States Pull the Plug on Electricity Deregulations
By Eric Kelderman, Staff Writer
In 1996, California launched a national fad by allowing power utilities to compete for customers within and across its borders. By 2000, 23 states and the District of Columbia had rushed down the path of electricity deregulation.
But the fad to open up the electricity market has faltered. Residential consumers have found little reason to switch to new power providers, and the promises of lower prices and a reliable electricity infrastructure have failed to materialize. The California energy crisis of 2000-2001, the financial scandals of energy giant Enron, and the massive Northeastern blackout in August 2003 have soured policy-makers, consumers and even some power companies on electric utility competition.
As a result, Arkansas, California, Montana, Nevada, New Mexico and Oklahoma have changed course and abandoned or indefinitely delayed deregulation. Oregon has limited electricity competition to large industrial customers, and pressure is rising in both Illinois and Michigan to pull back from utility restructuring. Consumers in many states also are bracing for rate hikes in coming years as price caps -- enacted to protect them during the early phases of deregulation -- expire.
"Nobody's benefited from deregulation - period, end of story," said Charles Acquard, executive director of the National Association of State Utility Consumer Advocates.
Javier Barrios, senior vice president of the Good Energy consulting firm, says electric industry competition has benefited industrial consumers in many states, especially Massachusetts, New Jersey, New York and Texas. But "for individual consumers, yes, [deregulation] needs a lot of work," concedes Barrios, whose business helps companies find cheaper power.
That's a reversal from the optimism of a decade ago when lawmakers began breaking up traditional regulated utilities that controlled both power generation and the retail delivery of electricity. Under the old structure, utility companies were ensured a monopoly over customers in a state or region. In return, they accepted a price -- limited by state regulators -- to cover the cost of the power, maintaining the poles and wires plus a small profit.
A lobbying blitz and millions of dollars in campaign contributions from Enron and other upstart energy companies in the late 1990s helped convince state legislators that residents would pay less for power if there were an open market for electricity. Utilities in deregulated states were required to break up their power generation and retail services, in order to compete with each other and negotiate with power plants across the country for cheaper prices.
Today, while large industrial power users are being wooed by electricity retailers, deregulation has caused just a ripple of competition for residential consumers. Only residents in Ohio, Texas and the District of Columbia get more than 10 percent of their electricity from alternative power suppliers, according to a 2004 study prepared for the Virginia General Assembly. In Ohio, nearly all of the utility switching was done by local governments that pooled their residents into a buying group, the report said.
In Michigan, alternative energy providers pursued only large industrial customers and ignored small businesses and residential consumers, said Kim Strazisar, a spokeswoman for Citizens for Long-term Energy Affordability and Reliability. The group is supporting legislation to make out-of-state power companies comply with Michigan's environmental and electricity reliability standards, and has more than 23,000 members, including consumer groups, small businesses and the state's two major utilities.
Susan N. Kelly, general counsel of the American Public Power Association, said that most for-profit utilities decided not to encourage residential customers to switch because there was no profit in it.
Most states that restructured their electric utilities put a temporary cap on the price of power to protect consumers. But those caps were too low and limited the profits of potential power competitors, Kelly said.
Aside from the price caps, deregulation did not lower the price of electricity, especially in states where power was most expensive, according to a 2004 study by the libertarian Cato Institute. States with traditional utility regulation still have lower-cost electricity, the report said.
New Jersey consumers were socked with a 19 percent rate increase when the price cap in that state expired in 2003. Energy experts are predicting similar price hikes when rate caps expire in other states.
The Illinois attorney general and consumer advocates are asking the Illinois Commerce Commission to extend a price cap set to expire at the end of 2006. "Consumers are asking why, with record profits [for electric utilities], should we accept rate hikes," said Martin Cohen, executive director of the Citizens Utility Board of Illinois.
Deregulation also spurred massive rate hikes when Houston-based Enron, an energy trading company, manipulated California's energy market in 2000-2001, according to a report by researcher Mark Cooper at the Consumer Federation of America. By withholding power during peak usage times, Enron caused the cost of electricity to jump tenfold, Cooper said.
Electricity industry restructuring also is blamed for weakening the grid of poles and wires that carry power across the country. Under a 1992 federal rule, alternative electricity providers were given access to power lines in states where they were competing for customers.
But the increased electrical traffic on an already-neglected power grid contributed to the August 2003 blackout that left millions without power in eight states and two Canadian provinces, according to a report from the North American Electric Reliability Council, which investigated the power loss.
The existing system is still insufficient for the increased demands of a competitive electricity market, and there is little political support for expanding the electricity infrastructure, Cooper said.
Nelly, of the APPA, added that there also is no economic incentive for competitors, or the incumbent utility company, to maintain the electric grid.