Static on the Grid

States that deregulated are trying to make competition work better for consumers and the state's power supply.
by | March 2007

A decade after deregulation swept through the electricity industry, few argue that the restructuring experiment went as planned. Residential prices went up rather than down; there's been less competition for customers than expected.

In the 17 states that stuck it out, even through California's famous meltdown, the question now is what a post-deregulation world looks like. Reverting back to the old regulatory system is impractical, as most of the states required or encouraged utilities to divest their power plants. Instead, states seem intent on tweaking market flaws or coming up with hybrid regulatory models that incorporate bits of old and new.

Even Texas, once considered a model for retail competition, is looking at reworking its system. The reason goes back to the 2005 hurricane season, when natural gas prices shot up. Power prices also rose, since much of Texas' electricity is generated using natural gas. But when gas prices collapsed in 2006, power prices stayed stuck at inflated levels. Customers are now even more exposed since a state-set rate cap was lifted on January 1.

Legislators are looking at several options for stimulating competition and protecting consumers. Some want to bring back the rate cap, with new mechanisms to encourage power prices to go down as well as up. Another idea is to force customers who have been reluctant to shop around to switch utilities. Even though one-third of residential customers in Texas have switched to a competitive power supplier--far more than in any other state--the Public Utility Commission is concerned that the largest power companies enjoy too much market share.

Rising retail prices aren't the only concern in restructured states. Under deregulation, utilities aren't building enough power plants to keep up with demand. Connecticut fears that if new generation doesn't come online soon, rolling blackouts may become the norm in the summer. Last month, Governor Jodi Rell proposed creating a state agency charged with making sure that doesn't happen. She also ordered a study of the state's options for generating electricity itself or buying power at bulk and reselling it to utilities.

Dominion Virginia Power, the state's major utility, is pushing "re- regulation"--a hybrid of old and new. Dominion says Virginia's restructuring law, which the company had supported, is now a hindrance to erecting new power plants. Dominion wants the predictability of old-fashioned rate-setting in order to get favorable financing for mega-projects, such as a zero-carbon nuclear plant the company proposes to build.

Consumer advocates in Virginia, who agree that deregulation is troubled, don't like Dominion's cure. They think the company is trying to lock in big profits that in the old days would have been negotiated with the traditional regulators, the State Corporation Commission. "They're trying to get the legislature to outline what the SCC can and can't do," says Irene Leech, president of the Virginia Citizens Consumer Council, "and to legislate that no matter what happens, they'll be guaranteed to get above-average returns."


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