July 23, 2010
Ken Silverstein
EnergyBiz Insider
Editor-in-Chief
Retail electricity competition has taken a drubbing. But information now out is suggesting that the concept is alive and well, and likely to gain momentum: More customers switched in the first quarter of this year from incumbent utilities to alternative suppliers that purport to deliver lower costs and better services.
Proponents of restructuring say that excessive regulation will lead to inefficiencies that work to the detriment of consumers and new innovation. Critics of retail deregulation are countering that it has always been a pipedream because electricity cannot be inventoried, necessitating that the industry always be under strict oversight.
While retail deregulation has fallen short of its promises, wholesale markets where industrials buy directly from generators are opening up. And the subsequent efficiencies are benefitting smaller consumers, who are also expected to see added improvements once their providers implement smart grid technologies that maximize efficiencies.
Reports from Ohio, Connecticut and Maine show that customers will switch from incumbents if the price is right, or if the alternative supplier offers green energy. The data, compiled by Restructuring Today, says that more than 1 million customers in Ohio shopped for power in five of the state's six utility service areas. In three of those places, the combined commercial, industrial and residential shopping exceeded 40 percent.
Similarly, Maine reported growth in two of three utility service regions. The big utilities there said that about a third of the electricity load was obtained from alternative providers. Connecticut, meanwhile, saw a 29 percent jump in residential customers who switched while 46 percent of the commercial and industrial users moved. Prices fell in ISO New England by 48 percent in 2009, from $80.54 per megawatt-hour in 2008 to $41.99 per MW-hr in 2009.
"When power suppliers compete against one another, consumers win," says Bill Massey, counsel for the COMPETE Coalition. "Allowing markets to work will promote private investment in clean energy generation and green jobs, allowing innovative solutions to meet electricity needs and environmental objectives."
While proponents of the competitive markets attribute open access laws to the decline of wholesale energy prices, opponents say it is more of a function of a weak economy. They are also saying that the biggest independent power producers that sell electricity on open markets are earning excessive profits.
According to the American Public Power Association, the greatest profits continue to be earned by those companies that owned generation largely paid for by ratepayers under cost-of-service regulation. In 2007 and 2008, it says that the generating segments of Exelon, Public Service Enterprise Group and PPL Corp. realized annual returns on equity of 30 percent, three times the 10 percent returns for regulated companies.
"If these ... wholesale electricity markets were truly competitive, during a time when demand and energy prices are falling, generator profits shouldn't be increasing," says Mark Crisson, chief executive of APPA. "Yet publicly available data identified in this new analysis shows that most generators continue to enjoy increased profits above what one would expect in a competitive market."
Strong Sentiments
In 1996, at least half the states considered legislation to open up their electricity markets. Now, those states that acted are back to the drawing board and trying to devise ways to minimize the price volatility that has characterized deregulation. Such steps include reregulation, price caps or some sort of a hybrid model that takes workable concepts from both the competitive and regulated regulatory models.
In the case of Connecticut, it has legislation pending that would impose constraints on the competitive operations of alternative providers. Meanwhile, Michigan, which enacted a law in 2008 that imposed a 10 percent ceiling on retail choice, is now considering a bill to repeal it. Proponents of competition say that a backlog of businesses there are on waiting lists to switch providers.
Despite strong sentiments on both sides of the restructuring debate, it is too late to reverse directions in the wholesale market. That's because of 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 a choice in the matter. Any efficiency gains would then be passed down to smaller users.
Deregulation has not been the panacea that supporters had hoped. But it is impractical to reverse course, particularly since customers are still switching.
Under regulation, ratepayers may bear the risk of mistakes resulting from where and how investments are made. In competitive markets, however, the penalties for such mistakes fall on management and shareholders. Such accountability leads to better results, say proponents of deregulation, adding that the transition period from the traditional regulatory model to robust competitive markets takes time.
Consider Ohio, which aggregates whole communities to gain purchasing power from alternative suppliers: The state's leadership has expressed frustration about restructuring there. But it has come down on the side of a mixed regulatory scheme whereby competitive suppliers will live alongside regulated ones.
"We continue to urge states that restructured to appreciate that reregulation is unwise, especially in a rising cost environment for anybody building new power plants," says John Shelk, chief executive of the Electric Power Supply Association, in a speech. "It makes more sense to stick with competitive suppliers who have every incentive to control costs and operate plants more efficiently."
The most significant catalyst for more efficient retail and wholesale energy markets will be less about new rules and regulations and more about technologies centered on the smart grid that can provide enhanced services and cleaner options. Utilities that incorporate those tools will, indeed, enjoy more competitive positions.
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