.l/98. The Legislative Research8/21/88. lntraLATA toll Council hosted an informationalcompetition allowed (for forum on developments in utilityresale).competition. This is the first time thestate legislature has addressed8/11/92. lntraLATA toll. restructuring of the electric industry.SD network cut over No action is expected.exchanges of 15participating ILECs for Current law allows retail wheeling1+ equal access. for new large customers. Littleinterest due to low rates.1996. Alternativeregulation began (caps).Tennessee 6/8/95. Local exchange 6/97. General Assembly created a No activity reportedcompetition allowed. special joint legislative committee tostudy electricity deregulation. A6/13/95. InterLATA and report is due 2/98.intraLATA toll. Resellersbecame regulated.9/97. TV A presented its position onFederal legislation at "Power1995. Legislation opened Summit." TV A is preparing forlocal loop to competition.Alternative regulationbegan.competition by reducing debt, butrequires provisions for stranded costsand Service territory.Little interest in restructuring due toTV A (not subject to state regulation)being the primary electricity providerin the state. State currently has one ofthe lowest electric rates in the U.S.Major cities are investigatingalternate wholesale providers otherthan TVA.NAWC 132 September 1998

Water ComparedAppendix AState Telecomni.unications Electricity Natural Gas[a] [b] [c]Texas 911/95. HB-2128 allowed 1995. SB 373 enacted to restructure No legislative activityfull local exchange wholesale electricity, consistent with reported.competition.PERC requirements. Law requiresutilities to provide nondiscriminatory Transportation-only service1995. Alternative unbundled transmission service and (industrial and commercial)regulation began. establish an ISO. always allowed.8/96. ISO authorized by PUC,operational by 7/97.1197. PUC issued three reports asdirected by the legislature. Volume Iis on the scope of competition;Volume II is an investigation intoretail competition; and Volume Illfocuses on recovery of stranded costsand competition.8/15/97. Proposed HB 1509 calledfor full retail competition by 2000.Allowed for stranded cost recoveryafter thorough and aggressivemitigation efforts by the utility. Thebill failed to pass 1997 session; nextlegislative session convenes 1/99.8/97. Senate committee formed toreview deregulation. A report ishoped for in 1999.I 0/97. Utility presented proposal forcustomer choice and 4-percent ratedecreases over 2 years for residentialcustomers. Utility announced a pilotprogram to allow about I ,000customers to support thedevelopment of renewable energyresources by adding certain amountsto monthly bills and receivingincrements of power from renewableenergy sources.12/97. Senate Interim Committee onRestructuring meets withstakeholders. Three utilities reachedagreements with the PUC onproposed competition plans; finalapproval required. All three proposerate reductions. One plan guaranteescustomer choice by 2003 andincludes stranded cost recovery.NAWC 133 September 1998

Water ComparedAppendix AState Telecommunications Electricity Natural Gas[a] [b] [c]Utah 10/29/85. IntraLATA 11/97. The Legislative Task Force No activity reportedtoll. 83-999-11 prohibited on Electric Deregulation andfacility basedRestructuriog voted to recommendcompetition. no restructuriog legislation for 1998session. The task force will prepare1986. IntraLATA toll. draft legislation for a restructuringResale not regulated.1994. Formal studycompleted.511195. HB 364 allowedlocal exchangecompetition.plan by 4/98 for introduction in the199 General Session.Under study by PUC.1995. HB 364 allowedfor alternative re~ulation.Vermont 1994. lntraLATA toll 12/96. Final order. called for retail No activity reportedcompetition allowed (I + choice in 1998, stranded cost10 digit). recovery, functional separation, andspecial environmental requirements.1997. Bill(s) iotroduced, butfailed to pass.4/97. Senate passed a bill based onplan issued by the PSB that wouldhave allowed retail choice by 1998.The bill stalled io he House.8/97. House funned specialcommittee to study issue; report due1/98.9/3/97. Governor urged the public topressure lawmakers to supportderegulation efforts.I 0/97. House ElectricUtility Regulatory ReformCommittee voted not to propose anyretail wheeling legislatiorl in 1998,but will draft its version of arestructuring bill for 1999.12/97. PSB plan proposed partialrecovery of stranded costs.No pilots; direct access schedule isphased, starting in 1998.NAWC 134 September 1998

Water ComparedAppendix AState Telecommunications Electricity Natural Gas[a] [b] [c]Virginia 10/1195. lntraLATA toll 2/96. General Assembly authorized No legislative activitycompetition allowed. special ratemaking by SCC under SB reported.248.1995. Alternative 10/97. Utility's customerregulation began. 11/96. sec issued an order calling choice program to educatefor more study on competition. The consumers approved.1196. HB 1956 allowed sec asked that the state move slowlyfull local exchange toward retail competition.competition.9/97. Utility advised legislature onrestructuring, presenting plan for a5-year rate freeze and fullstranded cost recovery.11197. sec issued a study onrestructuring and a model forcompetition. Draft modelrecommends a five-year transition tofull retail access. Phase I, from 1998to 2001, would involve rateexperimentation, unbundled rates andbills, a study of stranded costs,formation of an ISO and powerexchange, and pilot programs tostudy retail wheeling. Phase II, from2000 to 2002, would involvedecisionmaking for a competitiveindustry and utility plans forrestructuring. Full competitionwould be phased-in through 2005.2/98. HB 1172 and SB 688, toestablish a schedule for retailcompetition were introduced in theGeneral Assembly. HB 1172 passedby the House on 2117, and a Senatecommittee is scheduled to consider iton 3/2. HB 1172 would establish anISO and Regional Power Exchangeand wholesale competition byl/2001; transition to retailcompetition beginning 1/2002 andcompleted by 112004; and reasonablerecovery of stranded costs. SB 688recommends a 5-year transition planfrom 1998 to 2005, and has manysimilarities to HB 1172 (latter movestoward retail competition sooner).Working groups meet on strandedcost issues.NAWC 135 September 1998

Water ComparedAppendix AState Telecommunications Electricity Natural Gas[a] [b] [c]Washington 1985. Law allowed for 12/95. WUTC finished a year-long No legislative activitycompetitive classification. inquiry into retail wheeling and reported.restructuring issues, favoring a1989. Law allowed for gradual approach. 1989. Unbundled sales,alternative regulation.transportation, storage, and12/96. Regional study, standby service.4/94. ELI granted "Comprehensive Review of theswitched local authority(with full-carrier status).Pacific Northwest Energy System"completed and accepted by fourNorthwest governors.7/97. Pilot program began but waswithdrawn due to low supplierresponse.1997. Pilot programs underway,including open access and customerchoice for up to one-third ofload.Bill(s) introduced, but failed to pass.1/98. Bill introduced that focuses onconsumers protections in aderegulated market, such asdisclosure of rates, credit policies,generation resources, and emissions.West Virginia 1/1/89. lntraLATA toll 5/97. PSC formed a task force to No legislative activitycompetition allowed (dial- study restructuring; report is due reported.up basis). 10/97.No regulatory activity1995. Alternative 10/97. PSC staff report under review reported.regulation began. by task force.Utility's general1/98. A bill was introduced to the transportation service underlegislature to authorize the PSC to Rate Schedule GTSdesign and implement a deregulation provided.plan.NAWC 136 September 1998

