Heard Off the Street: Electric deregulation failing to live up to rose-colored promises

Sunday, February 11, 2007

By Len Boselovic, Pittsburgh Post-Gazette

Maryland state lawmakers, irate over a 72 percent jump in electric bills, vote to fire the state's Public Service Commission. Courts block the move.

Ohio, fearing double-digit rate increases, backs off market-based pricing and stabilizes rates through 2008.

The Illinois House votes to roll back Commonwealth Edison's rates after they go up 22 percent when caps designed to ease customers into deregulation are lifted. ComEd warns it will go bankrupt if the state doesn't face up to free market realities.

Virginia lawmakers prepare to pull the plug on deregulation, negotiating terms for returning regulatory power to the State Corporation Commission.

It's not exactly the laissez-faire paradise states bought into when they deregulated energy markets. The thinking was that freeing consumers of their regulated power provider would create competition -- and lower prices. The capitalist cornucopia envisioned hasn't come to pass in many states, including Pennsylvania, where the state's seven electric companies have until 2010 to complete deregulation.

Only 17 percent of the residential customers of Duquesne Light, the Pittsburgh utility by far the furthest down the deregulation highway, are getting electricity from another supplier, down from 23 percent two years ago, according to the Pennsylvania Office of Consumer Advocate.

Virtually none of the residential customers at the state's six other electric companies are shopping.

Ironically, the 83 percent of Duquesne Light's residential customers who are letting the state's most deregulated utility shop for them are paying less than they did 15 years ago. Even if the state Public Utility Commission grants every penny of Duquesne Light's proposed 9 percent increase, the utility's average residential customer would pay $80.44 per month vs. $84.38 in 1992.

The dearth of shoppers corresponds to what the U.S. Public Interest Research Group found in Illinois, Maine, Maryland, Massachusetts and Ohio. Deregulation, the grass roots organization said in a 2006 report, "has thus far failed to deliver real, sustainable cost reductions for the bulk of electricity consumers -- especially residential customers."

Some large industrial customers aren't happy, either. When Ohio pondered deregulation in 1998, Marty Suhoza was among the cheerleaders. Mr. Suhoza, then managing the energy needs of steelmaker LTV, believed deregulation would "provide a significant drop in rates."

Now an energy consultant for Mittal Steel USA, Mr. Suhoza says deregulation "is the farthest thing from satisfactory that I could describe." He blames the rules used to set wholesale rates, saying they artificially inflate electricity costs to the point where "the windfall profits the oil guys are making will pale in comparison."

A study done at Carnegie Mellon University suggests he may be on to something. Using rules enforced by the federally regulated entities overseeing the electrical power system, CMU researchers ran computer simulations of power auctions and concluded that even without collusion, sellers could study demand patterns and set prices very close to what "shoppers" would pay to an unregulated monopoly.

That's possible because auction rules don't give buyers the same freedom and flexibility sellers have, says Sarosh N. Talukdar, a CMU professor of engineering and public policy and a co-author of the study. He says regulators established deregulated markets without adequately testing market rules that have proven to be flawed.

"We'd never go up in an airplane that is as poorly tested as the markets are," Mr. Talukdar says.

To be sure, electric rates would have gone up without deregulation. Most of the generating capacity built in recent years is powered by natural gas, contributing to that commodity's spiking price. Paul Ring, a government affairs analyst for Liberty Power, says rate increases between 2000 and 2005 in states that didn't deregulate ranged from 37 percent in Georgia to 67 percent in Louisiana.

"Power costs have been rising regardless of whether it's a choice state or non-choice state," says Mr. Ring, whose company is one of many selling to customers in deregulated states.

Increases have been more shocking in deregulated states because of caps states used to ease the transition. The caps kept prices artificially low, discouraging companies such as Liberty from offering customers a choice and causing an outcry when the caps were lifted.

Pennsylvania regulators are mindful of the ruckus in other states as they prepare for the state's day of reckoning when rate caps expire in 2010. The PUC is seeking public comment on how to serve customers who don't want to shop, hoping to figure out a way to mitigate potential price increases.

Gov. Ed Rendell is proposing an $850 million Energy Independence Fund, financed through a surcharge on electric bills, that would encourage energy efficiency. Some of the money would go to smart meters that help consumers make more intelligent decisions. The thinking is that smart meters will make smart shoppers.

Some are encouraged by the initiatives, believing that given enough time and consumer education, deregulation will work. But there are those who believe the lights should have gone out on deregulation a long time ago.

"The No. 1 thing that has to happen is for the governor and the legislature to bring an end to the failed electricity deregulation experiment," says David Hughes of Citizen Power, a consumer advocacy group.

And so the battle over whether to put the genie back in the bottle or make him serve his master continues.

---

(Len Boselovic can be reached at [email protected] or 412-263-1941. )