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Texas Performance Review
The Future of the Public Utility Commission in Texas

Introduction

Performance Review of the Public Utility Commission of Texas

For decades, the U.S. telecommunications and electric utility industries have been subject to comprehensive regulation by both federal and state governments. This intensive level of regulation is due to the fact that these utilities have been allowed to operate as monopolies. Given the high cost of the utility infrastructure, most believed that a single company could provide these services in an area more efficiently than several competing companies.

This situation, however, is being brought to an end, both by deregulatory legislation and changing technologies. Traditional electric utility providers are being challenged by independent power producers and marketers and alternative energy sources in both the wholesale and retail markets. The divisions between telecommunications providers are breaking down; cable television companies, long-distance carriers, and even electric utilities are on the verge of competing with existing local companies to provide for local telephone service; local providers, in turn, are planning to provide long-distance service.[ 1 ]

As the electric and telephone industries move towards a deregulated environment, the Public Utility Commission of Texas (PUC) should ensure that all Texans continue to receive reliable, reasonably priced services. Competitive telephone and electric markets will force PUC to change its emphasis from the rate cases and regulatory directives of monopoly regulation to a broader oversight role designed to ensure fair competition while protecting consumer interests.

Moreover, since retail competition will come in a patchwork fashion, arriving in different markets and areas at different times, PUC must develop a transitional environment in which both competition and the conventional monopolistic model can succeed.

In anticipation of the legislative session and the likelihood of additional changes in Texas utility regulation, the lieutenant governor asked the Texas Performance Review (TPR) to conduct a review of PUC.

Scope of TPR's review

One of TPR's first and most critical tasks in this review was to determine its scope. PUC has undergone intense scrutiny in recent years, including the 1993 and 1995 reviews by the Texas Sunset Advisory Commission and a 1995 legislative interim committee review as well as numerous audits. These efforts examined and critiqued PUC's policies and processes in detail in addition to crafting the state's policies for competition in the telephone and electric markets.

This report makes no recommendations as to the nature or degree of further deregulation; instead, it is intended to help PUC manage the state's difficult transition to competition in the most effective manner possible, while broadening the public's understanding of the critical issues PUC faces.

TPR's intent is to make an original contribution to the ongoing examination of PUC. Recent studies of PUC focused primarily on the agency's current policies and processes. The magnitude of changes expected in the electric and telecommunications markets, however, prompted TPR to focus its review on a key question: "What will PUC need to look like during the next five years so that it will be flexible and responsive and effectively regulate changing industries while protecting Texas ratepayers?"

Agency goals

Of course, the dynamic nature of utility markets and the legal requirements that shape them make any predictions imperfect at best. Nonetheless, after intensive discussions with various industry and regulatory experts, TPR discovered general agreement about certain aspects of PUC's evolving mission. This led to the development of six principles that guided TPR's review of the agency, stated below as six overarching agency goals.

These goals support PUC's current mission statement:

To assure the availability of safe, reliable, high quality services that meet the needs of all Texans at just and reasonable rates. To accomplish this mission, the PUC shall regulate electric and telecommunications utilities as required while facilitating competition, operation of the free market, and customer choice.[ 2 ]

1. Continue to regulate telephone and electric service providers in noncompetitive markets primarily through rate regulation.

Prior to deregulation, governments substituted for competition by settingprices, rates of return, and service standards. While all telecommunicationsservices ultimately are expected to become competitive with deregulation,electric services are not. Although competition will reshape the powergeneration industry, the transmission and distribution of electricity isexpected to remain a monopoly for the foreseeable future. Furthermore, even intelecommunications, progress toward full competition is expected to be slow,particularly in rural and isolated areas. PUC's traditional activities relatedto monopoly regulation, therefore, must continue until competition existsthroughout the state.

2. Set and enforce minimum quality standards for all electric and telephone providers.

As competition expands, PUC's oversight role will change from setting the rates that utilities may charge to setting and enforcing operating standards. These will range from technical standards, such as voltage delivered tor esidences, to consumer standards, such as itemizing charges on a bill.