Water ComparedAppendix AState Telecommunications Electricity Natural Gas[a] [b] [c]Wisconsin 9/1/94. lnterLA TA. 8/97. PSC submitted 7 -step work No legislative activityMCI/Sprint filed tariffs plan to the legislature that focuses on reported.but do not need PSC reliability and infrastructureapproval to change. Act improvements, and does not 6/96. Utility's two-year496 allowed local recommend retail access at least unti1 pilot for small customerexchange competition. 2000. A final decision is set for unbundling initiated.10/30/97.1994. Alternative 3/97. PSC stated it wouldregulation began. I 0/2/97. PSC report to Governor follow a measured approachrecommended: I) deregulation by to competition.7/1/96. lntraLATA toll 200 I; 2) more power lines tocompetition allowed increase transmission capacity; and PSC endorsed unbundling(IOXXX and I+) 3) fewer bureaucratic obstacles to basic distribution,building power plants.competitive supply,balancing peak-day supply,11/5/97. There may be no retail and enhanced servicescompetition in the state by 2000; (demand-side management,more study needed.; PSC will focus social programs, etc.). Noon improving the utilitydate given.infrastructure. Recommendationsincluded improving transmissionfacilities; removing barriers to opentransmission access; developing anISO; promoting construction ofmerchant plants; and promoting thedevelopment of renewable energyresources.1/98. A bill was introduced thatconsiders the reliability issues asproposed in the PSC final decision of10/30/97.137 September 1998

Water ComparedAppendix AfiState Telecommunications Electricity Natural Gas[a] [b] [c]Wyoming 1995. Law mandated 6/97. A joint committee of No legislative activityintraLATA toll Wyoming legislature began a series reported.competition for I+ equal ofhearings on restructuring. Anaccess by 1998. HB-176 analysis of electric industry 6/95. Conference onallowed full local restructuring in the state was issued unbundling (industrial andexchange competition. by the PSC. The paper stated that large commercial)Law allowed for further study was needed; legislation scheduled.alternative regulation was needed; stranded costs should berecoverable; and pilot programs 11/95. PSC released "The1996. Alternative should be developed. Development of aregulation began (caps).Competitive Model for theWhite paper on restructuring Future of Retail Natural Gascompleted and guidelines are being Services and Regulation inSource: Author's construct based on:proposed by PSC. Concludes thatfull recovery should be allowed.Wyoming," which focuseson the role of gas utilities inthe changing regulatoryenvironment and details keyissues to consider as thestate moves toward retailunbundling.2/96. Utility's unbundledservice program for corecustomers was approved.Only gas sales would beopened to competition; allother services wouldcontinue to be provided bythe utilitv.[a] National Regulatory Research Institute, Aspects a/Telecommunications Reform: Results of a Survey of StateRegulatory Commissions (February 1995), and additional information provided by NRRI; NationalAssociation of Regulatory Utility Commissioners, The State of Competition: A NARUC Report (1997); andFederal Communications Commission, Common Carrier Competition, Status of Local Switched Competition(as of March 21, 1996) ( http://www/fcc.gov/ccb.htrnl).[b] National Regulatory Research Institute, Survey on Electric Industry Restructuring Chttp;//www.nrri.ohiostate.edu/restruct'resttruct.htrnll,March 1998; and Energy Information Administration, U.S. Department ofEnergy, Status of State Electric Utility Deregulation Activity as of March 2, 1998Chttp://www.eia.doe.gov/cneaflelectricitvjchg str/tab5rev.htrnll.[c] American Gas Association, Providing New Services to Residential Customers: A Summary of PilotPrograms and Unbundling Initiatives, Updated November 21, 1997 (http://www.aga.com/gio/ib97-03.htrnll; and U.S. Energy Information Administration, Natural Gas 1996: Issues and Trends and NaturalGas 1995: Issues and Trends (http://www.eia.doe.gov/pub).NAWC 138 September 1998

Water ComparedAppendix BAppendix BRestructuring Timelines by IndustryNAWC 139 September 1998

Water ComparedAppendixBTable B-1Key Dates in Telephone Industry Restructuring1969 The Federal Communications Commission (FCC) grants MCI's 1963 application to provide point-topointprivate line service not requiring interconnection to the nationwide switched network.1971 The FCC issues an Order following its inquiry, known as Computer I, to investigate the growinginterrelationship between communications and computer technologies. The decision prohibitedcommon carriers from obtaining data processing service from its data affiliate.The commission also adopts a policy of free entry for new specialized common carriers meetingfinancial and technical standards, opening some segments of the industry to competition and raising theissue of appropriate interconnections.1974 The Department of Justice files an antitrust suit against AT&T, Western Electric, and Bell Labscharging monopolistic practices with regard to a broad variety of telecommunications equipment andservices and seeking the divestiture of AT & T.1978 The FCC's Computer II decision draws boundaries between communications and data processingofferings (thus distinguishing basic from enhanced services), deregulated enhanced and customerpremisesequipment (CPE), and allowed common carriers to unbundle and offer new CPE and enhancedservices. Embedded CPE would eventually be detariffed.1982 Federal Judge Harold H. Greene approves the Modified Final Judgment, which terminated thegovernment's antitrust suit against AT&T, Western Electric, and Bell Labs. Complying with the orderof divestiture, AT &T's reorganization plan created twenty-two operating companies, structured underseven regional holding companies.1985 The FCC issues its Computer JJiorder, requiring the implementation of "open network architecture"and the development of accounting procedures to allocate joint and common costs for AT&T and theregional holding companies1996 The Telecommunications Act of 1996 constitutes the most significant overhaul of U.S.telecommunications law since enactment of Communications Act of 1934. The ultima!~ goal of the lawis to allow any communications business to compete in any market.The FCC issues its first report and order pursuant to the act. The order takes steps to remove statutory,regulatory, and operational barriers to local telephone services competition by establishing a frameworkof minimum, national rules that will enable the states and the Commission to begin implementing thelocal competition. In addition, the Commission sets forth a methodology for states to use inestablishing rates for i.nterconnection and the purchase of unbundled elements (actual prices will be setby the states). The commission's decision is the first part of a trilogy of actions that will bringcompetition to the telecommunications market; the second and third parts are universal service andaccess charge reform.!997 The National Association of Regulatory Utility Commissioners (NARUC) supports states in suing theFCC over state jurisdiction for local telephone pricing.Source: Adapted from Charles F. Phillips, Jr., The Regulation of Public Utilities (Arlington, VA: Public UtilitiesReports, 1993), Chapter 15 and Federal Communications Commission, Local Competition Web Page,http://www.fcc.gov/ccb/local competition/welcome.htrnl (January 1998).NAWC 140 September 1998

