Deregulation is failing in Ohio

Friday, July 27, 2007
David Hughes

The experiment in deregulation of electricity service, now in its sixth year in Ohio, is clearly not working. Residential customers have no choices, and the small "savings" that some customers experienced are gone. On the other hand, utilities are racking up record profits.

During the continually extended transition to full competition, generation prices are still approved by the Public Utilities Commission of Ohio. However, at the end of next year, those controls are due to end and prices will be determined by the marketplace, meaning marketeers with market power. Thus, prices could jump to record levels, just as they have in other states where rate caps have been removed. The utilities certainly think so: They are forecasting more record profits from their generation assets.

At the same time, investment in new infrastructure is lagging, and the current group of power-plant owners likes it that way. Shortage, and the threat of shortage, drives up the price of electricity. Sound familiar?

Deregulation proponents have run out of excuses as to why competition - price moderation and new investment - has not developed, and why the existing fleet of power plants should cost so much more to provide service than they did just a few years ago. These same people are suggesting ways that will supposedly cushion what they claim are unavoidable future rate increases.

We must look long-term

All sorts of remedies are being put forward. FirstEnergy just submitted a plan for another "competitive bidding process" to farm out customers to other suppliers. This auctioning of customers failed before and will likely fail again. The fallback will be the status quo, with the PUCO approving more rate stabilization plans that simply phase in rate hikes.

Gov. Ted Strickland has offered a set of principles that includes very good environmental initiatives, but none will have the desired effect on price.

It is time to stop ignoring the elephant in the room: The problem is deregulation. Attempts at mitigating the hardships and dislocations it has created without addressing deregulation itself will fail to fully protect Ohioans.

Ohio must return to long-term planning and cost-based pricing for our essential energy infrastructure. It is the only way to really address the fundamental, structural problems of reliability and affordability caused by electricity deregulation.

The central flaw of deregulation is reliance on short-term market concepts to manage essential infrastructure, which requires a long-term perspective and long-term financial and institutional commitments. Deregulation and its attendant phenomena - including dismantling the unified organizational structure of the grid, shopping for short-term power deals, substituting profit maximization for regulation in the public interest - are essentially shortterm. And problems follow: profiteering, lagging investment, market manipulation and high and rising prices.

'Public use, public regulation'

Deregulation proponents argue that it is too late to try to control our energy destiny by subjecting utilities to regulation. Echoing arguments from the 1890s that were refuted decades ago, they claim that doing so would be "taking" utility property, a violation of the 14th Amendment to the U.S. Constitution. We should not be frightened by this legal bogeyman. As the Supreme Court said 130 years ago, "[W]hen private property is devoted to a public use, it is subject to public regulation." What could be more public than basic energy service providers?

Citizen Power has opposed electricity deregulation from the beginning. We want to see approaches that truly address the problems associated with rising energy costs and declining reliability of service. We suggest reinvigorating the utilities' obligation to serve, including instituting long-range planning and requiring direct investments at regulated rates in supply and conservation.

Ohio should move away from short-term energy arrangements and transactions, including retail choice. It should eliminate market power and transactions such as mergers that are not in the public interest. And, during the transition to regulation, the state must protect its most vulnerable consumers - low-income and senior citizens on fixed incomes. Ohio's leaders can begin the process now to return to a system of public regulation of this essential utility service. With all its flaws, that system promoted stability, equity and growth in Ohio's economy. It will again.

Hughes is executive director of Citizen Power, a regional energy advocacy organization.

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