The national focus is on creating viable wholesale electric markets.
But proponents of retail electric competition say they are dedicated to
building robust markets where all consumers can get better products and
services.
|
Ken
Silverstein
EnergyBiz Insider
Editor-in-Chief |
The electricity sector has undergone a sea of change in the last
decade. The tumultuous ride that includes price spikes and market
manipulation has left consumers and state regulators weary of
deregulation. The transition was never expected to be easy. And while
there are certain unwelcome events that should have been anticipated,
the choice movement says that none of them obviate the need -- and the
potential benefits -- associated with free markets. They say that a
marketplace that operates without subsidies for electrical suppliers is
also one that would afford residential, commercial and industrial users
better services and a well-rounded portfolio of new products.
"The benefits are greater than in a cost-of-service regulated
monopoly scheme," says James Steffas, vice president of U.S. government
and regulatory affairs for Direct Energy that is a subsidiary of
UK-based Centrica. "Transitioning from 100 years of regulation won't
happen overnight." The 1992 law that provides open access to alternative
natural gas suppliers, for instance, went through at least seven years
of revisions.
Direct Energy says it is on the cutting edge of retail competition:
It offers a host of products to consumers that include "price droppers"
in Ohio that has a high initial price but declines significantly in the
next two years and "green services" in Texas. All told, electric
retailers serve more than 69,000 megawatts of peak electricity demand,
up from 52,000 MW in 2003 and the pace will continue, says KEMA
Consulting. Texas, Illinois, California, New York and Ohio account for
most of the activity, it adds. About 25 states have restructured their
electricity markets to varying degrees.
In Texas, 9 to 13 separate alternative providers exist in markets
there that provide up to 21 different options for consumers, adds C.H.
Guernsey & Co., a consulting firm. And they provide power at rates that
can be 10 percent less expensive than the incumbents. While commercial
and industrial consumers represent the 70 percent of the load that has
changed providers, residential consumers are also getting involved:
switch rates among this class of consumers is going up by 7 percent a
year and they represent 30 percent of the load. By contrast, New York
says that just 6 percent of its residential users have switched
companies since it began deregulation in the late 1990s.
The push to deregulate the power sector started when energy-intensive
businesses began demanding the right to choose their suppliers.
Aerospace companies in California, for instance, threatened to move
across state lines unless regulators acquiesced. Other states then
created laws to allow their industrial base the right to sidestep the
local monopolies. The movement had really gathered momentum in the late
1990s, when about half the states had enacted some form of
restructuring. Since the California and Enron debacles, however,
skepticism abounds.
Tipping the Balance
Clearly, a lot of state regulators and consumer groups say that the
push to deregulate the electric utility sector has destabilized markets
and raised rates. The Consumer Federation of America says that
electricity is too valuable of a commodity to leave to the whims of the
free market and particularly one that has shown it can be "gamed."
In a deregulated system, generators and transmission owners have
demonstrated the ability to manipulate the market and withhold supplies
to drive prices up, it says. While a tenfold increase in California has
attracted most attention, market power cost increases of 20 to 30
percent have been documented across the country. How so? Generators and
transmission owners enjoy excess profits when the price of scarce
resources is bid far above their costs in tight markets. These
overcharges can add 50 percent to the wholesale price of electricity,
the consumer group adds.
"You are not doing the average residential user a favor by making
them figure this all out," says Tim Brennan, with Resources for the
Future in Washington, D.C. "You can't impose deregulation from the top
under the guise that free markets are wonderful in theory."
Virginia is one of those states struggling with what to do next.
While it has opened its electric markets to competition, it has capped
the rates that incumbents can charge customers until the end of 2010.
That makes it hard for alternative providers to compete, especially
because the price of wholesale power -- the underlying fuel source that
allows the generators to run -- keeps going up. At present, no
competitive supplier there can offer a price that beats the mandatory
capped price offered by regulated utilities.
Understandably, state regulators are hesitant to end the price
controls given the volatility of the market. The ultimate objective,
however, is to phase-out the artificial caps and to institute a
competitive market. Along those lines, advocates of free markets say
that the market rules should be standardized across all the states -- a
move that would diminish the barriers to entry and subsequently work to
reduce the rates consumers pay.
Consumers can be shielded from price risks. Under a free market
model, they could opt for a flat rate plan that basically overcharges
them in months when they use little energy and undercharges them when
their usage peaks. Or, they could choose a "real-time" pricing structure
to try and drive their rates down below what they might otherwise be.
The goal, say supporters of competition, is to provide consumers with a
variety of options, just as wireless telecom users now have.
"Texas has enticed alternative providers to come in," says Tom Oney,
a lawyer for Hunton & Williams in Dallas who focuses on deregulation
issues. "Generators can interconnect easily and there are few
restrictions as to where they can build. Customers are switching by the
day and retailers are undercutting the prices of the integrated
utilities. This structure could serve as a role model for the rest of
the country."
Texas could well tip the balance and prompt other states to get off
the fence or institute market reforms. For now, though, the emphasis
nationally will be on getting wholesale markets right. The rationale is
that the biggest buyers understand risks and have the resources to make
informed decisions whereas the smaller ones lack such expertise and need
the protections.
The debate, no doubt, will continue as to whether electricity can be
made into a competitive enterprise, or whether it is an uncommon
commodity that should be tightly regulated. Markets will get pried open
in the wholesale sector where power providers buy from generators -- a
path that leads to the large industrials. But competition in the retail
sector remains an open question. |