Montana should learn from its expensive deregulation lessons

With the announced layoffs of Touch America’s remaining employees and planned liquidation of its assets through bankruptcy, the painful Montana Power Co.-Touch America death watch is almost over.

By Bob Rowe
chairman, Montana Public Service Commission in HeadwatersNews.org

We’re still living with some of the results:

* Loss of "rate base" control over MPC’s dams and coal plants, which indisputably is leading to higher electricity prices for small and medium-sized Montana customers, and diminished control over Montana’s energy future.

* A weakened utility infrastructure, on which customers depend for essential service.

* The loss of good jobs by MPC and Touch America employees who worked hard to provide good service in tough conditions.

* A tremendous loss in value to Montana shareholders in MPC/Touch America.

Have we learned anything from these expensive lessons? Based on my 10 years as a public service commissioner (much of it spent paddling upstream on these issues), here are a few things I would suggest we learn for the future. These should be agreed upon by those on all sides of the acrimonious debate over competitive wholesale and retail energy markets.

Regulation and competition are not mutually exclusive. Efficient markets have good rules. The challenge is to develop rules that are appropriate for particular markets, and for how those markets are developing. (I’m always on the lookout for dumb economic regulation, rules or practices that are too heavy-handed or have just outlived their usefulness.)

What’s the first thing countries around the world do when they privatize state-run monopolies or make a commitment to promoting infrastructure investments? They create an independent, professional, transparent regulatory agency. Right along with privatization, competitive markets and infrastructure development, economic regulation is busting out all over the globe.

Effective regulation promotes economic development and well-being; it doesn’t harm it. MPC confused its self-interest with Montana’s interest, and argued that utility regulation is anti-business. It isn’t. Businesses are utility customers, too. Effective regulation serves the interests of utility customers. It also creates a setting where regulated companies can plan and spend capital over the long term. Investors may make a quick killing in more speculative ventures, but they now recognize the yellow brick road often ends at a cliff. This is a lesson the rest of the world learned from us, but which we too often forget.

Affiliate interest transactions need to be watched. Most state public service commissions have the authority in law to adopt "affiliate interest" rules, preventing a company from shifting risk from its unregulated affiliate to its regulated core. The Montana PSC took a good swing at this about 10 years ago, claiming we had the general power to adopt these rules. MPC led the opposition, arguing what? That’s right: The rules would be anti-business. In fact, had the PSC adopted such rules, it would have forced MPC to think through and document its transactions much more carefully.

Compare this with effective regulation in Oregon: Enron owns Portland General Electric (PGE). The Oregon PUC used its affiliate interest and sales review authority to build a fence around PGE, and the utility affiliate looks as if it will escape unharmed by the sins of its parent Enron.

Now, NorthWestern is struggling to get out from under the burden imposed by its affiliates. The PSC issued a very tough order in January, spelling out what we expect NorthWestern to do to get its house in order. NorthWestern has been working hard to comply. Still, we’re trying to get the horse back in the barn because the barnyard didn’t have a fence. Customers and NorthWestern alike would have been better off if it had been forced to justify the relationships with the affiliates.

The PSC needs ­ finally ­ authority to review and act on sales of large blocks of utility property. If a private sale goes bad, the parties to the deal and their shareholders lose. If a utility sale doesn’t work out, customers may pay the price through higher rates, worse service, or both.

Almost every state in the country has this authority in law. Montana doesn’t. Instead, when a major sale is announced, the PSC claims the power to review it. The buyer and seller say we have only those powers specified in statute, and Montana law doesn’t expressly authorize PSC review of sales. At best, the tremendous uncertainty affects the negotiations between the companies and the Montana Consumer Counsel. Issues don’t get adequately addressed. In the worst case, the PSC had to go to court to get a bare month to do a limited review of a major sale.

When MPC announced it was putting its distribution systems on the block, I said publicly that a PSC review would have been good for customers, and could even have been good for the buyer ­ like the mortgage appraiser you don’t care for while he or she is evaluating a piece of property, but really appreciate after the fact. An MPC executive said my comment hurt MPC’s stock. MPC argued "trust us," the PSC doesn’t need the authority, because MPC would do nothing to harm Montana.

The sale of generators is a different matter. SB 390, passed in 1997, prohibited the PSC from saying anything, one way or the other, if MPC decided to sell its plants. When the plants were sold, the PSC was unable to do anything about the concerns expressed by some commissioners that a sale to only one company, PPL, could create at least a danger of local monopoly power, resulting in prices higher than they otherwise might be.

When the question is "now what do we do?" it may be too late. Montana citizens and political leaders in both parties are appropriately concerned about the utility situation, and are asking good questions. The Legislature took an important step this year in passing HB 509, developed through a PSC-led process, which together with PSC-adopted guidelines helps put "default supply" to small customers on a more stable footing.

We should be careful to avoid the trap of re-fighting the last war. We need to have good policies in place to identify problems early and respond to them effectively. Authority to review utility sales is just that kind of policy. We’ll desperately need it if there’s another sale of the gas or electric-distribution system. We’ll also need it if there is a utility bankruptcy, and we don’t want to hand over all authority to a federal bankruptcy court.

There’s lots more to Montana’s telecom sector than Touch America. Despite the loss of Touch America, there are a surprising number of innovative and growing Montana telecommunications companies that are helping lay a foundation for a modest but dynamic tech sector. Small and medium-sized companies and rural telephone cooperatives have deployed ATM switches across Montana, provide DSL in 150 mainly small communities, are setting up "fiber hotels," and operate a sophisticated network of switched video studios.

Qwest has expressed a renewed commitment to good service, is now deploying DSL in smaller communities and is beginning to push high speed access further out through into its network. I hope there will be a place for many of Touch America’s talented employees elsewhere in Montana’s still-vibrant telecommunications sector.

The most important lessons are often the most painful and costly to learn. There’s been nothing good in MPC/Touch America’s prolonged death rattle. Now is the time to apply what we have learned from this painful chapter in Montana’s history.

Bob Rowe is chairman of the Montana Public Service Commission.

http://www.headwatersnews.org/rowe.071403.html