According to the Merriam-Webster Dictionary, deregulation is the act or process of removing rules or regulations.
Electricity deregulation has opened up the marketplace in a number of states and has enabled consumers to choose from multiple electricity providers who now compete for their business. In areas where the electricity marketplace is still regulated, consumers have only one option when it comes to choosing an electricity provider (the incumbent). The point of deregulation is ultimately to reduce prices and by introducing competition and choice into the market.
There are three basic steps in getting the consumer electricity:
Understanding the electricity marketplace starts with understanding that there are three rather distinct components of it: generation, transmission, and distribution. Once electricity is generated, whether by burning fossil fuels, harnessing wind, solar, or hydro energy, or through nuclear fission, it is sent through high-voltage, high-capacity transmission lines to the local regions in which the electricity will be consumed. When the electricity arrives in the region in which it is to be consumed, it is transformed to a lower voltage and sent through local distribution wires to end-use consumers.
The generation of electricity is accomplished by providers that have some sort of power generating means, whether that is nuclear, coal, fossil fuels, wind, solar or various other types. When a provider generates power and places that power into the federal/state grid, they have a right to sell that power to any consumer willing to pay their price.
Transmission of electricity is the act of sending that power at high voltages to various distribution points for use. These are the high voltage lines most people associate with the big towers that cut through landscapes around the country.
Finally, distribution is the act of delivering that power to the end user or consumer. This is usually the company that most people think of as their “electric company.” It is also known as the “incumbent.”
So, we have the generators of power, the transmitters of power and the suppliers of power. Traditionally, the generators of power and the suppliers are one in the same. If you are generating power to the grid, you have the right to sell that supply on the open market in deregulated states.
What most conglomerates don’t want you to know is that if you switch suppliers in a deregulated state, it has NO EFFECT on your service. If there is a storm and power is knocked out, the utility that has contracted with the state to fix those outages will still fix the problem. If you lose power to your home or business, you still call the utility that charges you for transmission on your bill for service. The only change is in the price your new supplier charges you for electricity that you consume.
For the electric industry, deregulation means the generation portion of electricity service will be open to competition. However, the transmission and distribution of the electricity will remain regulated and your local utility company will continue to distribute electricity to you and provide customer services to you. Only the generation of electricity is being deregulated, which means you will have the opportunity to shop around for the electricity-generation supplier of choice.
Your local utility will also serve as “the electricity generator of last resort.” In other words, if your selected electricity-generation supplier is unable to provide the electricity you need, your local utility company will supply you with electricity at the prevailing price. When you shop for electricity, you should certainly consider your local utility company as one of the possible suppliers of your electricity.
Your local utility company – whether it is an investor-owned company or a rural electric co-op – will continue to distribute electricity to you and provide customer services to you. It does not matter who you may select as your electricity-generation supplier, you will remain a customer of your local utility company for transmission, distribution, and local services. These services will remain regulated for the foreseeable future. Your local utility company will be responsible for providing line repair and maintenance, restoring service after storms and accidents, and providing customer services, including metering and billing. When your local utility company is restoring electrical service after a storm or accident, the line crews cannot give preferential treatment to those customers purchasing electricity from the company.
With deregulation, consumers can purchase electricity service from a variety of Retail Electricity Providers (REPs) that purchase power from power plants and handle billing and customer service. As the electricity is still delivered over the same wires and poles by the incumbent, the switch is painless for the consumer.
If you are a huge conglomerate and have been supplying power to consumers in an area for years, deregulation scares you because now that means competition. You don’t want the average consumer to be educated because that means you will lose business. If you are charging everyone a flat rate of $0.077 per kilowatt hour (kWh) for energy and a supplier comes along offering the same electricity for $0.066 per kWh, you are going to lose customers.
As a consumer, simply ask yourself: “Do you shop around for the best price on a car before you purchase?” If two dealerships are offering the same exact car and one beats the price by $1000 less than the other, why would you buy the more expensive car?
Utilities are scared of deregulation and rarely mention it. They put small little blurbs in barely legible print on your bill that send you to a website they put together to supposedly “educate” you about deregulation. But they hope to talk around the real issues and scare the average consumer into thinking that if they switch suppliers that their service will be affected. That is the myth the major companies perpetuate on consumers to protect their primary interest – which is your money.
