Conditions Cited for Successful Deregulation - Consumer Group Disagree

Sept. 18, 2001
Bottom Line Energy Issues - September 2001

A new report from the Center for Advancement of Energy Markets contends that deregulation of natural gas has produced savings of $600 billion, or just under $6,000 per household. It implies that the same could hold true for electric deregulation. CEO Ken Malloy said, "The right conditions can foster lower costs for consumers and motivate the industry to investments that benefit the environment, our economy, and our national security." However, the study made the following points. Electric deregulation has reduced long term price fluctuations, albeit triggered more short term price volatility. Light-handed regulation of gas pipelines has been a big factor in passing through lower commodity costs to consumers. The certainty of markets has motivated suppliers to improve how it buys, sells, and trades natural gas supplies thereby rooting out inefficiencies. To California, the reports makes these recommendations:

Put the right regulatory framework in place...halfway measures are more dangerous than doing nothing. Don't expect results over night.

Additional suggestions for these key elements of successful deregulation were issued by Frost & Sullivan analyst Paul Harper-Slaboszewicx. Long term contracts should be encouraged. The default-provider price should be higher than the wholesale price and should be pegged to the price of natural gas, or some such index, so that the retail electric providers can be profitable, giving consumers a choice of providers. Permitting of new efficient power plants should not be blocked. Generators should not be allowed to own enough generation assets to manipulate the spot market energy price. The status quo of the grid should be public knowledge to give end users a change to reduce energy use. End users should not be entirely shielded from variations in the cost of generating energy. Metering should be assigned to IOUs, which should be authorized funding to upgrade systems to allow two-way communications, giving retail providers more choices in rate structures, and customers more information on their energy usage.
On the other hand, the Consumer Federation of America issued a report critical of the outcomes so far in deregulated states. Citing rising prices and falling reliability in MA, NY, and CA, research director Mark N. Cooper observed, "As states that moved early to deregulation come out from under price caps and start going to market prices, consumers are getting clobbered. Electrons are extremely difficult little things. You can't store them. You need a [varying supply to meet varying demands.] There is little elasticity in both supply and demand, a situation that makes the electricity market particularly vulnerable to price manipulation. People withhold supply and price shoots up." He said federal regulators need to push for improved transmission networks with strong public oversight and more effective controls over generating companies and power brokers to prevent manipulation of prices as occurred in CA. He added, "There are very, very, fundamental problems with this market. There ought to be a moratorium on restructuring. States that haven't done it shouldn't do it. States that have begun restructuring should concentrate more on competitive bidding for long-term supply and avoid the spot market."

However, representatives of Niagara Mohawk in NY explained that price caps were removed just as gas and oil costs rose dramatically, and the company was forced to sell its generating plants and buy power on the wholesale market. Consequently the price of electricity it buys is up 40% from regulated caps set in 1998. The NY PSC says that passing through the actual cost of electricity to consumers is essential, as in natural gas, because consumers need to know the real cost, whether rates are adjusted monthly or even daily and hourly. That way they can react by reducing their consumption when prices are high or shifting their loads to times when prices are lower. Cooper concluded, "Electricity markets can only perform well if all generators are equal size and if total demand is less than the amount generators can produce. Like any product, prices go up when material costs rise and when demand outstrips supply." Does this sound like a workable concept to you? If not, better let your legislators know what you think.

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