Universal Service in Competitive Retail Electric Markets: Whither the Duty to Serve?

Abstract

During the twentieth century, the privately-owned electric utility was regulated as a natural monopoly. Under the natural monopoly paradigm, a vertically-integrated electric utility provides generation, transmission, and distribution services under the rubric of a single firm serving a geographic service territory. While it is allowed to operate as a monopolist, this firm also has certain responsibilities: it submits to price regulation and assumes obligations to extend service to all customers within its geographic service territory and to continue providing service, once service has commenced. With the advent of deregulation, it is assumed that markets will largely displace price regulation, but little discussion focuses on the implications of deregulation for utility service obligations in the electricity industry. Today, electric utilities' extraordinary service obligations - often collectively referred to as the duty to serve - face their largest challenge ever. Can vigorous retail competition of the type public utility deregulation envisions coexist with extraordinary obligations to serve customers? If so, at what costs? Who will bear these costs? These questions are central to an emerging law and economic analysis known as the jurisprudence of networks, of paramount importance as regulators and courts implement competition in traditional public utility industries, including electricity, where the natural monopoly model is being abandoned or reformed. After summarizing how the duty to serve was implemented in the electricity industry under natural monopoly regulation, this article addresses whether traditional service obligations can coexist with retail competition. A rationale often given for universal service obligations in the telecommunications industry is that universal service, by promoting interconnectivity, enhances network system benefits for all customers. While the network economies argument may have worked to sustain universal service in the face of telecommunications deregulation, it is tenuous when applied to the natural gas and electricity industries. Many reformers look askance at the duty to serve in competitive retail utility service markets, often pointing to conflict between retail competition in electricity and the duty to serve. This article argues, however, that application of extraordinary service obligations to distribution companies in a competitive retail framework can coexist with improved efficiency in retail power markets, although the abandonment of the natural monopoly framework challenges regulators to articulate new rationale for service obligations and to devise new ways of paying for them.