Energy Wiz: Putting The Genie Back In The Bottle
Changing Market LandscapeLegislatures in all the following states are considering major changes to their electricity markets: Connecticut, Delaware, Illinois, Maryland, Michigan, Montana, Ohio, and Virginia. Changes under discussion vary from state to state but include the following.
- Freezing power prices
- Selling power plants back to regulated utilities
- Allowing regulated utilities to build and own new plants
- Creating state-owned public utilities
- Restricting market access to large customers (e.g., 5 MW)
- Charging exit fees to those buying from power marketers
- Mandating ‘green’ power requirements that could raise prices
Some see the re-opening of this Pandora’s box as an opportunity to revisit issues not directly related to retail competition, such as mandating renewable power quotas. Consumer groups have weighed in with their agendas, and (of course) the investment community wishes to be heard. In its recently released study titled, “Re-Regulation of U.S. Electric Utilities: The Toothpaste Challenge,” Standard & Poor’s equated a return to standard regulation to the messiness of “trying to put toothpaste back into the tube.” It raised concerns regarding which utilities would get which power plants, potentially resulting in “sub-optimal” generating mixes, e.g., heavy dependence on natural gas, with attendant price volatility. The credit standing of some utilities forced to buy back plants at higher prices than they sold them and the resulting impact on power prices were also raised.
Behind The InsurrectionPerhaps the biggest impetus toward re-regulating power pricing is the simultaneous lifting of multi-year freezes or mandated price cuts that were part of most states’ deregulation plans. Once lifted, such rules have spawned sudden double-digit price hikes, occasionally exceeding 35%. While prices were frozen or controlled, other market changes (e.g., run-up in natural gas pricing that raised wholesale power prices) set the stage for budget-busting jolts.
State consumer boards, the Electricity Consumers Resource Council, and even the American Association of Retired Persons (AARP) have all spoken out on how the promises of retail power competition have not panned out. On the opposing side, the Federal Energy Regulatory Commission, wholesale power marketers, and their associations, have pointed out how deregulation at the wholesale level (upon which retail competition depends) has lowered some costs, improved power plant operations, and (in some areas) built new plants with private funding rather than utility debt.
To many commercial and industrial customers, however, most benefits appear to have been skimmed by private generators and wholesale power traders before they could trickle down to endusers. One critic summed it up this way: “We ended up replacing a large bunch of poorly regulated power monopolies with a small number of barely regulated generating cartels.”
Grab Your WalletSo what does this mean for power customers? Unless something good appears soon for customers in deregulated states, higher power prices may start to become a political issue. Regardless of which way the electoral worm turns, however, further legislative intervention in the marketplace may result in price jolts, market instability, and a lack of direction. Further uncoordinated changes may confound the clarity that is needed to deal with the multiple issues of greenhouse gas mitigation, tightening margins between supply and demand (nearly always causing nasty surprises), the still-balkanized transmission network, and our ever-increasing dependence on fossil fuels.
There are no safe havens: even where retail deregulation has never been seen, changes at the wholesale level are behind jumps in fuel adjustment charges or rates that are passed through to customers by regulated utilities.
To soften the blows before they hit, this may be a good time to dust off those energy audits and find more ways to cut peak demand and power usage. ES