There are websites in every state put together by state commerce commissions which explain your rights as a consumer to choose what price you want to pay for electricity and how that affects your service.
Utilities will continue their veiled attempts to keep the average consumer in the dark about deregulation because they do not want to lose customers and desire to continue to charge bloated rates for supplying power to the masses. They want things to remain status quo and to make money from the uneducated masses. They don’t want deregulation to affect their bottom line. People once thought deregulating their phone service was a bad choice, but the products out there today have proven that that thought process was misunderstood also, and that the deregulation of the telecommunications industry not only promoted competition but innovation also.
This is quite simple: Switching suppliers to save money on your bill will have no effect on your service. There are laws in place in every deregulated state to protect consumers from fraudulent suppliers and from having your service interrupted without cause and notice by a utility.
The most important part of deregulation is education. But until people start educating themselves about how they can save money on their bills and ignore the scare tactics used by their current utility, deregulation will continue to be a misunderstood and misinterpreted benefit for consumers.
To understand electricity deregulation, one should first understand how the electricity industry originally developed and how it has traditionally functioned.
In the earliest days, there was no regulation of the electric power industry. Small companies operated small generators in municipal areas and sold power to industries and other users in that area. In 1896, Westinghouse pioneered the use of alternating current to deliver electricity over a long distance from its hydroelectric plant at Niagara Falls. This generating and delivery system was far more efficient and quickly became the national standard. This development quickly led to the formation of large “public utility” companies.
It soon became clear that generation, distribution and sale of electricity was virtually a monopoly. Some municipalities established publicly owned utilities, but most electric power was provided by private companies. Although these electric utilities did purchase some electricity, most of the electricity they sold was generated by the company itself. The distribution and sale of electricity to users was clearly a monopoly because it only made sense to have one set of power lines leading to each consumer. Because its monopolistic nature, states quickly established “Public Utility Commissions” (PUCs) to regulate the price of electricity sold to consumers. Under the standard type of regulation, the utility would justify its rates by accounting for the cost of producing, distributing and marketing the electricity and would be entitled to a “fair” rate of return.
As the industry continued to develop, utilities combined into large financial holding companies. In 1935, almost half of the generation of electricity in the country was under the control of three large holding companies. Because of the size, complexity and interstate nature of these trusts, their effective regulation by state public utility commissions became impossible. Not surprisingly, these trusts were accused of manipulating the cost of electricity in an anti-competitive fashion.
The origins of the current system of energy production and delivery date back to the New Deal era, when Congress brought an end to the tight reign of large interstate holding companies that controlled more than 75 percent of the country’s electric generating capacity. The Public Utility Holding Company Act of 1935 (PUHCA) forced the holding companies to break up, and gave utilities a government-sanctioned monopoly over a limited territory. In exchange, utilities agreed to provide reliable electric service to all customers at a regulated rate. The law resulted in the formation of nearly 300 power systems and 800 rural cooperatives.
The result was the onset of federal regulation of electric power. The Securities and Exchange Commission was provided with authority to require that the interstate holding companies divest their holdings until each became a single consolidated system serving a prescribed geographic area. At the same time, the Federal Power Commission, now the Federal Energy Regulatory Commission (FERC) was created for the purpose of regulating the interstate wholesale electricity market.
Under the resulting system, the electric power industry became a group of geographically contained “vertical” monopolies which controlled the generation, distribution and marketing of power in each company’s territory. Because they controlled the generation of power using primarily fossil fuels , the existence of this system has discouraged the development of renewable and other innovative energy sources because companies attempting to develop such new technologies did not have access to the country’s power system. Moreover, because the profitability of the public utilities depended on increased consumption and thus there was no incentive for the utilities to encourage energy conservation.
In the United States, all three of these vertically related sectors have typically been tied together within a utility, which has been either investor-owned and state-regulated or owned by the local municipality. For many years, each sector was thought of as a natural monopoly. In the transmission and distribution sectors, effective competition would require that rival firms duplicate one another’s wire networks, which would be inefficient. If wires owned by different companies were allowed to interconnect to form a single network, the laws of physics demonstrate that there would be significant externalities: the flow on one line affects the capacity of other lines in the system to carry power.
