alternative reader no. 129
In
Deregulation of Electric Markets, a Consumer Pinch
By Mark Clayton
The Christian Science Monitor
Competition was supposed to lower prices in deregulated states. But
faster-rising rates there are spurring a backlash.
It's the
slow season for the laundromat in tiny Milford, Pa., yet owner Darryl Wood
has raised the price of a wash by 50 cents this year, to $2.50. The
reason? Electric rates have more than doubled since January, threatening
to close the lid on a business his family has run for decades.
"I've
already seen an electric bill higher than anything that I've ever gotten,"
he says. "I thought deregulation would bring rates down. Now, I'm just
hoping we can hang on."
His
ordeal reflects the fresh dismay many consumers are feeling about the
deregulation of the electric utility industry. When deregulation was
implemented in the 1990s, supporters said it would drive rates down
through competition.
But data
so far suggest that rates in deregulated states are rising faster than
those in regulated states. That trend could expand as caps on retail
electric rates, which have held prices down, are lifted in at least six
deregulated states this year.
The
issue is heating up:
Maryland,
where homeowners were threatened with a 72 percent rate hike this summer,
deregulation is suddenly a major issue in the governor's race.
Delaware, where Delmarva Power set forth rate jumps of at least 59
percent, lawmakers responded by phasing them in over several years and
requiring power companies to do long-term planning.
Price
comparisons are limited because rate caps are only just being removed. But
in New England, where many caps came off last year, retail electric rates
surged about 15 percent - except for Vermont, where regulated rates are
roughly flat. In the Mid-Atlantic region, rates in deregulated New York
have risen 16 percent since 2002, while rates in still-regulated West
Virginia were about flat.
Such
unexpected disparities are prompting a backlash in states that recently
allowed markets to set wholesale and retail pricing. And it's fueling a
debate over what went wrong.
Industry
officials blame price spikes on higher fuel costs and rate caps set too
low years ago. But fuel hikes are only a partial explanation, analysts
say. Lack of competition and the ability of companies to sway markets to
maximize profits may be factors, too, they say.
"There
has been and is today no true competition in wholesale and retail
electricity markets," the Electricity Consumers Resource Council wrote in
a filing with the Federal Energy Regulatory Commission in November.
Power
companies strongly disagree.
"Competition has been incredibly robust," says John Shelk, president of
the Electric Power Supply Association. "People believe if prices rise
something is wrong.... But the reason is the cost of [fuel] increased."
That
hasn't cooled the anger in
Pike County,
Pa., which includes Milford, where residents are telling regulators that
the doubling of their rates is outrageous. Just two suppliers bid in an
auction to serve the area last October. "It seems a little fishy to some
people," Mr. Wood says. "It's very bad for the economy here and for
morale."
Some
states are even considering re-regulation. But getting the "genie back in
a regulated bottle" may be difficult or impossible, says Christie Rewey,
an energy specialist at the National Conference of State Legislatures in
Denver.
Many
states sold their generating stations for a song in the 1990s, she says.
Now these same states find that those old plants are a gold mine for their
owners and would be very costly to buy back.
Today,
16 of 23 states that initially passed electricity deregulation offer a
fully deregulated power system, studies show.
At least
34 states have repealed, delayed, suspended, or have limited retail access
to just large customers or are no longer considering deregulating
electricity for retail customers, according to a study last year.
Take
Montana. It once had the region's lowest electric rates, but sold off its
hydro-dams and deregulated in 1997. Some legislators there want the state
to buy back those dams. "The power those dams generated for less than $20
per megawatt hour has jumped to over $31 since deregulation," says Don
Judge, a political consultant in Helena, Mont. "It's ironic that we sold
them in the first place, and now we're paying the price."
Industry Defends Benefits of Deregulation
The
re-regulation push worries some industry officials. "Absolutely, we are
worried states will try to turn back the clock," Mr. Shelk says. "It would
be bad for us, but in [the] long term bad for states, too."
Industry
officials have launched a campaign called COMPETE to tout the benefits of
competition. And they cite two studies showing that deregulation has saved
consumers between $16 billion and $34 billion so far. But other studies by
academics and power consumers dispute those findings.