3. Ensure that basic telephone and electric service is available to all Texans.

Guaranteeing such availability and affordability, typically called "universal service" in the telecommunications industry and "obligation to serve" by electric companies, is a complex process in Texas, given the state's population and size, and will become considerably more difficult in a deregulated environment.

4. Provide customer information, education, and protection.

The underlying assumption in monopoly regulation is that consumers are protected primarily by government's ability to control the prices companies may charge. In a deregulated market with multiple providers, however, consumerswill need meaningful information to decide which company to choose, whatservices to purchase, and what prices are best. As the state's overseer ofderegulation, PUC will have a significant responsibility for providing customerinformation, education, and protection.

5. Use alternative dispute resolution to resolve disputes among providers and between providers and customers.

The resolution of such disputes has always been one of PUC's functions. Increased competition almost certainly will increase the types and frequency of such disputes. Their character will change, however; historically, provider disputes usually concerned prices and policies. Disputes between providers and customers involved such issues as utility bills and electric lines crossing private property. With deregulation, these disputes are more likely to concern access to and cost of using existing infrastructure. Quick resolution of disputes will become critical to prevent situations that present unfair disadvantages for some competitors and ultimately act to reduce or eliminate consumer choice.

6. Collect and disseminate information on telephone and electric companies, markets, and industries.

Guiding the transition to competition and monitoring competitive activities will require PUC to gather and share a significant amount of information, both for internal and external use. Successfully executing the first five goals listed here will require detailed information on industry developments, individual companies, and market trends.

Review approach

The next logical question was: "What activities should be performed to achieve these goals?" To answer this question, TPR made two key assumptions about the environment in which PUC will operate during the next five years. First, full competition in the telephone and electric industries will not be achieved statewide within the next five years. Second, while the generation of electricity is moving toward more intense competition, the transmission and distribution of electricity will not be fully competitive due to the large infrastructure required.

TPR analysts also gathered public input through a series of intensive efforts. Over 1,800 invitations were sent out announcing an open forum day where individuals presented their comments to TPR staff. An anonymous electronic mail site was established to allow PUC employees to share their thoughts and ideas. A special focus group was conducted with consumer groups to solicit ideas and gather information. These activities were in addition to the scheduled interviews with at least 20 percent of PUC's staff, several legislators, industry representatives, subject experts, and individual rate payers.

TPR identified 13 states that had either implemented restructuring policies or have studied in depth the various restructuring issues. These states include: California, Connecticut, Illinois, Maine, Massachusetts, Michigan, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont, and Wisconsin. TPR developed a comprehensive survey to obtain information in the areas of: structure and personnel, federal and state statutes and rules, agency restructuring efforts, consumer affairs and public information, alternative dispute resolution, information systems, and cost management. Eight of the 13 states provided data (Connecticut, Illinois, Maine, Michigan, New York, Pennsylvania, Rhode Island, and Wisconsin). While these states may differ from Texas in some respects, each of these states has deregulated or proposed deregulation of its utilities and therefore provided appropriate models for evaluating the practices of Texas' PUC. The Texas Senate Committee on State Affairs considered data on restructuring efforts from these same 13 states in preparing its Interim Report on the Implementation of S.B. 373.[ 3 ]

Early in the performance review of PUC, TPR asked PUC staff for a list of the most significant activities underway now or anticipated for the commission in the future. The list was organized into three periods of regulatory activity for both the electric and telecommunications industries. The first period was the traditional regulatory environment. That is, what has occurred in the past or what is currently happening with regard to the commission's activities in regulating monopoly utilities in Texas. The second period was the PUC staff's combined view of what activities will be required, or currently are required, during the transition to a more competitive utility environment in Texas. The third period was a state of full competition for utilities. Full competition was to be defined as after effective local competition in the telecommunications industry and after retail competition for the electric industry.