Water ComparedAppendix BTable B-2Key Dates in Electric Industry Restructuring1978 The Public Utility Regulatory Policies Act facilitated the emergence of"qualif'yingfacilities"(QFs), nonutility small power producers and cogenerators. Small power producers mustgenerate electricity with at least 75 percent total energy input from renewable resources;cogenerators must meet various ownership, production, operating, and efficiency requirements.1990 The Clean Air Act indirectly affects electricity markets by inducing pollution control investmentsand fuel-shifting strategies, as well as creating a market for emission allowance trading.1992 The Energy Policy Act (EPACT) modified the Public Utility Holding Company Act (PUHCA) andcreated another class of nonutilities (in addition to independent power producers), exemptwholesale generators (EWG). EWGs are exempt from PUCHA 's corporate and geographicrestrictions. With this modification, public utility holding companies are allowed to develop andoperate independent power projects anywhere in the world.EPACT also amended the Federal Power Act such that any electric utility can apply to FERC foran order requiring another electric utility to provide transmission services (wheeling). Permitsowners of electric generating equipment to sell wholesale power to noncontiguous utilities. Alsostimulates the emergence of power brokers (not FERC regulated) and power marketers (regulatedby the FERC as wholesale buyers and sellers).1996 FERC Order 888 addresses equal access to the transmission grid for all wholesale buyers andsellers, transmission pricing, and the recovery of stranded costs.FERC Order 889 requires jurisdictional utilities that own or operate transmission facilities toestablish electronic systems to share information about their available transmission facilities.In response to these rules, utilities are proposing to form Independent System Operators (ISOs) tooperate the transmission grid, form regional transmission groups, and develop an open accesssame-time information systems (OASIS) to inform all competitors of the available capacity ontheir lines.Legislation in California and Rhode Island restructures the electricity industry; other states follow.Source: Adapted from Energy Information Administration), Financial Statistics of Major U.S. Investor-OwnedElectric Utilities 1995 (Washington, DC: Energy Information Administration), 12.NAWC 141 September 1998

Water ComparedAppendix BTTable B-3Key Dates in Natural Gas Industry Restructuring1978 Natural Gas Policy Act ends federal control over the wellhead price of "new" gas as of January I,1985, but keeps in place wellhead price controls for older vintages of gas. The laws of supply anddemand began to work again in the natural gas industry.1984 Federal Energy Regulatory Commission (FERC) Order 380 invalidates contract requirements thata gas utility pay a pipeline for a certain amount of gas even if it could not take the gas. This pavedthe way for utilities to buy gas directly from producers and marketing companies.1985 FERC Order 436 establishes a voluntary program that encourages natural gas pipelines to be "openaccess" carriers of natural gas bought directly by users from producers. This order begins theseparation (unbundling) of pipelines' merchant and transportation functions, and it initiates reformof the natural gas industry's regulatory structure.1987 FERC Order 451 provides the opportunity for sellers of gas from older wells to receive a moremarket-sensitive price.1988 FERC Order 490 allows abandonment of first-sales contracts and pipeline bypass.1989 Natural Gas Wellhead Decontrol Act lifts all remaining wellhead price controls on natural gas.FERC Order 500, an addendum to FERC Order 436, provides mechanisms for settling certaincontract liabilities incurred by pipelines that could not take all of the gas they had ordered fromproducers (take-or-pay contracts).1991 FERC Order 537 clarifies the authority of interstate pipeline companies to move gas "on behalf of'distributors or intrastate pipeline companies under NGPA Section 311. Section 311 transactionsdo not require blanket certificates if they pass certain FERC conditions.1992 FERC Order 636 orders interstate natural gas pipelines to "unbundle," or offer separately, their gassales, transportation and storage services. The goal of this order is to ensure that all natural gassuppliers compete for gas purchasers on equal footing. The order also mandates capacity release,electronic bulletin boards, and straight fixed-variable (SFV) rate design.1994 FERC issues several orders clarifYing the commission's gathering policy. FERC retains the right todisregard the separate corporate structures of pipeline companies and their gathering affiliates inthe event that a pipeline company abuses the pipeline-affiliate interrelationship.1995 The first residential natural gas customer choice programs are implemented. By 1997, local naturalgas utilities in 17 states and the District of Columbia had proposed and/or implemented suchresidential customer choice policies or pilot.Source: American Gas Association, http://www.aga.com/gio/ncdvnamics.html (December 1997); FederalEnergy Regulatory Natural Gas Information and Educational Resources http://www.naturalgas.org/; andhttp://www.naturalgas.org/Termdef.htm#380.NAWC 142 September 1998

Water ComparedAppendix CAppendix CStatus of Regulatory Alternatives for theTelephone IndustryNAWC 143 September 1998................ _________________________ ~

Water ComparedAppendixCTTable C-1Local Telephone Competition as ofMarch 21, 1996Status of Rules In Some Rules Rulemakings No CurrentCompetition Place In Place In Progress Rulemakings(Some CombinedInterim) WithAgreementsBetweenFirmsCompeting Firms Have California MassachusettsBegun Service Illinois MichiganMarylandNew YorkWashingtonFirms Have Been Arizona North Carolina Kansas ArkansasApproved For Operation Connecticut Pennsylvania MontanaFloridaTexasGeorgiaUtahIowaWisconsinOhioWyomingOregonTennesseeFirms Have Applied For Colorado Virginia Alabama AlaskaCertification Louisiana Delaware District ofHawaii ColumbiaIndiana IdahoKentucky MaineMinnesota MissouriMississippi North DakotaNewNebraskaHampshire NevadaNew Jersey South DakotaNew Mexico VermontOklahoma West VirginiaRhode IslandSouth CarolinaSource: Federal Communications Co=ission, Common Carrier Competition Report,Spring 1996. Released Aprill996.http://www.fcc.gov/Bureaus/Co=on Carrier/Reports/FCC-State Link/comp.htmlNAWC 144 September 1998

Water ComparedAooendix CTable C-2Performance-Based Regulation as of October 1997State Year Inflation Adjust- Revenue Service Length of Length Infraplanin Index ment profit Quality freeze on of plan structureeffect (%) sharing Penalty basic InvestservicesmentAlabama 1995 GDPPI 3.0 No Yes. Up 5 years No limit Noto .8%additionto adjustmentfactorAlaskaArizonaNoneNoneArkansas 1997 GDPPI 15%of No No 3 years No limit Nocurrentrates or.75%GDPPICalifornia 1994 GDPPI 5.0 Yes No 4 years 3 years NoColorado 1995 GDPPI up to Yes Yes 5 years 5 years No5.0Connecticut 1996 GDPPI 5.0 No Yes 2 years No limit NADelaware 1994 GNP PI 3.0 No No 2 years 4 years 250~ by1998District of 1996 GDPPI 3.0 No No 4 years No limit 4Mto edColumbiainfrastructureFlorida 1995 GDPPI 1.0 Yes, to No 6 years No limit No1998Georgia 1995 GDPPI 3.0 No No 5 years No limit 2 billionby2000HawaiiIdahoNoneAll services other than basic local exchange are deregulated.Illinois 1995 GDPPI 4.3 No Yes, up 4 years 4 years 3 billionto 2.0by2000Indiana 1994 None None No No 4 years 4 years 150M byCaps 1999NAWC 145 September 1998

