Issues & Analysis: Deregulation of the electricity industry stalling

Deregulation of the electricity industry is stalling across the country in the aftermath of problems in the California market. Some state legislators are moving to delay decontrol and some are trying to repeal deregulation legislation. OGJ Online Senior Power Writer Ann de Rouffignac interviewed legislators and public utility commission staff in several states that are having second thoughts about electricity decontrol.

Ann de Rouffignac
OGJ Online

A backlash against deregulation of the electric utility industry is gathering steam. Some states are postponing the start of competition and others have dropped the discussion altogether. The change of heart is fueled by higher prices in California this past summer and uncertainty over whether utility restructuring will really lower rates for users.

The negative talk has turned some heads in the industry.

�Competition used to be close to Mom and Apple Pie,� says Dean Jones, vice-president of strategic business relations for Tulsa-based Williams. �Now, people are questioning if it�s good for the power industry.�

Consumer advocacy groups are wondering about the efficacy of retail deregulation of electricity.

�Our members are taking a second look. There�s a healthy skepticism to whether there is any benefit to residential customers,� says Charles Acquard, executive director of the National Association of State Utility Consumer Advocates.

Even though 26 states have passed restructuring legislation, at least 7 of those states are stalling implementation and handing up a variety of excuses.

State legislators in some of these states have promised to introduce legislation that will postpone deregulation. In other states, the public utility commissions have the authority to slow the process.

States rolling back deregulation include: Arkansas, Montana, Nevada, New Mexico, Oklahoma, Oregon and West Virginia. At least three others, including Alabama, Colorado, and Missouri will not pursue it further. And Kansas, South Dakota, and Tennessee never got started and don�t intend to now.

�We want the start of deregulation delayed,� says John Curl, utility director for the New Mexico Public Utility Commission. �We are concerned that New Mexico is in a similar situation as California.�

Competition was scheduled to begin in New Mexico in January 2002. PUC staff, industrial customers, and the Office of Attorney General�s office sent a formal request to the commission to delay separating generation units from transmission and distribution assets until after the next legislative session, says Curl.

Ditto for Nevada and Montana. Just 2 weeks ago, the Montana Public Service Commission proposed to push restructuring implementation out to July 2004 instead of July 2002. And legislators have already filed bill draft requests for the 2001 legislative session to repeal the whole deregulation law or postpone implementation, says Will Rosquist, staff economist at the Montana Public Service Commission.

Even big industrial customers want to slow the process in some states that already were listed in the deregulated column.

�We are going to take one step at a time,� says Bob Valdez, spokesman for Oregon Public Utility Commission. �The large industrials that wanted it (deregulation) in the first place are having second thoughts. They are pushing a proposal in the next legislative session to slow it down.�

Contributing to this thinking is the reality there is no turning back to the old cost-based system once utilities are broken up.

�You can�t put it back the way it was,� says Jim Hewlett, senior economist at the US Department of Energy�s Energy Information Administration. �You can�t put Humpty Dumpty back together again.�

Deregulation doubts
Doubts about deregulation are fed by a growing concern that throwing the electricity market open to competition may not bring consumers the lower prices that proponents promised. Not only is there fear that prices won�t fall. Concern is now focused on the potential for rising prices�witness California's experience this summer.

Hewlett says clear mistakes were made in California, and other states want to be reassured the same thing won't happen to them.

�No legislators wants to face their voters and say, �We raised your electricity prices,�� says Gerald Keenan, partner with PriceWaterhouseCoopers in Chicago. �States worry about putting a lot of effort into something that won�t have a positive impact on customers. These states ask, 'Why restructure the industry'. Where are the benefits?�

Legislators agree that it boils down to benefits �and that means price.

�We are the �Show Me� state. Show me where this makes a lot of sense,� says Missouri State Sen. Wayne Goode (D-St. Louis). �We never saw where it would be a benefit to residential ratepayers.�

In Oklahoma, State Sen. David Herbert (D-Midwest City) is unwilling to proceed with deregulation for consumers because of the risk that bills might rise instead of decrease. At 6.9�/kw-hr, Oklahoma�s electric rates are well below the national average of 8.3�.

�I will introduce legislation that will keep the electricity produced for consumers regulated,� says Herbert. �I don�t want Mom and Dad subject to higher electric bills.�

In Kansas, people want everything cheaper, says State Sen. Pat Ranson, (R-Wichita). �They will learn what competitive prices really mean. They can go up as much as they can go down.�

These legislators are more comfortable with the wait-and-see approach, preferring to let other states take the lead before jumping in.

