Industry opinion: Utility outdoor lighting service: Why regulate a competitive service as if it were a monopoly?

by Sheldon Switzer, Baltimore Gas and Electric Co.

History lesson

“Gas Lights — Without Oil, Tallow, Wicks or Smoke. It is not necessary to invite attention to the gas lights by which my salon of paintings is now illuminated; those who have seen the ring beset with gems of light are sufficiently disposed to spread their reputation; the purpose of this notice is merely to say that the Museum will be illuminated every evening until the public curiosity be gratified.” — first advertisement for Peale’s Baltimore Museum and Gallery of Fine Arts, American and Commercial Daily Advertiser, 13 Jun 1816

On Tuesday evening, June 11, 1816, Rembrandt Peale illuminated a room in his museum in Baltimore with burning gas, dazzling the patrons gathered there with a “ring beset with gems of light.”

The gas light was controlled by a valve attached to the wall which allowed the luminosity to vary from dim to very bright. The successful demonstration of gas lighting (using manufactured coal gas) at the museum underscored the opportunities for the application of gas lighting. On June 17, 1816, Baltimore’s City Council approved Peale’s plan to light the city’s streets. Thus the first gas company in United States was established, BGE’s direct predecessor: the Gas Light Company of Baltimore.

Background

“Inside my empty bottle I was constructing a lighthouse while all the others were making ships.” — Charles Simic

The Baltimore Gas and Electric Co. (BGE) offers two types of outdoor lighting services as set forth in its Retail Electric Service Tariff. Private area lighting service (Schedule PL) is available for the unmetered outdoor lighting of private property. Street lighting (Schedule SL) is available for the unmetered lighting of dedicated public streets and roads where required by a city, town, county, or other municipal or public agency, or by an incorporated neighborhood association.

Outdoor lighting services can be unbundled into several main components: installation, ownership of the poles and fixtures, maintenance, delivery service and generation supply. Both Schedule PL and Schedule SL are tariffed rate schedules with rates, terms and conditions, to varying degrees, regulated by the Maryland Public Service Commission (PSC).

Private area lighting is a fully bundled service whereby the BGE owns and maintains all facilities and provides poles, fixtures, maintenance services and the energy required for the provision of lumens to the customer. As such BGE views itself as the end-use customer for the energy consumed (kWh) and consequently Schedule PL customers are not currently permitted to shop for generation supply in the competitive retail market.

In contrast, street lighting services, while similar to private area lighting, are unbundled and customers have options to purchase all or none of the unbundled components from the company. The company may provide all the required services including installation, street lighting cable, poles, fixtures, maintenance, and energy or, alternatively, none of the above. As one example, a customer who owns the poles and fixtures may choose to contract with BGE to have the company perform both reactive and preventive maintenance services. As another example, the company may own all of the facilities but the customer has the option of contracting with a third-party supplier for the provision of generation supply.

Outdoor lighting services comprise only a very small percentage of BGE’s distribution throughput (MWh) and revenues as noted in figure 1.

In a restructured energy market, does it make sense to continue to regulate these services as monopoly services subject to traditional utility regulation with the allocation of costs determined in a rate proceeding using a fully allocated cost-of-service study based on historical costs? This question needs to be addressed with recognition that all such lighting services can be supplied by third parties behind the meter.

Schedule SL — street lighting

As noted previously, unmetered street lighting service is available for the lighting of dedicated public streets and roads where required by a government entity or by an incorporated association of local residents. A builder or developer may contract for street lighting service prior to the execution of a contract with the ultimate customer. After construction, the facilities are transferred to the government or civic entity.

Schedule SL is unbundled as follows:

1. Supply of electricity.
2. Delivery service: The charge for distribution wires (excluding street lighting cable).
3. Underground street lighting cable (includes cable rental and cable maintenance).
4. Lighting facilities: Lamp fixtures, lamp poles, maintenance (reactive and preventive).

Special provisions in the street lighting tariff include:

1. Customized lighting fixtures not specifically included in the tariff, as requested by the customer, may be priced on an individual customer basis. While this permits some flexibility in addressing customer needs without requiring a filing with the PSC, there is a prescribed methodology for determining the price for custom applications.
2. The various unbundled service components under Schedule SL — street lighting may be contracted for by the customer with BGE or provided by the customer on their own.
a. The company offers to install, own and maintain all equipment.
b. The customer may request that the company furnish and install the lighting facilities and sell those items (excluding cable) to the customer. The customer may then choose to have the company perform maintenance services or the customer may choose to perform their own maintenance.
c. Maintenance by the company is required for fixtures rented to the customers by the company.
3. The customer may choose a competitive third party supplier for the supply of electricity regardless of whether the company or the customer owns the lighting fixtures.