Water ComparedAppendixC,...IITable C-2 (continued)State Year Inflation Adjust- Revenueplan in Index ment profiteffect (%) sharingServiceQualityPenaltyLength offreeze onbasicservicesInfra-structureInvestmentLengthof planIowa 1995 GDPPI 2.6 NoNo3 yearsNo limitCompanyspecificKansas 1990 None None NoFreezeNo7 years7 years 160M(renew- first 5,able up toafter 5) 64Myrnext2Kentucky 1995 GDPPI 4.0 NoNoFrozenpendinguniversalservicereformNo limitNoLouisiana 1996 GDPPI 2.5 NoYes5 yearsNo limitNoMaine 1995 GDPPI 4.5 NoYesNo5 years NoMaryland 1996 GDPPI 3-year NoaverageCPINo4 yearsNo limitNoMassachusetts 1995 GDPPI 4.1 NoYes6 years6 years NoMichigan 1995 CPI 2 NoNoNoNo limitNoMinnesota 1996 None None NoFreezeYes3 yearsCom-panyspecificCompanyspecificMississippi 1996 None None NoFreezeYes3 years4 years Yes butcompanyspecificMissouri 1997 NA NA NAPCNANANANAMontanaNoneNebraska 1987 None None NoDeregulationNoNoneNo limitNoneNevada 1995 None None NoCaps-Yes5 years5 years CompanyspecificNAWC 146September 1998

Water ComparedAppendixCTable C-2 (continued)State Year Inflation Adjust- Revenue Service Length of Length Infraplanin Index ment profit Quality freeze on of plan structureeffect (%) sharing Penalty basic InvestservicesmentNewHampshireNoneNew Jersey 1993 GNP PI 2.0 Yes Yes 6 years 6 years !Billion+by1999New MexicoNoneNew York 1995 GDPPI- 4.0 No Yes 4 years 4 years 150MYrNorth Carolina 1996 GDPPI 2.0 No No 3 years No limit NoneNorth Dakota 1993 41.67% of GNPPI No No None No limit Noneor annual % changein GNPPI-2.75%Ohio 1996 GDPPI 3.0 No Yes 4 years 4 years 18Mover4yearsOklahomaOregonNonePrice-cap plan terminated in April 1996 because of poor service quality; company is nowunder rate base/rate-of-return regulation.Pennsylvania 1994 GDPPI 2.93 No No 5 years 5 years Universalbrmidbandby2015Rhode Island 1996 CPI Lesser No Yes None 5 years NoofCPIor5%South Carolina 1996 GDPPI 2 No No 4 years No limit NoSouth Dakota 1996 None None No Yes 3 years No limit NoCapsTennessee 1995 GDPPI Lesser No No 4 years No limit Noof.5GDPPIorGDPPI-2%NAWC 147 September 1998

Water ComparedAppendix CTable C-2 (continued)State Year Inflation Adjust- Revenue Service Length of Length Infraplanin Index ment profit Quality freeze on of plan structureeffect (%) sharing Penalty basic InvestservicesmentTexas 1995 CPI Set by No No 4 years No limit Yes-PUCdigitalupgradesby 2000UtahVermontNoneNoneVirginia 1995 GDPPI .5 of No No 6 years No limit NoGDPPIWashingtonNoneWest Virginia 1995 CPI None No No 3 years 3 years 350Mover 5yearsWisconsin 1994 GDPPI 3 No No 3 years 5 years 700Mover 5yearsWyoming 1996 None None No Yes No No limit NoCapsSource: Survey by Dr. Nancy Zearfoss, National Regulatory Research Institute, October 1997.NAWC 148 September 1998

Water ComparedData SourcesData SourcesPage I Title2 Table 1-1. Investor-OwnedIndustry Profiles (1996)10 Capital Intensity:Ratio of Utility Plant to Revenues(1995 and 1996)10 Average Service Life ofWaterAssets (Florida AdministrativeCode)11 Recent Trend in Ratio ofElectric Plant to Revenue ( 1991to 1996)II Recent Trend in Ratio ofWater Plant to Revenue (1991 to1996)12 Ratio ofNet Utility Plant toConnections (NA WC 1986 and1996)12 Scale Economies in WaterTreatment13 Economies of Scale in WaterSupply: Total Assets (NAWC1996) •13 Economies of Scale in WaterSupply: Operations andMaintenance Expense (NA WC1996)15 Electric Utility Plant in Service(1996)15 Water Utility Plant in Service:American Water WorksCompany, Inc. (1997)16 Recent Trends in Electric UtilityPlant Additions (1991 to 1996)16 Natural Gas Industry: Miles ofPipeline and Main ( 1970 to 1996)16 Natural Gas IndustryConstruction Expenditures ( 1996)SourceTelephone. Federal Communications Commission, Statistics ofCommunications Common Carriers, 1996/1997 Edition (1997).Electric. Energy Information Administration, Financial Statistics ofMajor U.S. Investor-Owned Electric Utilities 1996 (1997). NaturalGas. American Gas Association, Gas Facts 1995 (balance sheet)and 1996 (income statement) (1996 and 1997). Water. NationalAssociation of Water Companies, 1996 Financial Summary forInvestor-Owned Water Utilities (1997).Same as above (industry profiles) plus U.S. EnvironmentalProtection Agency, Community Water System Survey (1997).Florida Administrative Code, Chapter 25-30, Supplement No. 179.Energy Information Administration, Financial Statistics of MajorU.S. Investor-Owned Electric Utilities 1996 (Washington, DC:EIA, 1997).National Association of Water Companies, Financial Summary forInvestor-Owned Water Companies (various years).National Association of Water Companies, Financial and OperatingData for Investor-Owned Water Utilities (1986 and 1996).U.S. Environmental Protection Agency, Affordability of the 1986SDWA Amendments to Community Water Systems (1993).National Association of Water Companies, Financial and OperatingData for Investor-Owned Water Utilities (various years).National Association of Water Companies, Financial and OperatingData for Investor-Owned Water Utilities (various years).Energy Information Administration, Financial Statistics of MajorU.S. Investor-Owned Electric Utilities 1996 (1997). Does notinclude CWIP, $20 billion in nuclear fuel, and other adjustments.American Water Works Service Company, Inc., 1997 AnnualReport. Excludes wastewater plant, CWIP, and accumulateddepreciation.Energy Information Administration, Financial Statistics of MajorU.S. Investor-Owned Electric Utilities 1996 (1997).American Gas Association, Gas Facts 1996 (1997), Chart 5- I.American Gas Association, Gas Facts 1996 (Arlington, VA: AGA,1997).NAWC149 September 1998!I)

