Congress’ Government Accountability Office is the latest to ask the persistent question: How can deregulation of the electric power industry be fixed?
As the past few years have demonstrated, giving consumers a choice is easier said than done. Nearly seven years after deregulation in Virginia, competitive suppliers selling electricity to residents are more scarce than bread at Ukrop’s before a snowstorm.
Virginia is not the only the state where competition has faltered after electric deregulation. But in a report to a U.S. House panel last month, GAO investigators said federal efforts to boost competition will depend on “actions at the state level to bring consumers into the market.”
In other words, the government wants states to get consumers turned on to electric competition – even if they have to pay higher prices.
In 1999, Virginia lawmakers began restructuring the power industry and deregulating electricity supplies. The promise for consumers was that rates would drop and supplies would become more reliable.
Under Virginia’s deregulation law, all of the state’s 3.2 million electricity customers, with the exception of a few thousand in far Southwest Virginia, have the right to choose an alternative electricity supplier.
But except for a Dominion Virginia Power competitor selling expensive, environmentally friendly power to a few hundred customers, competitive suppliers are not active in the state.
If the situation continues until rate caps on Virginia electric utilities expire in 2011 – that is when wholesale market prices will determine rates – state lawmakers could face a day of reckoning.
Lawmakers in Virginia and in other states are relying on competition to deliver deregulation’s promises.
“Even in states that initially saw high levels of interest on the part of consumers and third-party electric-service providers, the market for alternatives to the [local] utility has all but dried up,” researchers from the Carnegie Mellon Electricity Industry Center at the University of Pittsburgh advised federal regulators recently.
Disputing other reports that show huge deregulation savings, the Carnegie Mellon researchers said their own research “shows that there is no evidence that restructuring has produced any measurable benefit to consumers.”
Dominion Virginia Power, a strong supporter of deregulation, told the federal regulators that the number of customers who switched to a competing provider should not solely decide the success or failure of a competitive market. The utility said electricity rate caps and high wholesale prices have kept competitors at bay in Virginia and other states.
Competition may not have saved Virginians any money yet, but the deregulation law has, the utility said. Dominion Virginia Power’s own studies said its customers will have saved as much as $1.8 billion by the end of capped electric rates in 2011.
On the other hand, the consumer counsel in the Virginia attorney general’s office indicates in a report to the General Assembly that the utility may have collected many millions more under capped rates than it would have with a rate and profit regulated by the state.
Lawmakers intended that the additional profit would be used to cover losses created by the move to competition. Dominion Virginia Power has spent more than $1 billion since 1998 getting its business ready for competition through such things as early retirements and supply contract buyouts. But its customer losses so far have been few.
The Virginia utility is not alone in arguing that deregulation has produced big consumer benefit despite the lack of competition around the country.
For example, Cambridge Energy Research Associates, a Massachusetts-based energy consultant, has estimated that U.S. consumers have paid $34 billion less for electricity than they would have over the past seven years because of deregulation.
Part of the savings came from new independent power plants that have sprung up after deregulation, relieving utilities and their ratepayers of the need to build new plants, according to a Cambridge report.
U.S. power prices are lower than before the beginning of the deregulation era in 1997 and lower than they would have been if traditional regulation had continued, the report’s authors contend. The Carnegie Mellon group, however, says lower rates are a result of government demands rather than market savings.
Regardless, Cambridge said the conventional wisdom among the public was that prices have to fall for deregulation to be considered successful is inappropriate, and prices must fluctuate for the sake of economic efficiency.
Like the GAO, Cambridge seems to suggests that consumers may need to feel some pain to make deregulation and competition work.
In fact, both the Carnegie Mellon researchers and Virginia regulators have said that even a well-functioning competitive market may mean power costs will be higher than they would be under traditional regulation.
Some Virginia electric cooperatives and municipal utilities that have had to turn to the wholesale market to buy power have had to pass along large price increases to their customers, the State Corporation Commission noted.
In other states where the wholesale market is now setting retail rates, consumers are also facing large rate increases. In Frederick, Md., for instance, Eastalco Aluminum Co. has warned more than 600 workers that the plant may have to close unless it can get relief from a Jan. 1 increase in its annual power bill from $89 million to $195 million.
“Deregulation has become the end rather than the means,” the Carnegie Mellon researchers said. If consumer welfare is deregulation’s goal, then it should not be expanded until it is shown to have reduced prices or the rate of price increases, they said.