Flexible prices make markets hum,

but discounts discriminate when monopolies rule.

Many expect that the electricity industry is moving inexorably toward a much-publicized "new competitive era." Companies, regulatory officials and experts all regard the momentum as powerful.

So far, the changes are just beginning, and there is a long way to go to reach fully effective competition. %n1%n Yet even at this early stage, the merger and pricing strategies adopted by the established electric firms may be threatening the prospects for competition.

Top utility executives are winning pay hikes these days, but only at the cost of risky stock options that put a premium on company performance.

"Higher overall pay levels, and especially the increased use of long-term incentive plans, point to the trend in the utility industry toward heightened risk-and-reward pay strategies," according to Executive Compensation in the Utility Industry, a recently released report compiled by William M. Mercer Inc.

The use of at-risk pay incentives becomes even more pronounced as the size of the utility increases.

The Idaho Public Utilities Commission (PUC) has ruled that electricity futures contracts or other types of "derivatives" or risk management instruments (e.g., options, forward contracts, swaps, etc.) do not fall subject to certain state regulations that exact fees and require PUC approval for security issues by utilities.

It distinguished the two categories: risk management instruments aim to shelter utilities from losses, while security issues usually provide a source of funding. Utilities, it said, need not file a confidential copy of its risk management plan with the commission.

The Pennsylvania Commonwealth Court has upheld a state commission order that allowed Pennsylvania Power & Light Co.

Finding no adverse consequences, but warning that the record was not yet complete, the Arkansas Public Service Commission has granted preliminary approval of a plan for the merger of Houston Industries, Inc., the holding company for Houston Lighting and Power Co., and NorAm Energy Corp., which provides natural gas distribution service in several states via three operating divisions, Arkla, Entex, and Minnegasco.

PSC Approval will remain conditional pending the outcome of related merger proceedings in Louisiana, Mississippi, and Minnesota, as well as before the Federal Energy Regulato

The West Virginia Public Service Commission (PSC) has criticized a request by Shenandoah Gas Co. to require its residential and commercial customers to pay the lion's share of a newly approved rate increase, citing the utility's cost studies as "flawed" and its cost allocations as having compounded the error.

The company had argued that its cost studies showed that interruptible customers were already generating a 45 percent rate of return, while rates for its firm customers produced a negative return on the investment necessary to serve them.

The North Carolina Utilities Commission has approved a proposal by Public Service Co. of North Carolina (the "LDC") to market gas supplies and unused pipeline capacity to large users through a joint venture between its own affiliate and a non-affiliated gas marketer.

The affiliate, PSNC Production Corporation, will own 50% of the new venture. The second venture partner is an unnamed, nonaffiliated marketing company that operates on a nationwide basis.

A federal court blocks FCC's "TELRIC" cost rule, but some states endorse it anyway.

With the Federal Communications Commission (FCC) having lost a major court battle last fall, the state public utility commission (PUCs) have taken the lead in the deregulation of local telephone service promised a year ago when President Bill Clinton signed the Telecommunications Act of 1996 (the "Act").

Some states have opened generic investigations; others have chosen to proceed case-by-case in individual arbitration proceedings.

Sound bites from state and federal regulators.

Natural Gas Briefs

Gas Marketing Affiliates. Indiana finds no jurisdiction to regulate Proliance Energy, LLC, a brokering and energy services affiliate of Indiana Gas Co., Inc. and Citizens Gas and Coke Utility, but says it will regulate the utilities in their transactions with Proliance. Case No. 40437, Sept. 27, 1996 (Ind.U.R.C.).

Gas Regulatory Reform. Ohio proposes alternative regulatory procedures for natural gas local distribution companies. Case No. 96-700-GA-ORD, Sept. 26, 1996 (Ohio P.U.C.).

Employee Incentives.

A group of 40 state agencies has joined with 33 utilities and the Nuclear Waste Strategy Coalition (NWSC) to file a lawsuit in federal district court after the Department of Energy (DOE) reported that it would not comply with a federal court mandate to accept high-level radioactive waste for permanent storage as of January 31, 1998, and begin removing such waste from temporary storage at some 73 power plants in 34 states.

The D.C. Circuit had ruled against the DOE last summer. (See, Indiana-Michigan Power Co. v.