i Iiil:Water ComparedData SourcesIIII iData Sources (continued)Page Title17 Current Energy Plant Additions(1996)17 Allocation of Current CapitalExpenditures in the WaterIndustry (1995)18 Local Telecommunications Plantin Service (1996)18 Total TelecommunicationsFiberoptic Cable and CopperWire (1988 to 1996)18 Annual Private CapitalExpenditures for UtilityStructures and Equipment (1995)20 Investor-Owned Electric Industry:Expenses by Function (1996)20 Natural Gas Industry:Expenses by Function (1996)20 Local Telephone Industry:Expenses by Function (1996)20 NA WC Water Utilities:Expenses by Function (1996)26 Investor-Owned ElectricityIndustry: Customers, Sales,Revenues (1995)26 Natural Gas Industry:Customers, Sales, Revenues(1996)26 Total Water Industry:Customers, Sales, Revenues(1995)26 NA WC Water Industry:Customers, Sales, Revenues(1995)27 Local Telephone Access Lines(1996)27 Telecommunications Carriers:Number and Revenues (1996)27 Telecommunications IndustryRevenues (1996)29 Number of Telephone Lines(1884 to 1996)29 Telephone Dial-EquipmentMinutes and Calls (1980 to 1996)30 Historical and Forecast Trends inElectricity Sales by Sector (1970to 2020)SourceEnergy Information Administration, Financial Statistics of MajorU.S. Investor-Owned Electric Utilities 1996 (1997). Reports"additions." American Gas Association, Gas Facts 1996, Section 15(1997). Reports "construction expenditures" for all companies.U.S. Environmental Protection Agency, Community Water SystemSurvey (1997).Federal Communications Commission, Statistics ofCommunications Common Carriers, 1996/1997 Edition (1997).Federal Communications Commission, Statistics ofCommunications Common Carriers, 1996/1997 Edition (1997).U.S. Department of Commerce, Annual Construction Expenditures1995 (April 1997), Table 4.Energy Information Administration, Financial Statistics of MajorU.S. Investor-Owned Electric Utilities 1996 (1997).American Gas Association, Gas Facts 1996 (1997), Table 12-6.Based on data for distribution, transmission, integrated, andcombination companies.Federal Communications Commission, Statistics ofCommunications Common Carriers, 1996/1997 Edition (1997).National Association of Water Companies, 1996 Financial andOperatin_g Data for Investor-Owned Water Utilities (1997).Energy Information Administration, Financial Statistics of MajorU.S. Investor-Owned Electric Utilities 1996 (1997), Table 15.Energy Information Administration, Natural Gas Annual, 1996.Revenues calculated from total sales and average prices.U.S. Environmental Protection Agency, Community Water SystemSurvey (1997).National Association of Water Companies, 1996 FinancialSummary for Investor-Owned Water Utilities (1997).Federal Communications Commission, Statistics ofCommunications Common Carriers, 1996/1997 Edition (1997).Federal Communications Commission, Statistics ofCommunications Common Carriers, 1996/1997 Edition ( 1997).Federal Communications Commission, Statistics ofCommunications Common Carriers, 1996/1997 Edition (1997).Federal Communications Commission, Statistics ofCommunications Common Carriers, 1996/1997, Table 6.10.Federal Communications Commission, Statistics ofCommunications Common Carriers, 1996/1997.Energy Information Administration, Annual Energy Review 1996(1970 to 1996 data) and Annual Energy Outlook 1998 (1997 to2020 forecast).NAWC150 September 1998

Water ComparedData SourcesData Sources (continued)Page Title Source30 Historical and Forecast Trends in Energy Information Administration, Annual Energy Review 1996Natural Gas Consumption by (1970 to 1996 data, adjusted with GDP implicit price deflator) andSector (1970 to 2020)Annual Energy Outlook 1998 (1997 to 2020 forecast).31 Per-Capita Telephone Dial- Federal Communications Commission, Statistics ofEquipment Minutes and Calls Communications Common Carriers, 1996/1997.(1980 to 1996)31 Trends in Per Capita Energy Use Energy Information Administration, Annual Energy Review(1947 to 1996) (hnp://tonto.eia.doe.gov/aerL).32 Total Daily Water Withdrawals in U.S. Geological Survey Estimated Use of Water in the Unitedthe U.S. (1950 to 1995)States in 1990 (1993) and Preliminary Estimates of Water Use inthe United States, 1995 (1997).32 Daily Per Capita Wa~er U.S. Geological Survey Estimated Use of Water in the UnitedWithdrawals in the U.S. (1950 to States in 1990 (1993) and Preliminary Estimates of Water Use in1995) the United States, 1995 (1997).33 Single Family Water Use Duane D. Baumann, et al. Urban Water Demand Management and(Metropolitan Water District of Planning. (NY: McGraw-Hill, Inc., 1998), p. 53.Southern California, 1993)34 Annual Household Energy Usage U.S. Energy Information Administration, Household Energy and(1978 to 1993) Consumption Expenditures (1993). Averages used for missingdata years.34 Residential Water Use per American Water Works Service Company, Inc. Based on allConnection: American Water companies. Not weather-adjusted.Works Service Company, Inc.(1980 to 1997)35 Annual Household Expenditures Bureau of Labor Statistics, Consumer Expenditure Surveyfor Utilities: Family of Four (www.bls.gov).(1995)36 Utilities as a Percentage of Total Bureau of Labor Statistics, Consumer Expenditure SurveyHousehold Expenditures: Family (online).of Four (1995)36 Annual Household Expenditures Bureau of Labor Statistics, Consumer Expenditure Surveyfor Utilities by Income: Family (online).ofFour (1995)37 Consumer Price Indexes for U.S. Bureau of Labor Statistics, Consumer Price SurveyUtilities (1970 to 1996, 1982- (www.bls.gov).1984=100)38 Telephone Service: Average Federal Communications Commission, Statistics ofMonthly Residential and Business Communications Common Carriers, 1996/1997, Tables 8.4 andRates ($1996) 8.5.39 Historical and Forecast Trends in Energy Information Administration, Annual Energy Review 1996Real Electricity Prices by Sector (1970 to 1996 data, adjusted with GDP implicit price deflator) and(1970 to 2020, $1996) Annual Energy_ Outlook 1998 (1997 to 2020 forecast).39 Historical and Forecast Trends in Energy Information Administration, Annual Energy Review 1996Real Gas Prices by Sector (1970 to 1996 data, adjusted with GDP implicit price deflator) and(1970 to 2020, $1996) Annual Energy Outlook 1998 (1997 to 2020 forecast).40 Trends in Real Electricity Costs Energy Information Administration, The Changing Structure of(1986 to 1995) the Electric Power Industry: An Update (Washington, DC: EIA).http://www.eia.doe.gov/cmeaf/electricity/chg_ str/chapter9.htmlNAWC 151 September 1998iii II

