Without a doubt, the promises of deregulation have fallen short. 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 has suffered and now a lot of states are trying to figure out what to do next.

A new Associated Press examination of data provided by the U.S. Department of Energy concludes that deregulation has led to higher prices. In 17 jurisdictions that restructured their power markets, it says that consumers paid 30 percent more than in areas where there is tight regulation. That compares to 24 percent in 1990 before the competitive processes were even started.

Public Power magazine just ran a piece on the various studies looking at this issue. Its author, Dr. John E. Kwoka, a professor at Northeastern University, is unimpressed with just about all of them. For starters, none of the 12 studies he examines precisely define the term "restructuring." With that in mind, he says that 9 of the 12 studies find that retail benefits and cost efficiencies associated with deregulation are noticeable, albeit some of the conclusions are qualified and others are "sweeping." Three of the reports say deregulation has produced "no benefits" and has even cost consumers money.

Kwoka's bottom line: "The methodologies used in these studies consistently fall short of the standards for economic research. In addition, most of these studies fail to fully address the effects of restructuring. These deficiencies call into question the conclusions reached by existing studies of restructuring."

In 1996, at least half the states considered legislation to open up their electricity markets. Many of those did to some degree. Now, those states are back to the drawing board and trying to devise ways to minimize the price volatility that has characterized deregulation. Such steps include re-regulation, price caps or some sort of a hybrid model that takes workable concepts from both the competitive and regulated regulatory models.

Frustrations Mount

Despite strong sentiments on both sides of the restructuring debate, it is too late to reverse directions in the wholesale market given the existing investments in unregulated generation and the sales efforts built to support that. The goal then is to create a fair market that enforces equal access to the grid and allows at least big buyers their choice as to whom to buy from. Any efficiency gains would then be passed down to smaller users.

Ohio is among those rethinking its regulatory approach to the electric utility industry. Gov. Ted Strickland says that deregulation has not worked but does not agree that the state ought to entirely reverse its current position, noting that a mix between the regulated and the unregulated models is where the answer lies.

Ohio is not alone with its frustrations. Illinois deregulated more than a decade ago and capped its rates to allow for a transition to free markets. That freeze ended in January, sending prices up as much as 50 percent in places. Maryland has the same issues. Rates there have risen 72 percent. Other places like Arkansas and New Mexico have rescinded their restructuring laws before they could take effect.

"Competitive markets simply have not developed, and lower electric rates were probably not a realistic expectation," says Governor Strickland, in a public speech in Columbus. "In fact, in other states, deregulation has brought with it significant increases in utility rates. If we could go back, I think most people would stay with regulation. But we can't put the genie back in the bottle."

Utilities that operate in deregulated environments say that price caps and tight regulation are not the solution. Consultants at KEMA say that that rising fuel costs have been largely to blame for recent higher power rates -- a phenomenon that has occurred regardless of how power markets are structured. In deregulated markets, however, buyers of power are provided with a number of options that create transparencies and the ability to mitigate risks that include day-ahead markets and financial transmission rights.

Under regulation, ratepayers may bear the risk of mistakes resulting from where and how investments are made, says The Electric Power Supply Association. In competitive markets, however, the penalties for such mistakes fall on management and shareholders. Such accountability leads to better results, it says, adding that the transition period from the traditional regulatory model to robust competitive markets takes time.

"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, 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.

The transition to "free" markets was never expected to be easy. But the tumultuous ride that includes price spikes and market manipulation has left consumers and state regulators dubious of deregulation. The mission now before those states that have rewritten their laws is to try and calm markets while applying some competitive principles.

More information on this topic is available from Energy Central:

Restructuring Revisited, Energy Biz, Jan/Feb 2007

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