DEREGULATION UPDATE

Rhode Island

Overview

The smallest state in the nation made big noise when it became the first state to pass a retail choice law. The Utility Restructuring Act of 1996 was introduced on Feb. 6, 1996 by House Speaker John B. Harwood and House Majority Leader George D. Caruolo, and was signed into law by Governor Lincoln Almond on Aug. 7, 1996. The act called for competition in Rhode Island to be phased in between July 1997 and July 1998.

The Rocky Road to Restructuring

When the law took effect in July 1997, not one customer left their electricity provider. Industry experts cited three reasons why Rhode Islanders resisted choosing another supplier:

• A temporary capacity shortage in New England drove up wholesale rates;
• Customersf misunderstanding that if they left their utility now, they wouldnft be able to take advantage of the standard offer rate, the 10 percent rate reduction on Jan. 1, 1998 for customers who choose not to switch; and
• The likelihood, but not the certainty, that the standard offer rate would be lower than the rates offered by power marketers.

A setback to the implementation of retail competition occurred when the state rejected bids from all competitive suppliers. The state received bids, on the generation portion only, that ranged from 3.4¢ to 5.2¢ per kilowatt-hour (kWh) from five suppliers. The state determined that they could save 10 percent by remaining with local utilities.

Another setback to implementation came when none of the 30 eligible industrial customers switched. This prompted an investigation by The Energy Council of Rhode Island (TEC-RI), an advocacy organization for large customers.

TEC-RI discovered confusion about the utilitiesf standard offer. Neither Eastern Utilities Associates (EUA) nor New England Electric System (NEES) - parent companies of the electric utilities serving the state - had established a standard-offer rate.

Some customers believed that the rate for generation would be as low as 2.8¢ per kWh. Furthermore, industrial customers believed that if they left the utility to purchase electricity from another supplier, they could not return when the standard offer became available January 1998.

At the urging of TEC-RI and marketers, the utilities agreed to send out letters to customers to clear up any confusion. The letter informed customers that they could stop service and return with 30 days notice when the standard offer became available. Since then, about a dozen manufacturers have signed up to receive competitive retail power.

Power marketers continue to avoid Rhode Island because they canft compete with the standard offer rate. The utilities claim that the standard offer is not a tool they will use for competitive purposes. It is meant to be a "safety net" to help customers ease into competition. They plan to gradually increase the price over time to encourage customers to begin seeking competitive supplies.

The New Face of Rlfs Utilities

Generation, transmission and distribution will be unbundled so that generation becomes market-based. Transmission and distribution functions remain regulated by the Federal Energy Regulatory Commission, which requires the utility to provide open access to its transmission systems.

Recovering Stranded Costs

To recover stranded investments, utilities are required to determine the market value of generating assets through the sale or spin-off of a portion of their fossil and hydro assets. Market value will then be deducted from the stranded investment total. The utility will recover 100 percent of that total via transition charges.

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