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Regulating Deregulation
As shackles come off electricity sales, experts remain at odds regarding potential outcomes
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Business New Haven
1/6/2003
By: Lisa MiCali
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Now that headlines from around the country screaming about the Enron scandals, rolling California brownouts, phony electric trades and accounting mismanagement have been reduced to a whisper, most of us are still in the dark about electricity deregulation and its impact on Connecticut's future.
Meanwhile, the Bush administration continues to warn that the nation could encounter regular blackouts and insists that the nation faces a severe energy crisis unless it builds one power plant a week to stem a potential national cataclysm.
While it's true that per-capita demand for electricity continues to rise, recent studies show that electricity prices have actually fallen steadily over the last five years. And for most consumers as well as businesses, there isn't a crisis yet (unless you live in California, where energy producers squeezed millions out of unsuspecting consumers).
But here in Connecticut the same energy games could undermine the state's best intentions because the message from other states is clear: Regulate deregulation or it will regulate you.
Electricity restructuring of wholesale markets - or deregulation, as it is better known - began with the passage of the Energy Policy Act in 1992 and the restructuring of retail markets in 1996. In Connecticut, Gov. John G. Rowland followed the example of many of his peers and signed into law one of the most comprehensive pieces of legislation in Connecticut's history, making Connecticut the 18th state to restructure its electric utility industry. Quietly, electric restructuring began here on January 1, 2000. In less than one year - on January 1, 2004 - price controls will come off electric rates in Connecticut.
The transformations mandated by Connecticut law will have a profound effect on electric bills, distributors, generators and regulators of electricity. To date, 1.5 million residential and commercial electric customers in Connecticut have yet to feel much of an impact. But that may soon change.
The impact of restructuring on consumers, according to Northeast Utilities' Lisa Thibdaue, vice president for rates and regulatory affairs, is: “The ability to shop for power, which means that will have the ability to compare price, service, and terms of contract. In the long run, just about everybody believes competition will bring prices down.
“Also in the long run,” she continues, “customers should see declining prices. But, I have to stress, this is not a promise from this year to next year, or this month to next month. As more efficient generating plants are built and as generators compete with each other selling in the same market, they're going to be forced to streamline their businesses, become more efficient and sell at cheaper and cheaper prices. And the customer will see the benefit.”
When Connecticut adopted legislation in May 1998 that allowed consumers to choose their electric suppliers, the act required the state's two electricity companies and the state's Department of Public Utility Control (DPUC) to take steps to establish a competitive market by giving end-users genuine choice rather than being captive customers of a monopoly.
Consumers in “distressed” municipalities were the first to choose electric suppliers, with consumers in most other parts of the state following their lead. (Distressed municipalities locally included Ansonia, Bridgeport, Derby, East Haven, Meriden, Middletown, New Haven, Stratford and Waterbury.)
However, to date only one percent of customers have chosen a supplier. But that number is rapidly rising as customers venture, however gingerly, into the open marketplace.
Explains NU's Thibdaue: “The wholesale markets have been dramatically reformed. We have a robust deregulated wholesale market with generation no longer owned by the utilities, and with it owned by third-party merchant companies buying and selling electricity in New England and in the Northeast.
“At the retail level, it's progressing a little slower than anyone anticipated,” Thibdaue allows. “But what we're starting to see, particularly the large customers are now starting to go out and buy electricity on their own. As time goes on, as people get more comfortable with it, there will be some incursion into the smaller and residential customer.”
In addition, under Public Act 98-28, Connecticut's Restructuring Act established the Standard Offer Service (SOS), which provides for energy to be supplied by an electric distribution company to consumers who do not choose an electric supplier. (SOS began January 1, 2000 and is scheduled to expire on December 31 of this year.) The state legislature is expected to examine the issue during the upcoming legislative session to determine if the SOS will be extended and/or to establish procedures for how electric companies will proceed in obtaining their power supply once the standard period had expired.
But will consumers and business customers actually choose new suppliers? Executives at New Haven's United Illuminating Co. believe they will and are - albeit slowly.
Says UI spokesperson Myra Stanley: “Customers now have had the option of choosing an electric supplier since deregulation began, and slowly we're seeing customers choose suppliers.” She says currently, UI residential customers may choose only one alternate supplier other than the standard offer, which is Green Mountain Energy. The Connecticut Energy Cooperative was another provider, but ceased to provide service last year.
A recent report by PennFuture, an environmental activist group based in Harrisburg, Pa., shows that residential consumers in deregulated states pay less for electricity and have greater access to cleaner power. The report “Electricity Competition: The Story Behind the Headlines - A 50-State Report,” shows, though, that commercial and industrial customers haven't reaped the same benefits and have actually fared worse in deregulated states.
The report is based on electricity pricing data from the U.S. Department of Energy and the Energy Information Administration, and restructuring information from the National Conference of State Legislatures as well as research from the American Council for an Energy Efficient Economy.
It says residential electricity prices have fallen nationally by 15.4 percent since 1996, except in Vermont and Hawaii. In the 22 states and the District of Columbia with restructured markets, the decline was greater, averaging 15.9 percent. In states where power markets still function as monopolies, the decline was only 11.6 percent.
