Once Staggered, Electricity Reform is Still Fighting

wholesale_electricity_reformFifteen years ago, retail electricity deregulation took a mean right hook and was against the ropes. And while the Enron debacle and the California crisis sidelined free market reforms, they did not knock them out. Today, about 17 million electricity customers have exercised their right to choose among providers.

Having suppliers bid for business sounds nice. But the reality is that the unfolding of markets has been extremely messy and many jurisdictions have curtailed their operations, or stopped them altogether. In most industries, the products and services can be delivered on demand, allowing those with the most innovative techniques to win. But with electricity, it cannot be stored, meaning that the prices can really fluctuate and subject unwitting consumers to extremely high rates.

That’s what happened in during the California crisis, when some traders took power plants out of service and reduced supply levels — all during peak demand. And while some of those energy traders and markets got rich off this ploy — Enron’s Jeff Skilling is still in prison because of it — the little guys got hammered. “Aunt Millie” had a tough time buying groceries, as one trader quipped.

“The evidence is clear that generators are profiting excessively from RTO power markets, and that sellers’ rates are not ‘just and reasonable’ as the law requires,” says Elise Caplan and Stephen Brobeck, who co-authored a paper on the subject. Caplan, with the American Public Power Association and Brobeck, with the Consumer Federation of America, go on to say that regulators do not adequately monitor the open access system.

So, it’s understandable that many states hit the pause button. Others, though, felt that free market reforms were in the best interest of both their corporate and residential customers who wanted choice. In the case of companies, a lot of them were stuck with their incumbent providers and they were desperate to have better services and rates. So, the states went back to the drawing board.

About a dozen states allow commercial, residential and industrial customers to choose which providers supply their air and heat. Two such states are Ohio and Texas, which have weathered the storm and which are entering a new phase of electricity restructuring. Ohio, for example, allows consumers to pick either the regulated rate — the default option — or to shop for the best prices and service.

“Electricity is one of our largest operating costs and having more control over our electricity bills keeps overall costs down and enhances our growth and profitability,” says a letter signed by WalMart, RiteAide and Loews, and 10 other major companies. “Competitive electricity markets not only lower our costs, but give us the flexibility to choose a supplier that best meets our individual business goals with service offerings that provide choices on price, generation portfolio mix, risk management, and product and service features.”

Consider Texas: the market has had growing pains but it has matured nicely, allowing competition there to endure. Deregulation has permitted the state’s retail consumers to choose since 2002 their so-called retail electric provider (REP), which purchases its power from competing generators. To help customers shop, the REPs are required to provide standardized information related to pricing, contract terms and emission levels.

Transmission and distribution is still provided by the local utility in Texas, and elsewhere. In fact, this has been a sticking point: The incumbent utilities’ customers have paid for the construction of those lines and those power companies have their own “native loads” to service. Those proprietary beliefs have prevented the competitive suppliers from gaining fair access to the lines, critics say.

That’s behind the push to turn over the operations and management of the lines to regional transmission organizations (RTOs) or independent system operators — the guys who order up the power and schedule its deliver to customer. It’s all based on costs and who needs what and where. And the Federal Energy Regulatory Commission requires such open access.

“People choose from an ever-increasing diversity of retail electricity products,” says Nat Treadway, managing partner and lead author of a report written by the Distributed Energy Financial Energy Group, which says 17 million of us buy electricity on the free market. “In Texas, more than 300 different choices are available—somewhat like your grocery store cereal aisle—and this is a display of increased consumer participation and healthy competition.”

“More than two dozen providers offer a variety of plans for the nearly 7 million customers in the competitive Texas market,” adds Donna Nelson, chair of the Public Utility Commission of Texas.

Even today, strong sentiments are present on both sides of the restructuring debate. But lots of investments have been made in power generations that sells its output on the free market. What now?

The goal then is to create a fair market that enforces equal access to the grid and that allows big buyers a choice of supplier. RTOs are one mechanism by which to achieve that goal while enforcing existing laws that ensure grid access is another. It’s been a bumpy ride but lots of energy managers are benefiting from the past experience and the progress.

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2 thoughts on “Once Staggered, Electricity Reform is Still Fighting

  1. GreatArticle,
    Look for more states to follow Ohio and Texas examples. Ultimately it’s going to be a responsible PUC that distances themselves from the strategic and political connections of the large private utilities that will drive more free market dynamics into electricity.

    That’s sad one of the first steps that should be taken is to have a utility bill review by a professional company. With the advent of smart meter technology there are many opportunities for discovering refunds and going forward savings for commercial clients

  2. Thanks Rob. Wholesale competition is here to stay. Retail competition is better described as restructuring. Ken

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