Schedule PL — private area lighting

Schedule PL — private area lighting is a fully bundled service available for the unmetered outdoor area lighting of private property. Unlike Schedule SL, there are no separately stated charges for generation supply, distribution wires, underground lighting cable, maintenance, poles and fixtures. Rather there is a bundled monthly rental charge for the installation and maintenance of lamp fixtures. Monthly price varies by type of fixture (mercury vapor, metal halide, or sodium vapor), whether supplied underground or overhead, and lumens (or billing watts). There is also a separately stated charge for the installation of lamp poles and cables which varies by type of pole — size, and material (wood, fiberglass or metal).

As in the case of street lighting, customized lighting fixtures not specifically included in the tariff, as requested by the customer, may be priced on an individual customer basis. While providing a means of adding new options that customers want without regulatory delay, the method for pricing such custom options is prescribed.

Notably the generation supply price for Schedule PL is not separately stated. Private area lighting is a fully bundled service whereby the company owns and maintains all facilities and provides poles, fixtures, maintenance services and the energy required for the provision of lumens to the customer. BGE procures the generation supply in the competitive retail market for its private area lighting facilities.

Alternatively the customer can choose a competitive lighting contractor to provide for private area lighting. The installation and ownership of an entire private area lighting system shall rest with either the company or the customer, at the customer’s option. In the latter case, the company provides only the supply of electricity under its standard general service tariffs. Unlike street lighting, the company does not inspect or maintain any customer-owned equipment. Essentially, the private area lighting requirements of the customer are met in the same fashion as any other electric use by the customer, as part of the load behind the meter.

Outdoor lighting services are competitive services

“There is a single light of science, and to brighten it anywhere is to brighten it everywhere.” — Isaac Asimov

The regulation of BGE’s outdoor lighting services is out of sync with the competitive market for lighting services. BGE’s current prices for outdoor lighting are over 13 years old (with the exception of the supply price). Absolute and relative prices do not comport with current market conditions. BGE also lacks the ability to negotiate with individual customers to meet their specific needs. Further BGE’s earnings on its outdoor lighting activities are constrained to a rate-of-return based on traditional monopoly ratemaking assumptions, which limits incentives to devote scarce capital resources to optional endeavors.

Yet BGE is faced with competition from manufacturers, distributors, full service lighting companies and electrical contractors. Competitors range from large corporations, operating both nationally and in international markets to many smaller local companies that provide a variety of lighting services such as trenching and cable installation, design, installation, maintenance and repair.

Examples abound as to what happens over time to services regulated as if they are a monopoly when such services have close substitutes in the market. All one need do is look at the decline in the regulated parcel post service of the United States Post Office while UPS expanded its parcel delivery business. Another example of a service constrained by regulation that declined over time is the central telephone office switching services for intra-company telephone calls by the local telephone exchange carriers in the face of competition from private branch exchange (PBX) equipment.

The policy recommendation for utility outdoor lighting services is simple and straightforward. Utilities should be allowed to have flexibility in pricing outdoor lighting services and discretion in establishing terms and conditions of service that can address individual customer needs. This will enhance the value of the lighting services that can be provided, will facilitate the allocation of capital resources to the lighting business and will ensure that outdated rates do not distort market price signals. This recommendation is made based on the ability of customers to seek lighting services from a variety of competitive businesses and the provisions in the company’s current tariff that allow the customer to seek alternatives to lighting services that are not uniquely tied to regulated core distribution services.

Authors’ note: The views expressed in this paper are those of the author and do not represent the opinions of anyone else at the Baltimore Gas and Electric Co. or any of its affiliates. This article is based on a presentation at the Advanced Workshop in Regulation and Competition, 25th Annual Eastern Conference, Center for Research in Regulated Industries, Rutgers Business School, Rutgers University, May 17-19, 2006.

Sheldon Switzer is director of electric pricing and tariffs in the pricing and regulatory services department of Baltimore Gas and Electric Co. He has been with BGE for 21 years and has worked at BGE in other capacities including load research and demand-side management. His experience includes the analysis of competitive issues in the telecommunications, gas, electric and energy industries. Prior regulatory background includes work at the Maryland Public Service Commission and the U.S. Federal Trade Commission.

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