Generation was argued to be a natural monopoly because of the large scale of efficient generation plants and the losses that occurred with long-distance transmission, which made it more efficient to have local areas served by one or a small number of generating plants. Few people argue that the basic economics of transmission and distribution have changed. But, over time, the optimal scale of generating plants has declined, not increased, as many thought it would in the 1960s and 1970s with the growth of nuclear power. In addition, technology improvements reduced the losses that occurred during transmission, making it more feasible for plants hundreds of miles apart to compete with one another.
OPEC’s worldwide oil embargo in 1973 had a dramatic impact on the electric industry. Although the embargo was most famous for creating interminable lines at the gas pump, it also produced sharp increases in electric utilities’ costs. The result was a surge of interest in alternative forms of energy. In 1978, Congress passed legislation to require utilities to purchase power from companies which generated power using renewable sources or through “cogeneration”. The Public Utility Regulatory Policies Act (PURPA) required utilities to use “renewable” energy, which is produced from wind, solar, and other sources. Both PUHCA and PURPA would later be viewed as impediments to workable national electricity deregulation.
Thus, in the 1980s, a movement began to increase the efficiency of the generation sector by letting independent entrepreneurs compete to supply power to the utility.
In 1992, Congress passed additional legislation which allowed generating companies to be exempt from regulation and have access to the nation’s distribution systems at “just and reasonable” rates. This development opened the door to a restructuring of the electric power industry by allowing for market competition among power generators.
Why has deregulation been considered?
In the 1990s, deregulation was pushed by commercial customers rankled by utilities that built too many power plants and saddled customers with the tab. Deregulation was supposed to let customers buy electricity from more-efficient, competing suppliers. To prevent utilities from favoring their own plants, many had to sell the generation facilities to unregulated affiliates or to independent power wholesalers.
By the mid-1990s, large industrial consumers sought to escape the high costs of power in some parts of the country, like California, that came as a result of building expensive nuclear power plants. At the same time, independent power producers like Enron were actively lobbying to be able to sell power to these big consumers. Political pressure for deregulation mounted because the breakup of the $300 billion dollar utility industry meant huge amounts of money could be made. Enron, an important campaign contributor to the Republican Party and to President Bush, lobbied for deregulation not only in California, but at state legislatures across the nation and in Congress.
The intent and purpose of deregulation was presented as a way to improve the quality of people’s lives by lowering the cost of a critical commodity: Electricity. Deregulation was supposed to do for the power industry what it did in the airline and telecommunications industries: bring consumers lower prices and more competition.
The federal legislation which permitted companies to market their power was the first step towards a realization that the electric power industry was not necessarily a natural monopoly at least when it came to generating electricity. Other industries such as the banking industry, the airline industry and the telecommunications industry had successfully underwent deregulation. Many consumers in states with high rates anticipated that deregulation would reduce prices. Moreover, new technologies for generating electricity using modern turbines allow cost effective smaller scale generating systems.
The main argument used to support deregulation is that a freer market promotes efficiency. In a regulated environment, for example, wholesale and retail electricity power prices are calculated based on a utility’s costs. If a utility invests in what turns out to be an uneconomical project, it can still add the costs of the investment to the price it charges for electricity. Thus, the risks and economic consequences of a poor investment are passed to the electricity customer.
Despite efforts to manufacture an appearance of grassroots support, deregulation was primarily driven by large industrial users, who thought they could save money, and energy companies, who thought they could make money out of it. The case for deregulation could not be presented in self-interested terms to the public. It had to be presented as being in the interests of the wider public. Groups such as large industrial energy users used the language of free-market advocates to state their case in terms that disguised their self-interest.
The Heritage Foundation, a conservative think tank, helped spread the rationale for deregulation. Texas Congressman Thomas DeLay set out his “free-market vision” for the electricity industry at a Heritage Foundation lecture: “Bringing electricity into the competitive world will unleash new products, greater efficiencies, business synergies, and entrepreneurial success stories,” he said. “It will create new industries, new entrepreneurs, and new jobs.” Delay, the majority whip in the U.S. House of Representatives, was closely connected to Enron and a beneficiary of Enron donations. Two influential members of his “kitchen cabinet” were used as lobbyists by Enron. In Texas, his efforts to promote deregulation earned him the nickname DeReg.