Water ComparedData SourcesData Sources (continued)Page I TitleSource41 Total 20-Year Infrastructure Need U.S. Environmental Protection Agency, Drinking Water(1995) Infrastructure Needs Survey (1997).41 Current SDWA and SDWA- U.S. Environmental Protection Agency, Drinking WaterRelated Need (1995) Infrastructure Needs Survey (1997).41 Current Assets and Projected U.S. Environmental Protection Agency, Community WaterNeed for the Water Industry System Survey (1997) and U.S. Environmental Protection(1995) Agency, Drinking Water Infrastructure Needs Survey (1997).46 Water Systems in the United U.S. Environmental Protection Agency, Community WaterStates (1995) System Survey (1997).46 Water Systems and Service Environmental Protection Agency, Community Water SystemConnections (1995) Survey (1997).47 Historical Pattern of Ownership M. N. Baker, "Water-Works," in Edward W. Bemis, ed.,in the Water Industry (1800 to Municipal Monopolies (1899).1896)47 Privately Owned Water Systems U.S. Environmental Protection Agency, Community Waterby Type (1995) System Survey (1997).48 Electric Utilities: Ownership, Energy Information Administration, Electric Sales and RevenueSales, and Revenues (1996) 1996 (1997).48 Community Water Systems: U.S. Environmental Protection Agency, Community WaterPublic v. Private Ownership System Survey (1997)(1995)56 Gas Delivered for the Account of Energy Information Administration, Annual Energy Review 1996,Others (1986 to 1995)Table 6.5 (http://www.eia.doe.gov/emeu/aer/contents.html).56 Monthly Natural Gas Prices Energy Information Administration, Natural Gas Monthly,(1994 to 1997) December 1996 and November 1997. Table 4.57 Industrial Natural Gas Delivered Energy Information Administration, Natural Gas Monthly,On Account of Others (1996) November 1997 (http://www.eia.doe.gov/fuelnatgas.html).Indicates sales not on system.57 Commercial Natural Gas Energy Information Administration, Natural Gas Monthly,Delivered On Account of Others November 1997 (http://www.eia.doe.gov/fuelnatgas.html).(1996) Indicates sales not on system.60 Economics of Wheeling: Estimates prepared by Eugene H. Owen, Baton Rouge WaterIllustration of Transmission Costs Company (Presented at the Annual SEARUC Conference, Juneas a Percentage of Wholesale 1998).Commodity Costs by Sector (I 00-mile transmission)60 Economics of Wheeling: Estimates prepared by Eugene H. Owen, Baton Rouge WaterIllustration of Distance at Which Company (Presented at the Annual SEARUC Conference, JuneTransmission Costs Equal 1998).Commodity Costs (miles)62 Market Share of Toll Service Federal Communications Commission, Statistics of CommonRevenues (1984 to 1996) Carriers, 1996/1997. Table 1-5.62 Interstate Telephone Service Federal Communications Commission, Carrier Locator: InterstateProviders (1997) Service Providers (1997).63 Telecommunications Operating Federal Communications Commission, Statistics ofRevenue by Service Category Communications Common Carriers, 199611997.(1970 to 1996)NAWC 152 September 1998

Water ComparedData SourcesData Sources (continued)Page Title66 Employment by Utility Sector(1947 to 1997)74 Electric Restructuring PolicyInitiated or Pending (1997)74 Natural Gas UnbundlingInitiatives (1997)SourceU.S. Bureau of Labor Statistics, Current Employment Statistics(www.bls.gov).Appendix A.Appendix A.NAWC153 September 1998III

Water ComparedData Sources[blank page JNAWC 154September 1998

-~------Water ComparedGlossaryGlossary on RestructuringABMs. Aggregators, brokers, andmarketers.Access. Ability of user to enter a givennetwork.Access charge. Charge levied oninterexchange carriers and localsubscribers to compensate local exchangecarriers for use of local exchange facilities.Funds collected from access charges areused to offset fixed (non-traffic-sensitive)costs incurred by local telephonecompanies. There are three majorcategories of access charges: specialaccess, subscriber line charges, andswitched access.Acquisition adjustment. The differencebetween the price paid to acquire anoperating unit or system of a utility and therate base of the acquired property.Aggregation. Consolidation of thedemand needs of a group of customers inorder to exercise purchasing power onutility markets.Aggregators. For electricity, brokers forsales of bulk power from generators to agroup of electricity customers.A voided cost. The cost an electric utilitywould otherwise incur to generate power ifit did not purchase electricity from anothersource. Also the basis of the rate that mustbe paid to qualifying facilities (QFs) forpurchased power under PURP A.Bilateral contract. A contract between aproducer and a consumer.Bundled rate. Several services combined· into one tariff offering for single charge.Buyback rates. Rates paid to electricutility customers who produce their ownelectricity in excess of their needs.Bypass. Self-supply or supply througharrangements from suppliers other than thelocal utility provider, the latter of whichmight require use of the utility'stransmission and/or distribution facilities.City-gate. The point at which natural gasis transferred from a long-distance pipelineto a local gas distribution company (LDC).Cogeneration. Production of electricityfrom steam, heat, or other forms of energyproduced as a byproduct of anotherprocess.Combination utility. A utility providingmore than one product, such as electricityand natural gas.Comparably efficient connection.Requirement that allows non-telephonecompanies to have ari equal opportunity toutilize the network for a specific service.Comparably effiCient interconnection.Requirement that allows companies notaffiliated with a local exchange carriertelephone company to have an equalopportunity to utilize the network for aspecific service.Competition transition charge. Amechanism used to collect uneconomicutility costs. It is a "non-bypassable"NAWC 155September 1998