In deregulated states, electricity rates for commercial customers have fallen an average of 13.7 percent, and industrial customers' rates are down 4.5 percent. In monopoly states industrial rates fell slightly further, by 4.8 percent. Still, the report blunted arguments by some that electricity deregulation has had little effect on prices.
While some states have experienced higher rates (notably New York and California), how can regulators ensure that Connecticut customers receive fair market prices?
UI's Stanley replies, “Regarding California's deregulation issues and escalated rates, it is important to understand that there is a major difference between deregulation in California and here in Connecticut, mainly due to the structure of power supply contracts.
“Under the law in both states, utilities are required to provide service to customers who elect not to choose an alternate electric supplier,” says Stanley.
“However, in California,” she adds, “utilities are required to buy this supply on the daily spot market - a highly volatile, risky proposition. In Connecticut, utilities were allowed to negotiate a long-term agreement to supply this service at a fixed price that is a more secure arrangement. UI negotiated an agreement with Dominion (in January 2002; its initial SOS provider for 2000 and 2001 was Enron Corp.) to supply our standard offer customers with power, thus reducing any concerns about drastic price fluctuations or sudden energy shortages.”
Northeast Utilities' Thibdaue says what happened in California was the perfect storm.
“[California] did just about everything wrong that they could do,” she explains. “They had experienced phenomenal growth that made phenomenal needs for new power. They hadn't built a new generating plant in 15 years or any new transmission [capabilities]. A lot of the problems would have happened with or without deregulation.
“Here in Connecticut,” says Thibdaue, “the legislature let us buy power under contracts for customers who haven't chosen suppliers, so we bought four-year contracts.” And, thus reducing concerns about drastic price fluctuations or sudden energy shortages.
An unsuccessful 2002 Green Party candidate for the state senate, Mike DeRosa believes electric rates are going to soar in Connecticut in January 2004 after the standard offer ends and the free market takes over.
“In almost every state which has allowed rates to float without regulation, the rates have gone way up,” DeRosa says. “You cannot have a 'free' market when you have a powerful subsidiary - Energy Select of the incumbent utility - controlling over 90 percent of the members of that market. This is not a market situation; it's a virtual monopoly.
DeRosa adds: “It is like going from the frying pan into the fire. We are going from a regulated monopoly to an unregulated monopoly that almost guarantees rate hikes and other serious dislocations. Small- and medium-sized businesses and residential customers are the ones who are going to get slammed with high rates - and there is nothing they can do about it.”
DeRosa believes that the future holds what he calls the four Bs: brownouts, blackouts, bankruptcies and bailouts. “We have already seen the energy coop go bankrupt, and we have seen the CRRA [Connecticut Resources Recovery Authority]-Enron debacle which has cost Connecticut over $220 million,” he says.
“When there is no oversight and no realistic regulation there is a high probability of these kinds of events happening often. We can expect manipulation of the market throughout New England, similar to what you saw in California and in other states in 2000 and 2001.”
Kevin McCarthy, principal analyst for Connecticut on electricity restructuring says: “California was the first state to actually implement new electric deregulation, the results of which are now routinely referred to in the press as a debacle. California is now in the process of spending billions of dollars more on further bailouts and subsidies for utilities, and Connecticut may do the same in the future. Energy infrastructure is no longer a state-specific issue, but a regional one, in which each state must balance broader equities.”
Critics argue that there are solutions to ensure that the electric deregulation mess that happened in California and other states doesn't happen here. “They include a real energy policy for Connecticut by subsidizing conservation and reducing demand for electricity at its source,” says DeRosa. “We need the will to make major investments in clean and renewable energy plants, which use solar, wind and tidal power for energy sources. We have to have a strong state power authority, which will oversee the entire process of supply and demand in electricity use and will keep our hard earned money and energy in Connecticut. We also need an elected DPUC that will answer to us and will re-regulate the electric industry and a citizens' utility board, which will research and represent consumers before the legislature and other government agencies. We also need municipal utility districts, which will produce clean and affordable energy and will be locally controlled.”
However much or little criminality may have occurred at Enron in regards to the California power fiasco of 2000-01, the emerging revelations in the investigation reinforce the serious concerns about deregulation.
Before deregulation, electricity markets operated reliably and usually with substantial rate stability. While there is some evidence that deregulation would provide the price breaks for consumers that advocates tout, the policy for the foreseeable future is caution.
The utility companies are no longer in the business of supplying power - they're concentrating on the transmission and distribution of power to customers in their service territories. Because of that, concerns about the supply of energy for the region continue. And the utilities, once easy to blame, are no longer the scapegoats they once were.
Says UI's Myra Stanley: “Concerns about energy are best addressed by ISO-NE.” [ISO New England, a not-for-profit, private corporation, assumes responsibility for managing the New England region's electric bulk power generation and transmission systems and administering the region's open access transmission tariff.]
There's still a great deal of uncertainty in the market and in the eyes of consumers, adds CBIA's vice president of government affairs, Joe Brennan.
“If we don't improve the infrastructure here in Connecticut,” Brennan says, “particularly in southwestern Connecticut, we could have a crisis. We're not facing a crisis now, but there are definite reliability concerns. We've had a relatively smooth and easy transition to a market economy but now we need to act smart.”
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