PUC provided a chart contrasting PUC activities for each industry--telephone and electric--performed during each period. PUC divided its activities into five major categories: rate setting, dispute resolution, consumer protection, general regulation, and licensing. TPR then asked PUC to rate the effort needed to perform each activity within each category, ranging from "none" to "high."

The level of effort was to represent the PUC staff's opinion based on historical effort required for the activity, comparisons with other similar activities, or an estimate of level of effort for any new activity. The scal ewas to be subjective rather than quantitative and one of five levels was to be assigned each activity.

Once the tables were finalized, TPR staff conferred with commission staff to address any questions or disagreements on the table contents. Selected portions are present in Exhibit 1 and Exhibit 2 on the following pages. PUC staff agree that the tables represented here are accurate.[ 4 ]

The telecommunications industry is in the transition period and describes transition and full competition activities. However, the electric industry is some years from entering the transition period with regard to retail competition (although transition to wholesale competition has begun). Exhibit 2 shows traditional regulatory activities and activities for the transition to competition.

As a final clarification of its scope, TPR considered a third question: "Does PUC have adequate authority, organizational structure, processes, and resources to perform its most critical activities well?"

TPR's recommendations attempt to address these questions and are organized into six chapters.

Rate Regulation concerns PUC's traditional authority to set the rates monopoly utilities may charge. TPR's recommendations in this area would streamline agency procedures concerning protested cases, which commonly involve rate issues; change the role of PUC staff in case proceedings, to generate significant productivity savings; and direct the PUC to establish a system for determining when "competition" arrives in a market in a meaningful way, eliminating the need for rate regulation.

Setting and Enforcing Standards highlights the major elements of PUC's emerging new role: the creation and enforcement of meaningful operational and service standards for competitive utilities. TPR's recommendations in this area call for the revision of present agency standards to reflect the changing market; a study of the impact of deregulation on the gross receipts tax; education for utilities on their responsibilities under state law and PUC rules; consolidation of agency auditing efforts; and strengthening the present administrative penalties system.

Ensuring Universal Access concerns agency efforts to ensure that all Texans have access to basic utility service. TPR recommends PUC examine additional means of expanding phone service to low-income Texans, and clarification of whether the Universal Service Fund monies should be deposited in the Treasury. TPR also recommends that PUC explore ways to strengthen universal service guarantees for electric customers.

Consumer Affairs, Consumer Education, and Public Information concerns PUC's efforts to educate consumers about the emerging competitive marketplace, and to protect their interests throughout the transition to competition. TPR's proposals in this area would refine and expand PUC's consumer education role, reorganize the agency's consumer activities along functional lines, and strengthen and simplify its consumer complaint process.

Alternative Dispute Resolution concerns PUC's initial attempts to use alternative dispute resolution (ADR) methods such as arbitration and mediation to avoid hearings and litigation. TPR proposes ways to broaden PUC's use of ADR while guaranteeing that consumers' interests remain protected.

Finally, Mission and Structure recommends statutory and rule changes and are organization of PUC to reflect the agency's changing mission and activities, discourage excessive middle management, improve agency working conditions, reduce paperwork burdens, and help the agency establish an effective plan for the transition to oversight of competition.

Endnotes

[ 1 ] Public Utility Commission of Texas, Agency Strategic Plan for the 1997-2001 Period (Austin, Texas, June 12, 1996), p. 22.

[ 2 ] Public Utility Commission of Texas, Agency Strategic Plan for the 1997-2001 Period, (Austin, Texas, June 12, 1996), p. 8.

[ 3 ] Texas Senate, Committee on State Affairs, Interim Report to the 75th Legislature on the Implementation of SB 373 (Austin, Texas, June 24, 1996 Final Draft), p. 37.

[ 4 ] Interview with Vicki Oswalt, director of policy development, Public Utility Commission, Austin, Texas, January 16 and 17, 1997.