"At
best, at this point in time, no discernible overall benefit to retail
consumers can be seen from restructuring," wrote Kenneth Rose, an
independent energy consultant, in an analysis of deregulation last year.
Consumer
anger, others contend, is the surest sign that deregulation has not lived
up to its promise.
Disappointment is strong in the PJM wholesale power market, which covers a
region with 51 million people in all or parts of 13 states, including
Pennsylvania, New Jersey, Maryland, Delaware, Ohio, and Virginia.
In
Pennsylvania, which deregulated electricity in 1996, most households are
still protected by retail rate caps until 2010. Yet even Irwin "Sonny"
Popowsky, the state's consumer advocate on utility pricing and a one-time
booster of electricity restructuring, is shaken. "I'm just really
disappointed and shocked by the results in places like Pike County,
Maryland, and Delaware," he says. "This isn't the way it was supposed to
be."
Market
prices in New York and New England (except Vermont), where rate caps have
come off, are often set by the highest-cost facilities. "These generators
all get paid as if they're running a natural-gas-fired machine at double
or triple the rate - and that has thrown the equation off," says Gerald
Norlander, executive director of the Public Utility Law Project of New
York.
Analysts
also blame poor competition in residential markets on the higher costs
companies incur serving smaller customers. In Ohio, for instance,
customers like Mary Babcock want to compare offers from the eight power
companies doing business there. But she can't.
Instead
of adding competitive pressure to sell electricity at lower cost,
deregulation in Ohio has so far yielded just one company interested in
selling Mrs. Babcock power - the same one that's sold it to her for years.
"No competitive retail electric service providers are currently enrolling
customers," says the Ohio Public Utilities Commission Web page.
That's
bad news for Babcock. But it's far worse news for Bob Flygar, manager of
Eramet Marietta, Inc., a southeast Ohio branch plant that makes alloys for
hardening steel. Electricity rates that have leaped 50 percent since 2004
could mean "eventual demise of the Eramet plant" and 400 jobs, he
testified before the state utilities commission last October.
"We need
a healthy dose of real competition," says John Anderson, president of the
Electricity Consumers Resource Council. "We were deregulation's first
supporters. But all we've really done is go from one regulatory structure
to a new one that is less customer friendly."
He and
other critics also allege that a key negative feature in each market is
"market power" - an oligopoly situation that may be allowing generating
companies to whipsaw prices upward.
Market
power worries Howard Spinner, director of economics and finance for the
Virginia State Corporation Commission. In his analysis of PJM's market
data from last year, Mr. Spinner found 41 generating units he says may be
employing a strategy of "economic withholding," which could effectively
cut power supplies and raise prices. But he's not certain, since PJM won't
release critical data for analysis - something the transmission
organization denies.
"We've
heard these charges before," says Ray Dotter, a PJM spokesman. "Our
independent market monitor has consistently said it is competitive."
Hockey-Stick Bidding: Market Power in Action
But Dr.
Rose, the energy consultant, sees what may be subtle attempts to influence
prices through strategic bidding that, when graphed, resembles a hockey
stick. He points to July 27, 2005 - one of the hottest days in PJM last
summer - as a case in point.
A big
power company started the bidding with a very low offer: 4,300 megawatts
for zero dollars or other nominal amounts, Rose says. It offered the next
2,700 megawatts at gradually higher prices until it reached $100 per
megawatt hour. But the last 1,000 megawatts were offered at $200 to
$1,000, and it's those last high-cost blocks of power that often set the
rate overall.
That, he
says, could be evidence of market power.
PJM
officials strongly reject allegations of tacit collusion. On the hot
summer day in question, prices peaked at $512 per megawatt hour.
Hockey-stick bidding is "a common market mechanism," says Joseph Bowring,
PJM's internal watchdog. It ensures prices high enough to lower
consumption and "keep the market from running out of power."
Back in
Milford, officials will soon hold hearings into the power auction process.
And hopes are growing that a new auction may be held and a lower-cost
supplier found.
"All the
consumers up here are saying: 'Now, I see how this deregulation works,'
says David Wilson, executive director of the Pike County Chamber of
Commerce.
25 April
2006
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