Water ComparedGlossaryobligation placed on ratepayers throughlegislation. (Kenneth Rose, NRRI)Competitive access provider (CAP).Teleconuuunications companies thatprovide access to interexchange carriersfrom large end-users, bypassing the localexchange carriers.Competitive local exchange carrier(CLEC). One of the new breed oftelecommunications companies who arebeginning to be authorized by stateregulatory agencies to offer switched localexchange service in competition with theincumbent local exchange carrier (LEC).Contestable market. Markets that havecharacteristics of monopoly or oligopolybut relative freedom of exit or entry(especially in terms oflegal and regulatoryinstitutions) so that potential competitionprovides a reasonably effective check oneconomic behavior.Contract carriage. Transportation ofnatural gas by a pipeline that does not ownthe gas. Gas pipelines traditionally haveacted as wholesalers, buying gas fromproducers and reselling it to local utilitiesor industrial users. Under contractcarriage, a gas user can buy gas directlyfrom a producer and contract with apipeline to ship it.Contract carrier. A transport companythat offers services to other parties undercontract.Core customers. Customers that arecaptive to a single utility supplier becausethey have no competitive options.Cramming. Services or enhancementsprovided without the recipient'spermiSSIOn.Cross-subsidization. Practice of usingrevenues generated from one (oftenregulated) product or service to supportanother (often unregulated) one.Disaggregation. Separation of verticallyintegrated utility functions (that is,generation, transmission, and distribution)or separation of formerly bundled utilityserv1ces.Direct access. Ability of consumers todirectly arrange service from producers.Distributed resources. Small incrementsof energy or other resources (includingconservation), that are not centrallyproduced and considered attractive forcost, ancillary services, and loadmanagement purposes.Divestiture. U.S. District Judge HaroldGreene's order that divided the assets ofAT&T into the seven regional holdingcompanies and twenty-two local telephoneoperating companies, with AT&T retainingcontrol over long-distance, manufacturing,and research capabilities. The modifiedfinal judgment governs activities of theoperating companies and one of itsprimacy directives is nondiscrimination.Elasticity. The percentage change in onevariable relative to the percentage changein another variable.End use. Use of a utility product for aparticular purpose by its ultimate customer.Energy services provider. A companythat provides energy and related services,NAWC 156September 1998

Water ComparedGlossaryincluding demand-management servicesand aggregation services, to consumers.Exempt telecommunications company(ETC). A wholly-owned subsidiary of anelectric or gas holding company that offerstelecommunications services. Formationof an ETC usually involves a merger, jointventure, or strategic alliance with atelecommunications company. The 1996Telecommunications Act removed federalbarriers to entry for such entities. (NRRI)Extended area service. The result ofbroadening the telephone service area inwhich no long distance charges areassessed. Usually applied to a geographicarea within a "community of interest."Economic development rate. Specialdiscount rates offered to attract newbusinesses to the area or to entice existingbusinesses to expand.Eminent domain. Right of thegovernment and other entities to takeprivate property for public use.Energy Policy Act of 1992. Federallegislation that removed restrictions onownership of wholesale electric generatingfacilities and limitations on access totransmission of wholesale electric power.Enhanced telephone services. Moreteclmologically advanced telephoneservice, including voice messaging,protocol conversion, data base services,etc.EPA. Enviromnental Protection Agency.Established in 1970 by the NationalEnviromnental Policy Act of 1969.Equal access. Generally, the principle thatall legitimate interests must have the sameopportunity to access a given network (forexample, local exchange companynetworks).Facilities-based carrier. Telephoneutility that owns its own transmissionfacilities.FCC. Federal CommunicationsCommission. Established in 1934 by theFederal Communications Act.FERC. Federal Energy RegulatoryCommission. Established in 1977.FERC Order 436. Issued October 1985to encourage freer movement of naturalgas through pipelines. Pipeline companiesmust offer the same contract carriage termsto all customers in order to take advantageof special FERC blanket certificates ofautomatic approval.FERC Order 636. Issued in 1992 to openthe natural gas pipeline industry tocompetition by requiring open access totransportation.FERC Order 888. Rule implementing ·the 1992 Energy Policy Act provisions foropen access to electricity transmissionlines. Addresses equal access to thetransmission grid for all wholesale buyersand sellers, transmission pricing, and therecovery of stranded costs. (EnergyInformation Administration)FERC Order 889. Rule implementingthe 1992 Energy Policy Act provisions foropen access to electricity transmissionlines. Requires jurisdictional utilities thatown or operate transmission facilities toestablish electronic systems to shareNAWC 157September 1998

Water ComparedGlossaryinformation about their availabletransmission facilities. (EnergyInformation Administration)Firm power. Delivery of utility serviceon a non-interruptible, always availablebasis. A utility must supply its firm powercustomers whenever they demand it,despite conditions.Firm wheeling. Transmission ofelectricity for another party that is notsubject to interruption except forcircumstances beyond the transmittingutility's control.Franchise. A privilege to do business thatmay be limited to specified period of timeand/or geographical area and may or maynot be exclusive.Gas inventory charge. Charge assessedby a pipeline for standing ready to servecustomers. Designed to cover all take-orpayliabilities and other costs of gas supplynot recovered through the commoditycharge.Grid. A transmission system forinterconnecting producers.Hedging. The difference between aprearranged price and the sum of (a) thecash-market city-gate price as quoted by acommodity price index, (b) a previouslyagreed upon retail wheeling markup, and(c) distribution company transportationcharges relevant to the particularconsumer. (IURC Regflex report)Incentive rates. Rates used to inducedesirable usage (for example, economicdevelopment rates) or timing of usage (forexample, time-of-day rates).Incentive regulation. Methods ofeconomic regulation, including but notlimited to the use of price caps, designedto provide utilities with incentives forefficiency, cost control, and/or otherdesirable activities.Independent power producer (IPP). Asdefined b y FERC under PURP A, agenerating entity, other than a qualifyingfacility (QF) and not a utility, that is: (1)unaffiliated with the utility purchaser and(2) lacks significant market power. Thefacility must not be in the utility's ratebase.Independent system operators (ISO).Proposed entities to operate the electricitytransmission grid on a nondiscriminatorybasis. (Energy InformationAdministration)Integrated utility. A utility providingmore than one service or function, such astransmission and distribution.Interconnection. The connection of twoor more systems. It has more precisemeaning for different industries. (depending on the nature of network).Interruptible rates. Special rates forenergy consumers who are willing to havetheir energy delivery service interrupted bythe utility when necessary. This is a lowpriorityservice with generally lower unitrates.Joint use. More than one entity uses anentity's property or facilities, such asutility poles used for telephone lines,usually for compensation to the owner.Lifeline rates. As approved by the FCC,customers meeting certain eligibility tests,NAWC 158September 1998

Water ComparedGlossarymay apply to have an amount equal to thesubscriber line charge deducted from theirmonthly bills. Also used generically todesignate special rate plans offering verybasic utility service at low rates to eligiblecustomers. May also be called "baseline"rates.Local access and transport area(LATA). Contiguous local exchange areasthat include every point served by a localexchange telephone company within anexisting community of interest and thatserve as the dividing line for the allocationof assets and liabilities between longdistancecompanies and local exchangecompanies (LECs).Local distribution company. A naturalgas utility that generally buys gas from apipeline company to sell to end users.Local exchange carrier. Local telephonecompany.Local exchange carrier (LEC).Company that offers local telephoneservice; it also provides access to itsnetwork to long-distance companies andother legitimate parties.Market-based carrier. Prices fixed in thefree market under conditions of purecompetition.Market center. According to PERC, anareas where pipelines interconnection andthere is a reasonable potential fordeveloping a market institution thatfacilitates the free interchange of gas.(IURC Regflex report)Market power. The presence of acompetitor in a marketplace, oftenmeasured by share of sales revenues.Market retention rates. Special discountrates offered to large users to keep themfrom leaving the system.Natural Gas Policy Act of 1938.Provides for the regulation of interstatesales for resale and transportation of gas.In 1954, the Supreme Court interpreted theNGA to cover interstate wellhead sales ofgas.Network industry. An industry in whichproviders are highly interconnected acrossexpansive geographic areas.Nondiscrimination. In general usage,reasonably equal treatment for all.N ondominant carrier. Service providerthat does not dominate its particularmarket. In many states, a nondominantcarrier is subject to less stringentregulation than the dominant carrier.Obligation to serve. The legal obligationto provide service on a nondiscriminatorybasis within a service territory.Onsystem sales. Natural gas sales tocustomers where the delivery point is apoint on, or directly interconnected with, atransmission, storage, and/or distributionsystem operating by a reporting company.(Energy Information Administration)Open access same-time informationsystems (OASIS). Proposed system forinforming all competitors of the availablecapacity of electricity transmission lines.(Energy Information Administration)Open network architecture.Telecommunications network designallowing more freedom of access.NAWC 159September 1998