�Competition was promoted to lower prices,� says David Hughes, executive director of Citizen Power, based in Pittsburgh. �It hasn�t.�

Most of the states that adopted restructuring laws and actually implemented them have relatively high electricity rates. New England states, with residential electric rates ranging from 11�-14�/kw-hr, were some of the first to deregulate the electric industry. New York with residential rates of 13.6�/kw-hr and California with rates of 10.6� also deregulated. All these states have rates well above the US average of 8.32�/kw-hr for the year 2000.

But states such as Kansas, Colorado, Missouri, and South Dakota, with rates ranging from 7.5� to 7.9�/kw-hr have little interest in deregulating the industry at this time.

In Kansas, draft legislation got nowhere about 3 years ago, says Ranson.

�It�s not that we haven�t studied about it (deregulation.),� she says. �We are no country bumpkins. We looked long and hard. Kansas has low rates and we have no incentive to do it.�

Missouri legislators feel much the same way. After 4 years of looking into deregulation, a legislative committee chaired by Goode found no �will� to go forward. �We encountered a lot reluctance all along the way to deregulate,� he says.

The committee held a hearing 2 months ago to see how stakeholders felt about what happened in California.

�Almost no one had anything good to say,� Goode said. �Nothing will get passed this legislative session.�

In Colorado, the legislature ordered a comprehensive report on deregulation. A 30-member stakeholder panel concluded in November 1999 that deregulation was not in the public interest. In the legislative session last spring, the issue didn�t come up at all and no discussion is expected next session either, says Terry Bote, spokesman for the Colorado Public Service Commission.

South Dakota elects its Public Utility Commission. The commissioners are clearly against deregulation, says Bob Miller, executive director South Dakota Electric Utility Companies, a trade association.

�There is zero interest,� he says. �There are no shortages of power and we have low rates.�

In Oklahoma, the start date for a competitive market was supposed to be July 1, 2002. A bill outlining the rules and specifics for the new marketplace was defeated in the state House of Representatives last session.

Even though the Oklahoma Corporation Commission is operating in recognition of the mandated deadline, it will be difficult to implement competition by the deadline with such a late start on the details and specific rules for a competitive market. The bill is expected to be reintroduced in 2001, says Matt Skinner, spokesman for the commission.

Long run benefits
Deregulation proponents stick to their belief that deregulation is the correct path for the industry. It�s simply a matter of patience with the market, they say.

�Consumers will ultimately benefit. It�s a question of how far into the future,� says Jay Lukens, president of Lukens Consulting in Houston. �It takes a minimum amount of time.�

Economists agree prices will fall eventually in markets left alone, squeezing out excess profits or inefficiencies that keep costs high. Entry and exit to the market is what makes prices equilibrate to the lowest possible level and still cover costs. Inefficient producers are pushed out.

�Deregulation is good because in the long run efficiencies will be gained,� says EIA�s Hewlett.

But how long is the long run? That's always been the debate.

While markets search for equilibrium, electricity prices have risen so far, especially in California. Free market advocates blame a flawed market design for California's problems, but others point out the market participants did exactly what they should have in a competitive market: they maximized profit in the face of considerable short supply and non-responsive demand. As a result, prices tripled.

�No one wants to live through the proper signals while the participants try to get it right,� says Janee Briesemeister, senior policy analyst with Consumers Union. �That always means higher prices in the meantime.�

Lukens says deregulation will yield the results consumers want. It�s a simple matter of supply and demand. In the face of increasing demand, supply must be increased and the fundamental goal of deregulation is to get more generation.

�It�s not something that you can snap your fingers and have happen over night,� he says.

Wait and see
Briesemeister says there is no reason to rush as long as so many unanswered questions remain. Economist Hewlett worries that deregulation can�t really work without a complete break up of the transmission system. Each power pool needs one large independent transmission organization.

�You can have all the competition you want in generation, but without a separate independent large regional transmission entity, it won�t work,� he insists.

Some legislators go a step further and question if electricity is a commodity that should ever be left to market forces.

�People feel it needs some oversight,� says Ranson. �It�s like water.�

There are concerns some consumers are just not interested in shopping for electricity, especially when slim savings, if at all, result.

Keenan says the wholesale market will have to become competitive first before any real progress can be with the retail market. Electric restructuring is very early in the process. It could take 10 years to work through. He observes that deregulation of the wholesale natural gas took 15-16 years to complete.

He questions if the retail electricity market is really viable at this point. �There might not be sufficient margin on the sale of gas or electricity,� says Keenan.

Randy Corbin, chief policy analyst for Consumers Counsel of Ohio, predicts no more states will move forward with deregulation until legislators see how it has worked in states that have deregulated. It will be tough to get anything passed on the federal level either, he says.

�There will be no clamor from the electorate to push this forward,� says Corbin. �It will be wait and see.�

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