A New Push to Regulate Power Costs
By David Cay Johnston, New York Times

More than a decade after the drive began to convert electricity from a regulated industry into a competitive one, many states are rolling back their initiatives or returning money to individuals and businesses.

A $1 billion rebate for Illinois residents and businesses, for example, was signed into law last week. In Ohio, politicians, utilities, their customers and consumer groups are negotiating how to end competitive electricity pricing, while Virginia has repealed its law.

Of the 25 states, and the District of Columbia, that had adopted competition, only one, California, is even talking about expanding market pricing.

The main reason behind the effort to return to a more regulated market is price. Recent Energy Department data shows that the cost of power in states that embraced competition has risen faster than in states that had retained traditional rate regulation.

One prominent critic of competitive pricing - Marilyn Showalter, a former Washington state utility regulator who has become an advocate of publicly owned power systems - has calculated that, in the year ending May 31, customers in competitive states paid an extra $48 billion for their power, compared with what they would have paid under rates in regulated states.

Market Rules Graph - New York Times

The combination of higher and faster-rising prices has outraged individual consumers and small businesses and prompted big electric customers to fight back on political, regulatory and legal fronts.

"It is fair to say that in the states that did restructure, we are on the defensive," said John Shelk, president of the Electric Power Supply Association, which represents owners of competitive power plants.

Since the early 1990s, half the states adopted laws, some of them drafted by Enron, to induce some form of competition.

Most of these laws, however, concerned only wholesale markets, and thus artificially induced competition in only part of the industry. The system for metering, transmitting or distributing power was not part of the changes.

After Gov. Rod Blagojevich of Illinois signed a bill into law last week to provide $1 billion of rate relief for electricity customers, he hinted that more aid may be coming. He also reiterated his opposition to the particular kind of auction that Illinois uses for selling electricity, saying it was unfair to everyone except utilities and big industrial customers.

Virginia imposed new terms on the state's corporate-owned utilities, setting price controls by guaranteeing them a profit margin equal to the average profit margins of utilities in four neighboring states.

Mr. Shelk, of the trade association representing competitive power plants, called the provision "simply outrageous" and said it removed incentives for management to improve efficiency.

Connecticut has made changes in its law, too, and many other states are debating revisions to their laws.

The California legislature suspended that state's electric competition laws after soaring prices and rolling blackouts caused a backlash in 2001. The president of the California Public Utility Commission has proposed moving toward competition again, but such a policy shift might require legislative action.

Thomas H. Rawls of the Alliance for Retail Choice, a pro-competition group that represents the marketing arms of electric-generating companies, said that the trend back toward traditional rate regulation shows "that there is magical thinking, some idea that a regulator can do magic, which is to reduce prices below what the price is in reality."

"How can a regulator stop prices from going up when commodity prices, fuel prices, are rising?" he asked.

Many studies, paid for by competition advocates, have shown lower prices in deregulated states compared with regulated ones. However, a number of critiques by electricity economists show that the benefits were not the result of market forces, but of government-imposed freezes and caps on rates.

Big industrial and commercial customers, the very forces that agitated for competition originally, are leading the return to traditional regulation. Then, and now, these big customers say they are being charged too much.

Marc Yacker, a vice president of the Electricity Consumers Resource Council, which represents large industrial customers, said that while competition laws were enacted "we did not get what we asked for, we got something very different."

"We asked for competition, but we do not see competition in any wholesale market," he added.

John Anderson, the resource council president, said his group prefers competition, but only if it creates true markets.

"A healthy dose of real competition would benefit all consumers," Mr. Anderson said. "Unfortunately there are no examples in America right now of any real competition, and what is out there is absolutely terrible."

The Web site for Industrial Energy Users-Ohio has a countdown clock showing when the state will expand its competitive model, which the group fears will lead to higher prices.

"The structure currently in place in Ohio assumed we would have a competitive market, but we don't," said Samuel C. Randazzo, general counsel for the energy users group. "I don't think anybody disagrees with that conclusion, and we need to change the law to reflect that reality."

In many of the deregulated states, utilities were required to sell their power plants, though they were sometimes sold to sister companies under the same corporate umbrella.

The supposedly competitive markets did not involve transactions between equals. The utilities are required by law to supply whatever volume of power that customers demand. Independent generation companies do not have this legal obligation. During periods of peak demand the generation companies can charge prices far above the cost of production, in some cases 30 times the highest cost of production.

The effect, experiments at Carnegie Mellon and George Mason Universities have shown, is to allow near monopoly prices even when there are competing electric-generating companies.

Official reports on pricing data from Texas and other states have declared some prices were artificially high at times, a characteristic of an oligopoly. This occurs when a small number of suppliers legally coordinate their actions, achieving prices close to those a monopoly could charge.

Peter Van Doren of the Cato Institute, who edits its Regulation magazine, said that "if you have repeat players in narrow enough markets" and a grid that is not designed to move electricity efficiently, prices rise artificially.

Mr. Van Doren added, "Just calling something a market does not make it a market."

The Federal Energy Regulatory Commission, however, has declared that once it determines that a market for electricity is in place, the prices that result are inherently market prices.

In response to critics who said the agency was using circular logic, the commission recently announced an inquiry into whether that policy is sound.

Mr. Van Doren questioned whether state lawmakers have the nuanced knowledge of the complex economics of electricity to establish laws creating viable markets.

Ms. Showalter, the former Washington state utility regulator, reached her conclusion about faster-rising rates for power in competitive markets by analyzing pricing data provided to the government's Energy Information Administration.

Ms. Showalter is executive director of Power in the Public Interest, which has reports on each state, and she operates a blog where she analyzed the data.

She examined prices in the 11 states and the District of Columbia that had gone the furthest in developing competitive markets. The federal data analyzed showed that power in those jurisdictions cost four cents a kilowatt-hour more than in regulated states, up from a two-cent price differential in 2000.

Even taking into account that those jurisdictions began with more expensive power, she said, "the comparative economic disadvantage to consumers in the deregulated states is enormous."

She calculated from government data that the total real cost to consumers in states with competition was $292 billion in higher electricity prices since 2000.


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