Water ComparedGlossaryOpen access transporter. In the naturalgas )ndustry, an interstate pipeline that hasagreed to transport for other on anondiscriminatory basis.Performance-based regulation. Analternative to traditional rate base/rate-ofreturnregulation that focuses on meetingperformance objectives rather thancovering the cost of service; includes pricecaps, yardsticks, and profit -sharing.Public Utilities Holding Company Act of1935. Prevented electric and gas utilities!rom using complex corporate structures toevade regulatory oversight.Public Utility Regulatory Policies Act.Part or the National Energy Act of 1978, itrcq u ires State regulatory agencies toconsider a variety of issues affectingelectric and gas utility customers. Theintent was to establish standards andpolicies that promote energy conservation,encourage efficient use of facilities andresources, and provide equitable rates for(:{)nsun1ers.Pool capacity. Capacity provided by apower pool member in order for themember to meet installed or reservecapacity obligations.Pooling. Different utilities share theirphysical plants or resources to increasetheir efficiency and conservation energy.Power brokers. Participants in emergingenergy markets who do not take ownershipof electricity and are not regulated byFERC. (Energy InformationAdministration)Power marketers. Participants inemerging energy markets who buy and sellwholesale electricity and are regulated byFERC. They generally do not possessgeneration or transmission facilities or sellto retail customers. (Energy InformationAdministration)Power pool Two or more interconnectedelectric systems planned and operated tosupply power in the most reliable andeconomical manner for their combinedload requirements and maintenanceprograms.Preferential tariffs or rates. A tariff orrate by which a specified class ofcustomers is given special treatment, forexample a "lifeline" rate top provide verybasic service to low-income customersPrice caps. Relatively recently devisedmeans of regulating utility rates as analternative to rate of return regulation. Theprices the utility charges are capped at acertain level, allowing the utility to earn alarger rate of return if it cuts expenses,increases productivity, etc.Qualifying facility. Cogenerator whosatisfies section 20 I of PURP A. Amongother things, the majority equity ownermust not be primarily engaged ingeneration or sale of electric power, thefacility also must meet certain size, fueluse,and fuel-efficiency requirements.Regulatory compact. The implied longtermsocietal agreement by which utilitiesare granted the right to provide service inexchange for meeting regulatory standardsand requirements for rates and services.Power exchange. A market for tradingpower.NAWC 160September 1998

Water ComparedGlossaryReseller. In general, any entity thatpurchases goods or services to in turn sellthe same goods or services to a third party.Restructuring. Fundamental changes inthe way utility services are provided interms of the number of providers, marketconditions, and regulatory frameworks.Retail wheeling. Transmission ofelectricity to a customer who haspurchased the electricity from anotherutility outside the transmitting utility'sterritory.Retention rates. Rates used to inducecustomers to stay on the utility system.Securitization. Creation of a financialinstrument that is backed by a revenuestream pledged to pay the principal andinterest of that security. For electricutilities, the main purpose for this deviceby is to reduce uneconomical costs with anup-front, lump-sum payment from the saleof a security or bond. Securitizationrequires legislation to create a transferableproperty right to collect the utility'suneconomical cost from ratepayers througha competition transition charge. (NRRI)Separation. Process by which a utility'sexpenses and investment in plant aredivided between interstate operations andintrastate operations.Slamming. Changing a service from oneprovider to another without the recipient'spermission.Small power producer. One that hasproduction capacity of no more than 80megawatts and uses biomass, waste, orrenewable resources (such as wind, water,or solar energy) to produce electric power.Standby service. A class of servicewherein the utility does not serve thecustomer on a regular basis, but only whencalled upon to do so by the customer.Stranded investment (or costs).Investments or expenditures made byutilities that become unrecoverable duringthe shift from regulated to based-services.Also called stranded assets or sunk costs.Switching. The process by which entitiesconnect with and disconnect from eachother. Specific definitions vary byindustry.Take-and-pay contract. Energy salescontract that requires payment only forenergy actually delivered.Take-or-pay contract. Energy salescontract that requires payment for a givenamount of energy whether the customertakes it or not.Transmission. The movement or transferof electric energy in bulk. Ordinarily,transmission ends when the energy istransformed for distribution to the ultimatecustomer.Ultimate customer. The end user of theutility product.Unbundling. Separation of individualutility services (including generation,transmission, distribution, and meteringand billing) and corresponding prices.Universal service fund. Fund designed tooffset high operating costs of smallertelephone companies servicing customersin low traffic, low density areas. Generallyfunded by a small surcharge.NAWC 161September 1998

Water ComparedGlossaryValue-of-service pricing. Method ofpricing that considers the perceived valueof the service and not simply the cost ofthe service.Vertical integration. The utility companyperforms all major utility services for itscustomers, including production,transforming, transmittal, and distribution.Monopoly utilities in the past frequentlyprovided vertical service; with increasingcompetition, rates for component parts ofservices are being disaggregated (orunbundled) and offered separately.Wellhead price. The price received by theproducer of oil or gas for sales takingeffect at the oil or gas well (that is, thesource of supply).Wheeling. Movement of electricity on thetransmission system of one utility forsomeone other than that utility;transmission for others.Wholesale wheeling. Movement ofelectricity on the transmission system froma power generator to a reseller.Source: Adapted in part from National Association of Regulatory Utility Commissioners, NARUC Compilationof Utility Regulatory Policy, 1994-1995. Washington, D.C.: NARUC, 1996. See also, "The Language ofElectric Industry Restructuring," Restructuring Facts (Rosemead, CA: Edison International, July 1997) andIndiana Regulatory Utility Commission, Regflex Report (http://www.ai.orgliurc/report!regflex/gas/m-9.htrnl).The author gratefully acknowledges the assistance of Mr. Robert Burns, National Regulatory Research Institute,who reviewed a draft of this glossary.NAWC 162 September 1998