In Energizing America: A Blueprint for Deregulating the Electricity Market, Adam Thierer, a fellow of the Heritage Foundation, argued that regulation of electricity monopolies had caused a “lack of price competition and consumer choices, limited innovations, and a lackluster environmental record” whereas “deregulation of the electricity marketplace” promised “rich rewards.” These rewards, he argued, included lower prices, lower operating costs for industry, more jobs, increased reliability of service and a cleaner environment.
Even the more centrist think tank, the Brookings Institute, produced a report supporting electricity deregulation for its potential consumer savings. The report was financed by companies lobbying for deregulation including Enron, Pennsylvania Power and Light, Wisconsin Electric Power, Cinergy and the Electricity Consumers Resource Council, a coalition of large electricity users.
Advocates of deregulation also formed a plethora of corporate front groups and coalitions, including the Alliance for Competitive Electricity, Citizens for State Power, Electric Utilities Shareholders’ Alliances, the Alliance for Power Privatization, and the Coalition for Customer Choice in Electricity. The campaign was coordinated by Americans for Affordable Electricity (AAE), whose members included the Ford Motor Company, Enron and various utilities. AAE raised millions of dollars for lobbying and advertising, spending $4 million a year on top of what each of its members spent. Member companies and groups also donated the time of their public relations, legal, policy and lobbying personnel.
Citizens for a Sound Economy (CSE), a front group with close Republican ties, spent tens of thousands on advertising in various states and even used banners from airplanes to promote “consumer choice.” It commissioned a study (funded in part by Enron) claiming that deregulation would reduce the average electricity bill by 43 percent. Politicians financed by business interests were eager to use think tank and front group data in their arguments for deregulation. After CSE’s figure of 43 percent was cited by the Heritage Foundation, the Foundation’s report was publicized by others as a confirmation of CSE’s study. A press release from the House Commerce Committee claimed that “yet another academic study” had concluded “that giving consumers the freedom to choose their own electric utility will result in lower rates, improved service and better reliability.” The Committee also cited the Brookings Institute report.
Politicians promoted the concept of consumer choice as a primary benefit of deregulation because they wanted wide voter support, which is why the actual legislation had names like the “Electric Consumers’ Power to Choose Act.” When the chair of the Commerce Committee, Tom Bliley, appeared at a press conference promoting the bill, he brought along representatives of what were supposed to be hundreds of consumer groups that wanted consumer choice. This was to avoid the impression that the bill was being introduced for the benefit of big business. The press conference announced a “media outreach” initiative telling consumers that deregulation could save up to 43% on their power bills.
Political campaign donations helped Enron play a major role in the deregulation campaign. In total, Enron donated just under $6 million to election campaigns beginning with the 1989-90 election cycle. It became the sixth highest contributor during the 1994 election cycle and by 2000 was the top contributor of all corporations in the Energy/Natural Resources sector. Enron also spent millions lobbying Congress, the White House and federal agencies. Like the EEI, Enron drew its lobbyists from both the Republican and Democrat parties. By the late 1990s it employed more than 150 people on state and federal government affairs in Washington, DC.
The battle for deregulation at the state level was equally well financed. Following their successes in Congress, the power companies spent large amounts of money on lobbying for deregulation at the state level. Enron’s lobbyists sought out consumer groups, schools and other community groups that would benefit from cheaper electricity and tried to persuade them that deregulation would be good for them.
Enron CEO Ken Lay “is pulling out all stops to hasten deregulation,” Business Week reported. “In April , he launched a $25 million-a-year nationwide ad campaign and says he’ll spend up to $200 million to argue the merits of free-market electricity.
In Texas, Enron spent $5.8 million between 1998 and 2000 on funding state politicians, hiring 83 lobbyists, advertising, and donations to Texan charities. It used its enormous political influence to overcome the resistance of the existing regulated utilities in Texas and persuade the public (which was already paying low prices for electricity) that they would be better off with deregulation.