Exhibit 1

Public Utility Commission of Texas Outline of Key Regulatory Activities for the Telecommunications Industry

Regulatory Activities During the Transition to Competition
Regulatory Activities After Effective Local Competition


Rate Setting Activities
Administer competitive rate flexibility; Administer incentive regulation - High

Review sale/transfer/merger - Moderately High
Review sale/transfer/merger for market power and consumer protection. - Moderately High
Monitor relations with affiliates -Moderately High
Monitor relations with affiliates for market power and consumer protection. - Moderately High
Participate in rate cases - High involvement to None

Approve tariffs - Moderately High to None

Fair Competition
Resolve number portability issues - High
Monitor and audit funding - Moderate
Mediate/approve interconnection agreements - High

Set wholesale rates for incumbent LECs; Oversee unbundling; Enforce collocation guidance - Moderately High

Monitor market power / participate in antitrust investigations - Moderately High
Monitor market power / participate in antitrust investigations - Moderately High
Develop/enforce code of conduct for participants in competitive telecommunications markets - Moderately High
Develop/enforce code of conduct for participants in competitive telecommunications markets - Moderately High
Ensure dialing parity; Oversee number administration; Enforce access to rights-of-way; Enforce access to buildings; Imputation; Administer special treatment of small utilities - Moderate

Consumer Protection Activities
Enforce quality/reliability of service - High
Enforce quality/reliability of service - High
Ensure consumer safeguards - High
Ensure consumer safeguards - High
Handle consumer complaints - Moderately High
Handle consumer complaints - Moderate
Provide consumer education and public information - Moderately High
Provide consumer education and public information - Moderate
Conduct compliance audits - Moderate
Conduct compliance audits - Moderate
Licensing Activities
Certify new competitors (COAs and SPCOAs) - Moderate
Register new competitors (COAs and SPCOAs) - Low
Register nondominant carriers- Low
Register nondominant carriers - Low
Register operator service providers, ADAD and payphones - Low
Register operator service providers, ADAD and payphones - Low

Exhibit 2

Public Utility Commission of Texas Outline of Key Regulatory Activities for the Electric Power Industry

Traditional Regulatory Activities

Regulatory Activities During the Transition to Competition

Rate Setting Activities

Participation in rate cases - High
Participation in rate cases - High

Participation in rate cases for transmission and distribution - Moderately High

Administer incentive regulation - Moderately High

Administer competitive rate flexibility - Moderate
Tariff approval - Moderate
Tariff approval - Moderate
Review sale/transfer/merger; Monitor electric utility relations with affiliates - Low
Review sale/transfer/merger; Monitor electric utility relations with affiliates -Moderate
Fair Competition Activities

Implement resolution of stranded investment issues - High

Oversee unbundling of distribution - Moderately High

Support activities related to restructuring of electric industry - Moderately High

Monitor market power / participate in antitrust investigations - Moderate

Develop/enforce code of conduct for participants in competitive electric markets -Moderately High

Special treatment of small utilities - Moderate

Approve interconnection agreements - Moderate

Resolve disputes between providers - Moderate


Consumer Protection Activities
Enforce quality/reliability of service - Low
Enforce quality/reliability of service - Moderate
Ensure consumer safeguards - Moderate
Ensure consumer safeguards - Moderate
Handle consumer complaints - Moderate
Handle consumer complaints - Moderately High
Provide consumer education and public information - Moderate
Provide consumer education and public information - Moderately High

Preserve system benefits in the transition to competition (e.g., low income, obligation to serve, carrier of last resort) - Moderately High


Licensing Activities
Conduct integrated resource planning - Moderately High
Conduct integrated resource planning - Low
Register IPPs, Power Marketers, and EWGs - Low
Register IPPs, Power Marketers, and EWGs - Low

Certification of electric service suppliers - Moderate
SOURCE: Public Utility Commission of Texas and John Sharp, Texas Comptroller of Public Accounts.


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