The Pew Charitable Trusts

From tax shortfalls to power blackouts to exorbitant rate increases, electric utility deregulation has been more of a pain than panacea for a number of states.

Also known as electric utility restructuring, deregulation is supposed to bring about lower electricity prices by exposing utility monopolies to competition. At least that's what the 24 states that opted for deregulation had anticipated.

That definitely hasn't been the case in California, whose 1996 deregulation law made it one of the first states to remake its electric industry. Not to put too fine a point on it, the Golden State's experiment with the policy has been a disaster. State consumers and public officials are in near revolt over power outages and soaring electricity rates.

California's experiences likely played a role in Nevada's decision to postpone its Mar. 1 deregulation rollout, and probably induced Iowa lawmakers to table a bill to deregulate that state's electric industry. In May, Mississippi officials opted not to introduce deregulation there. On the other hand, Michigan's legislature in May passed a deregulation bill it hopes will begin lowering electric bills this summer. Other states that have broken up electric utility monopolies are Arizona, Arkansas, Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Montana, New Hampshire, New Jersey, New Mexico, New York, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Texas, Virginia and West Virginia.

Critics of deregulation are quick to point to California. Among the fixes proposed for the Golden State's $20 billion electric industry are across-the-board rate freezes and even a return to regulated power monopolies.

Price Spikes

As far as California is concerned the screaming is loudest in San Diego, home to a large number of pensioners as well as San Diego Gas & Electric, the first state utility to deregulate. Residential electric bills for some San Diego consumers have doubled in the last three months, prompting Attorney General Bill Lockyer to call for an investigation.

"San Diego should charge tuition for this class, `Botched Deregulation 101,'" the executive director of the Utility Consumers Action Network , Michael Shames, told The Associated Press. "Other states would be stupid not to look at us and then let this situation repeat itself."

In fairness, no one said the road from electric power monopolies to free competition would be a trouble-free cakewalk. But that's probably little consolation to San Diegans chasing runaway electric bills.

Other deregulated Western states confronting escalating power bills are Oregon and Montana, where companies have been forced to lay off workers to cope with power costs. In addition to deregulation, other factors behind the price increases include hot western weather that's bumped up electricity demand and lower-than-normal river levels that have caused electricity production at hydroelectric dams to fall.

Looking East, New York City residents are bemoaning power rate increases that have accompanied Empire State deregulation. According to Consolidated Edison, the average New York City residential customer will pay 30 percent more for their 2000 June and July electricity bills, compared with the same months in 1999.

In accordance with New York's state law, Con Ed lifted price caps on the generation of electricity, and was also forced to sell most of its generating plants, making Con Ed essentially an electricity distributor and putting city residents at the mercy of outside producers.

A utility industry spokesman said fuel costs are behind rising prices, not power companies. "The cost issues affecting New York and other parts of the country have almost exclusively to do with the soaring price of natural gas," says Jim Owen, an Edison Electric Institute spokesman. "There certainly still are problems and issues out there, and (competitive deregulated electricity) markets are still maturing."

Lights Out!

Illinois, Arkansas, New York and Delaware -- all deregulated states -- experienced electricity outages in the summer of 1999. In March 2000, the federal Department of Energy warned that the summer of 2000 could bring more of the same, and those predictions have come to pass.

A DOE report cited overtaxed transmission and distribution lines and utilities emphasizing cutting costs and maximizing profits, instead of reliability.

In June, demand placed on California's electrical grid led to deliberate blackouts in the San Francisco Bay area, the first time that's happened since World War II. The specter of blackouts presently hovers over the entire state, because supply is too closely linked to demand, a situation that also exists in other states. So much swapping of power is taking place on the national transmission grid, that something has to give, says the Owen of the Edison Institute, an organization of roughly 200 investor-owned utilities that supply 75 percent of the nation's electricity.

"In 1995 there were about 20,000 commercial transactions on the grid," Owen says. "Last year, there were about 2 million. Those transactions are taking place on a transmission grid that was really not designed for that kind of volume." Owen likens it to a two-lane rural road suddenly forced to handle the traffic of a major interstate.

"There are going to be bumps and potholes in this road," Owen cautions.

Adding to the strain of deregulation is increased demand brought about by an unparalleled economic boom, not to mention more new homes to personal computers to power. As a result, electricity demand had increased an average of 2 percent annually, but increases in power production haven't risen correspondingly.

Revenue Jolts

Predictions that electric utility restructuring can have negative tax revenue consequences materialized in New Jersey, which is coping with the surprise loss of $234 million in utility taxes.

State Treasurer Roland Machold revealed in May that utilities were contributing $960 million to the current budget, instead of an anticipated $1.076 billion. Two reasons were given for the shortfall: Due to deregulation, New Jersey utilities sold power plants to out-of-state firms that were able to sidestep New Jersey business income taxes.

Secondly, New Jersey utilities had to buy back contracts and used those losses as tax deductions.

Meanwhile, Texas' new deregulation lowered the valuation of nuclear plants that Somervell and Matagorda counties depended on for their respective tax bases. As a result, school districts in those counties experienced a revenue loss that local and state officials must make up.

The South Texas Project nuclear plant, which provides some of Austin's power and accounts for 58 percent of Matagorda County's tax base, dropped in value from $2 billion to $1 billion as a result of deregulation.

"We are not laying people off, we are not cutting services at this point," said Herbert Ressler, business manager for the Palacios school district, which is in Matagorda County. "It's certainly got us concerned. Overall, we're probably going to lose about a million dollars in revenue."

The situation is even more severe for Somervell County, which is in North Texas and gets 98 percent of its tax base from the Comanche Peak nuclear power plant. That facility's assessed value dropped from $6.3 billion to $1.9 billion, as a result of deregulation.

Matthew Brown, who focuses on energy matters for the National Conference of State Legislatures, predicted last year that breaking up electric monopolies might have negative tax ramifications.

"Utility taxation was never an issue in the past, because utilities were monopolies and they passed the taxes through in their rates," Brown says. "Now, it's a huge issue."