In California, big electricity users formed Californians for Competitive Electricity to lobby for deregulation. It encompassed a range of other coalitions including the California League of Food Processors, the California Manufacturers Association, the California Large Energy Consumers Association – a coalition of cement companies, steel manufacturers and a gold mining company, and the California Independent Energy Producers Association. The California Manufacturers Association spent $1.7 million on lobbying in 1995 and 1996. The California Large Energy Consumers Association and Californians for Competitive Electricity also spent hundreds of thousands of dollars.
Existing regulated utilities also participated in the campaign for deregulation. The Center for Public Integrity estimates that three major Californian utilities spent $69 million between 1994 and 2000 on lobbying and political spending. In return for giving up their monopoly status, the regulated utilities negotiated a deal assuring them that $28.5 billion of ratepayer money would be used to pay off past debts from capital investment (‘stranded costs’) incurred by the construction of nuclear power plants.
The utilities were influential supporters of deregulation. For decades they had been giving campaign contributions and other donations to local politicians to ensure that the issue of public power was kept off the political agenda. They also donated money to a variety of community and civic groups and charities. According to the San Francisco Bay Guardian, the Pacific Gas & Electric Company (PG&E) “infused itself into San Francisco politics, society, culture and business – using its money to make connections that have insulated the company from criticism or political challenge.”
“The politicians and the community groups are all neutralized by the money, and there’s no countervailing force to fight the utility,” observed consumer advocate Ralph Nader. PG&E insinuated itself into several influential business organizations and onto the boards of large companies in the area. Even after prices for electricity soared and service deteriorated, business groups refused to publicly support a shift to publicly-owned utilities. According to Nader, PG&E also spread large amounts of “money around to the big law firms, so there’s no major firm that can take on PG&E. Then they enlist the political power of these law firms to press their agenda.”
The revolving door between business and government also helped the deregulators line up bipartisan support. California’s Republican Governor Pete Wilson led the push for deregulation. Democratic Senator Steve Peace was also a key advocate and received $277,000 in campaign contributions from the three large utilities. David Takashima, who had been Peace’s chief of staff in the 1980s before working as a lobbyist for utility SoCalEd, returned to work for Senator Peace and helped shape the deregulation bill. Takashima then left to be director of government affairs for PG&E.
In addition to campaign contributions, legislators also reaped personal benefits. Energy companies supported an organization called the California Foundation on the Environment and Economy (CFEE), which had representatives of the three main utilities on its board of directors. CFEE paid for various overseas trips for politicians and members of the Californian Public Utilities Commission (PUC) to “study deregulation.”
The state government also spent tens of millions on an “education program” in preparation for deregulation. “Plug in, California” was an $89 million government advertising campaign aimed at householders and small businesses that promised degulation would mean cost savings, reliability and consumer rights. It included television, radio and newspaper ads as well as direct mail and trained speakers talking to 84 community groups.
Enron spent more than $345,000 lobbying for deregulation in California and another $438,155 on political contributions. It hired former legislators and Californian PUC officials to shape legislation that created the disastrous energy market which would later be referred to as “the Enron model.”
What really happened in California?
In California, the utilities, at first, were skeptical of deregulation, because of the high cost of power from their nuclear plants. However, they began to hunger for the profits that could be made in a speculative market. They lobbied heavily for deregulation because they knew that with their enormous political clout in the state legislature, they could shape the outcome of deregulation.
The legislation, written primarily by California’s utilities, was extremely complex, a vast program for a vast state. It was wrangled over in a series of rapid-fire hearings, and rammed through the legislature at the last minute in a process that took only three weeks. It was unanimously passed and signed into law by Governor Pete Wilson in the fall of 1996.
The legislation, written and supported by utilities, privatized their profit and socialized their risks. The most glaring example of this was the $28 billion dollar consumer-funded bailout for their so-called “stranded costs.” Stranded costs are essentially mortgage payments that the utilities make to cover their purchase of expensive boondoggle nuclear power plants. The utilities argued that the bailout was necessary because they would now be assuming marketplace risk, and the uncertainty of their future profits made the paying off of debts they incurred under regulation too burdensome. To accomplish this bailout, rates were artificially frozen for 4 years, at what was then 50% above the national average cost of electricity.
