Shocking electricity prices follow deregulation

Rose and other industry experts largely blame wholesale power markets dominated by a handful of large suppliers. In some cases, these giants have been accused of manipulating prices in ways that echo complaints during the 2000 California energy crisis. Some economists say electricity isn't suited to competition because it's needed 24 hours a day and can't be stored, giving sellers too much leverage.

In the 1990s, deregulation was pushed by commercial customers rankled by utilities that built too many power plants and saddled customers with the tab. Deregulation was supposed to let customers buy electricity from more-efficient, competing suppliers. To prevent utilities from favoring their own plants, many had to sell the generators to unregulated affiliates or to independent power wholesalers.

The power-generation price on the bill was no longer regulated, but states continued to oversee utilities and the separate price they charged to maintain the wires to homes and businesses. Customers could buy from the new competitors or stay with their utility, which itself would have to purchase power from the wholesalers. To ensure instant benefits for consumers, states froze residential rates for five to 10 years.

But while 60% or more of commercial customers in many deregulated states switched to rivals and realized at least some savings, fewer than 10% of consumers have defected, says a study by Michigan State and Ohio State universities.

Richard Rathvon, head of the Retail Energy Supply Association, blames the rate caps, which kept prices artificially low and left rivals no room to undercut the utility. "Competition hasn't failed," he says. "It hasn't been allowed to work."

Proof, he says, lies in Texas, where utilities have been able to raise their rates in response to fuel price increases and this year were freed of all price restraints. About 60% of Texas consumers have chosen an alternative power supplier.

D'Lana Motta, 52, of DeSoto, Texas, switched from utility TXU txu to Reliant Energy rri earlier this year to light her home and clothing boutique. She's saving about 10% on her electric bill. "In running a business, you want to save money," she says. "And maybe it's a little more personal service."

'Deregulation has been disappointing'

Yet critics say Texas points up competition's failure: Average electricity prices still have surged 58% since 2002. "Deregulation has been disappointing," says Clarence Johnson of the Texas Public Utility Counsel.

The culprit, Rathvon says, is fossil-fuel costs, especially natural gas, which has tripled in price since the late 1990s. Even coal prices have risen 70%. That has driven up electric rates in regulated states as well.

Rose says fuel costs don't explain the bigger price increases in deregulated states. Echoing a sentiment voiced by consumer advocates, Rose instead points to wholesale electricity markets he says are far from competitive. Wholesale power suppliers have built few plants as they've been unable to obtain financing. And most big utilities and their generation affiliates have not built transmission lines to import out-of-state power or local plants because keeping supplies tight means higher prices, Rose says.

In a power sale last year, Baltimore Gas & Electric said it purchased 70% of its electricity from its unregulated parent company, Constellation Energy ceg. BG&E sold its plants to Constellation during deregulation.

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