ERMUSR OTHER BUSINESS 03-18-2003

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to MINNESOTA MuMOPAL unuTIES A55004TION 12805 Highway 55 • Suite 212 • Plymouth, MN 55441-3859 • 763 551 1230 • 800 422 0119 IMN) • Fax 763.551.0459 Deregulation and the Electric Utility Industry The federal Energy Policy Act of 1992 was intended to foster the development of a competitive wholesale market. In the wake of its passage, however, a number of interest groups, particularly those representing very large electric users, called for deregulating the industry at the retail level. Deregulation was seen as a gateway to lower rates in high cost states,particularly on the East and West coasts. In the latter part of the 1990s a number of states began implementing deregulation initiatives. Public power systems in Minnesota and throughout the United States urged policy makers to exercise caution and move very carefully in considering the potential transition to deregulation at the retail level. We noted that there are a number of factors that make the electric utility system unique, and the transition to a market-based retail system extremely complex. Electricity is a real-time product, with no viable means of storage. The exact amount being consumed in an instant must be produced in that instant. Failure to maintain this delicate balance can lead to blackouts and brownouts. Because there is no substitute for electricity, prices in times of shortage quickly skyrocket to ten, one hundred, or even 1,000 times the normal level. Capacity constraints and flow problems often prevent the movement of electric energy from areas where it is plentiful to areas where it is needed. The extreme complexity of the system provides ample opportunity for market manipulation,price gouging, and fraud. Fortunately, Minnesota has acted prudently and taken a cautious approach toward deregulation. Experience has shown this to be a wise course. Recent events have demonstrated that the drawbacks of retail deregulation can far outweigh the benefits. California's ill-fated experiment with deregulation cost consumers and businesses billions of dollars and led to blackouts and brownouts. Enron and other power marketers manipulated markets to deceive regulators, drive up prices, and extract huge profits. Energy trading and marketing companies lost 90 percent of their value in the last year. In 2002 Standard &Poor's downgraded the debt of 182 private power companies while upgrading only 15. California has suspended retail access; Arkansas, Montana,Nevada,New Mexico, and Oklahoma have delayed their transition to deregulation. It is abundantly clear that electric deregulation is an idea whose time has not yet come. Minnesota has wisely recognized the need to develop a robust transmission system and a healthy and fully functional wholesale electricity market before considering the leap to retail deregulation. Implementing deregulation in a period of shortage would likely cause prices to go up rather than down. For the foreseeable future Minnesota should continue to concentrate on strengthening the wholesale power market. Any attempts to implement deregulation on a piecemeal basis, such as pilot programs, initiatives limited to large customers, or proposals that would introduce deregulation in the guise of advancing renewables, should be recognized for what they are— attempts to start Minnesota down a slippery slope that can lead to shortages, price hikes and reliability problems that our consumers and businesses can ill afford. Minnesota Municipal Utilities Association February 2003