As of March 31, 1998, California was one of the first states to deregulate their electrical industry. For about a year and a half, deregulation worked fairly well in California, but their success did not last. Around June of 2000, prices of wholesale electricity in California began to rise to all time highs. Because of these problems and others that ensued because of it, the state is not currently deregulated. Other states have had some problems with deregulation, but some states like Texas are truly succeeding with their new restructured electrical industry.
In California and some other states, the utilities were required to divest themselves of power generating assets. In California, utilities were subject to a rate cap until they recovered their “stranded costs” and completed divestment. A nonprofit “Power Exchange” or “PX” was created as an auction market for the buying and selling of electricity. This feature was discontinued when it was realized that a reliance on “spot market” pricing was contributing to the high cost. Now utilities contract with power suppliers directly and are able to structure contracts which provide more price stability. Under all plans, the costs and profits associated with the transmission, delivery and sale of electricity to consumers remain regulated.
Also, the legislation provided incentives for California’s utilities to sell their power plants to unregulated companies. They sold most of their fossil fuel plants at above the book value, providing them with a significant profit. However, they retained their nuclear and hydro-power generation, along with a small amount of fossil-fuel plants.
The power-generation price on the bill was no longer regulated, but states continued to oversee utilities and the separate price they charged to maintain the wires to homes and businesses. Customers could buy from the new competitors or stay with their utility, which itself would have to purchase power from the wholesalers. To ensure instant benefits for consumers, states froze residential rates for five to 10 years.
Under the legislation, the price of electricity was temporarily fixed at 6.5 cents per killowat hour which was substantially higher than the market price. The utilities were allowed to use the difference to recover “stranded” costs which were costs for equipment which could not be sold to producers. The wholesale price for electricity generation precipitously jumped in the summer of 2000 less than a year after one of the three major utilities (San Diego Gas & Electric) was allowed by the legislation to charge consumers an unregulated price after recovering these stranded costs. The rise in price was unrelated to any increased demand when compared to the previous year. The causes of such a dramatic rise are not completely clear although it is becoming more clear that power companies took advantage of the absence of regulation to close plants for maintenance to create artificial shortages. Indeed, the pattern of plant closures was abnormal when compared to the previous year.
Because they had not recovered stranded costs, the other two major utilities in California, Southern California Edison and Pacific Gas and Electric were required to charge consumers no more than 6.5¢ per kilowatt hour until March 2002. Because this rate had become much lower than the market rate, both utilities began to lose vast sums of money because they had to purchase power at the unregulated market rates. Their requests to raise rates above the legislative cap were refused and Pacific Gas and Electricity declared bankruptcy. Because San Diego Gas & Electric was exempted from the cap, the State government has been purchasing power over 6.5¢ on behalf of San Diego consumers since September 2000. For many months in the fall of 2000 and spring of 2001, the Federal Energy Regulatory Commission and the Bush Administration refused to regulate the wholesale prices despite the requests of California Governor Gray Davis and most members of California’s Congressional delegation. Finally in April 2001, the FERC did institute a temporary wholesale price cap formula only after the state began purchasing power under long term contracts. The result has been a form of new regulation. In order to pay for purchases of power, the state has authorized rate increases and the issuance of a $12.5 billion bond measure. Shortly after the negotiation of these contracts, the cost of electricity substantially decreased but the state is locked into long-term contracts which are substantially higher than the present market rate.
Enron made huge amounts of money from Californian energy deregulation. A significant proportion of California’s electricity and natural gas market operated through Enron’s online auction. According to Public Citizen, the auction “allowed Enron’s unregulated energy trading subsidiary to manipulate supply in such a way as to threaten millions of California households and businesses with power outages for the sole purpose of increasing the company’s profits.”
California utilities, claiming bankruptcy as a result of the price manipulation by unregulated power companies, used their information channels to ensure that the crisis was not depicted as a failure of deregulation. PG&E inserted a letter into 4.6 million ratepayers’ bills saying that “the state’s booming economy can be a mixed blessing,” referring to rapidly growing population and the “multiple electronic devices” of the Internet age: “New energy supplies have not kept pace with that growth.”
