Be Patient: Electricity Deregulation Is Coming

Dec. 21, 2004
Twenty-three states now call for competition, and federal legislation is astir.

For American companies, the nation's latest deregulation initiative -- the opening of the electric-power industry to competition -- can't happen fast enough. After all, the ability to shop for electricity in an open market, according to some projections, can save individual industrial plants as much as 50% on utility bills. So you can't blame firms for being upset at the sluggish pace of deregulation in many states. Or at the slowness of Congress to pass federal legislation that would mandate competition in all states. Or at the disappointing savings that have resulted so far in states where competition already is. Despite companies' impatience, the reality is inescapable: The U.S.'s march to electricity deregulation is steadily advancing. Developments at both the state and federal levels are bringing the day of full competition closer. And the advertised savings -- in some cases dramatic -- are expected to begin soon. Among the states, Texas Gov. George W. Bush in June signed a bill providing for retail competition in that state's electricity market; a similar measure in Ohio was signed earlier this month by Gov. Robert Taft. The two states bring to 23 the number that have taken action to adopt competition either through legislation or through orders by their regulatory commissions. Indeed, "The electricity map looks a heck of a lot better today than it did several years ago," reflected Rep. Tom Bliley (R, Va.), chairman of the House Commerce Committee, in a Washington speech last month. "What once was a map showing no [electricity] choice is all but a memory." Agrees Edward Comer, vice president and general counsel of the Edison Electric Institute, the Washington-based trade association of investor-owned utilities: "The restructuring of our industry is going very quickly -- far more quickly than it did in the telecommunication and natural gas industries." Clearly, states are leading the way -- partly because of Washington's hesitancy to give change a federal push. But the introduction of a comprehensive restructuring bill by the Clinton Administration in April is spurring Congressional activity. In the House, Bliley reports that a subcommittee bill mandating nationwide electricity competition will be ready for his panel's approval by Congress' August recess. In the Senate, the Energy & Natural Resources Committee has been holding hearings on the issue, even though the panel's chairman, Frank Murkowski (R, Alaska) believes that states are moving sufficiently on their own. But federal legislation "is absolutely necessary," insists John Anderson, executive director of the Electricity Consumers Resource Council, Washington, a trade group of large industrial users. "States can deal only with issues within their boundaries, and electrons move across state lines. The federal government needs to give guidance to the states so they can move in a consistent way." Although 23 states are adopting competition, their transition to an open electricity market varies widely. Most still are deciding how to compensate utilities for "stranded costs" -- sustained when customers flee a utility's system and no longer pay into its rate base, sticking the firm with the cost of new capacity it built when it was obligated to serve all potential customers. Yet of the states considered furthest along, only in Pennsylvania are industrial customers seeing significant savings -- reaching 20% in some areas. "But that will soon change," foresees Peter Christensen, director of energy projects at Strategic Energy Ltd. (SEL), a Pittsburgh-based industrial-energy consultant. Recent changes in transition rules coupled with the normal post-summer decline in electricity prices, he predicts, will bring average savings of 10% or more to industrial customers in Massachusetts and Rhode Island this fall. More dramatic savings are in prospect in California. Even though deregulation there is considered the most complete of all states, to date scant decline in consumers' electric bills has been seen because of the way utilities are permitted to recover stranded costs through their rate bases. But one of the state's largest utilities, San Diego Gas & Electric Co., is expected to complete collection of its stranded costs this summer, and will cut its rates. Pacific Gas & Electric Co. and Southern California Edison Co. likely will follow suit within the next two years. "When those stranded costs get paid off, we're expecting huge rate decreases -- maybe 25% to 35%," says Christensen.

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