Even after the profiteering of Enron and other electricity companies got out of hand, the spin doctors worked to divert the blame from deregulation. Even as the utilities threatened bankruptcy and ongoing blackouts unless the state government bailed them out, the major media outlets in California and throughout the world depicted the problem as a shortage of energy itself. Hundreds of articles were published insisting that the crisis stemmed from a booming economy and industrial growth, coupled with unusually hot, dry weather which caused energy demand to surge.
What about other states?
Many states have takes the view that “If it isn’t broken, don’t fix it.” The electric power system under the federal/state regulation system has kept up with demand and produced electricity at relatively stable prices over a long period of time. At the same time, it has provided a stable financial return for investors.
Restructuring has not caused the problems that California has experienced, probably because no “spot market” for power was created and long term contracts guarantee a steady electricity supply. In Pennsylvania, many consumers have begun to choose different electricity suppliers and the rates have actually decreased. Pennsylvania, unlike California, did not require their utilities to divest themselves of power generation.
But while 60% or more of commercial customers in many deregulated states switched to rivals and realized at least some savings, fewer than 10% of consumers have defected, says a study by Michigan State and Ohio State universities.
Richard Rathvon, head of the Retail Energy Supply Association, blames the rate caps, which kept prices artificially low and left rivals no room to undercut the utility. “Competition hasn’t failed,” he says. “It hasn’t been allowed to work.” Proof, he says, lies in Texas, where utilities have been able to raise their rates in response to fuel price increases and this year were freed of all price restraints. About 60% of Texas consumers have chosen an alternative power supplier.
D’Lana Motta, 52, of DeSoto, Texas, switched from utility TXU (TXU) to Reliant Energy (RRI) earlier this year to light her home and clothing boutique. She’s saving about 10% on her electric bill. “In running a business, you want to save money,” she says. “And maybe it’s a little more personal service.”
Natural gas represents a small portion of electricity generation but has a disproportionate effect on wholesale prices. That’s because idle natural gas plants that rev up to meet excess demand on hot days charge high prices that all generators, even low-cost coal plants, receive. Such “spot market” prices also affect rates for long-term contracts. By contrast, regulated utilities must charge customers the average cost of all their generation.
To discourage manipulation of wholesale purchases, the Federal Energy Regulatory Commission (FERC) has proposed new rules, including making suppliers disclose their bids to other bidders after a brief lag. Bids are now kept secret for six months. “We’re trying to increase the transparency,” says FERC Chairman Joseph Kelliher. He says FERC is closely monitoring power markets and, with a 2005 law, can now impose hefty fines for manipulation.
Yet officials say scrapping deregulation brings its own perils. Bill Massey, a former FERC commissioner and a lawyer for Compete, a group of wholesalers, utilities and customers, says free markets have led to more efficient and innovative plants. Now, rivals are best able to offer conservation and energy efficiency services to cut global warming emissions, he says.
Electricity deregulation has passed (or been adopted by a regulatory process) in 23 states plus the District of Columbia. However, because of the situation in California, Utah repealed its deregulation bill and New Mexico has delayed implementation of its deregulation legislation. Of the states that passed bills, only a handful of them have begun changing their energy supply systems. Some places, like Washington, D.C., negotiated long-term contracts at reasonable rates, which will put off by several years the disasters of a truly deregulated market. And in almost all states, deregulation is to be phased in over a period of years. To make the legislation politically viable, price caps, mandated rate reductions and other benefits that will be sunset were included.
In a deregulated marketplace, the price of electricity fluctuates by the season, the weather, and by the time of day. Prices are governed by the amount of available generating capacity and the amount of demand. But consumers are charged just a flat fee for their use of electricity that does not vary with the cost of electricity that they are using. The technology for charging consumers varying prices based upon the time that they use electricity has been developed but it is still several years away from being implemented. Thus consumers are not encouraged to use electricity in an economically prudent way. Many economists believe that until there is a way for the demand for electricity to respond to changes in price, there has to be some type of regulatory price cap on the cost of electricity.
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