Many regulators and policy makers continue to promote competition and deregulation in the retail electricity markets. Despite their best efforts, it remains an elusive goal.
The US Energy Information Administration says that retail competition is available in 18 states. (The others have delayed, never adopted, or abandoned restructuring efforts.) However, the Center for the Advancement of Energy Markets (CAEM), a Washington, DC-based energy think tank, gave only four states – Texas (69), Pennsylvania (67), Maine (64) and New York (61) – a passing score of more than 60 out of 100 possible points on its Retail Energy Deregulation Index. The Index uses objective criteria to measure progress on electric restructuring. By contrast, the England and Wales market earned an 87, the highest score in the survey.
Markets have simply failed to develop in many of the states cited by EIA as being open to competition. In Virginia, for example, less than 0.2 per cent of the 1.3 million customers that have the opportunity to choose their power supplier have done so.
Even in the states with favourable climates for competition, customers have been slow to change. In Texas, cited by CAEM as the top US market, only about seven per cent of the approximately 5.5 million customers eligible to switch have done so. In Pennsylvania, 28.7 per cent of Duquesne Light and 9.2 per cent of PECO Energy residential customers have chosen an alternative supplier. Less than 1.0 per cent of the residential customers served by five other utilities in the state have chosen to switch.
Conventional wisdom says that incentives are stronger for commercial and industrial customers to switch. Maybe, but switching levels are similar to those for residential customers. In New York, 5.5 per cent of residential customers and 6.9 per cent of non-residential customers have changed suppliers.
The reasons competitive retail markets have been slow to develop include:
•Increasing consumer and regulator distrust following financial and legal scandals among major players, including alleged market manipulation
•Lack of headroom resulting in little opportunity for cost savings (exception: Texas) and
•Market rules that vary from state to state, substantially raising the cost of customer acquisition and retention.
In recent years, many companies that expected to be major players – the dot-coms, Shell Energy, NewPower and others – have exited the business, disappointed by opportunities or financial results. Those who favour competition have to find ways to solve these problems to achieve their goals.
Enter the Federal Energy Regulatory Commission, chaired by Patrick Wood, former chairman of the Public Utility Commission of Texas and avid fan of retail competition. FERC recently issued a Notice of Proposed Rulemaking aimed at establishing a standard market design for wholesale energy markets. The NOPR is the result of a ten-month process in which FERC sought input from the electric industry, state regulators, customers, vendors and other federal agencies.
It asserts FERC jurisdiction over all transmission facilities used in interstate commerce, including rates, planning and grid expansions. The proposal generally follows the concepts adopted by PJM, arguably the most successful regional wholesale power market in the US. It also includes proposals for monitoring and mitigating market power, ensuring adequate long-term resources and coordinating with the states. The schedule calls for implementation by September 2004.
“Our goal is to create a seamless, national market for wholesale electricity, so that sellers can transact throughout broad regions and customers can receive the benefits of less expensive electricity,” Wood says.
Whether the NOPR is a good idea depends on where you sit in the industry. In general, states that have higher than average costs moved more quickly towards competition, while states with lower costs have opposed it. The battle over the standard market design is shaping up along those lines. States with lower rates have expressed serious concerns that the proposed policy would benefit regions that now have higher costs at the expense of those with lower costs.
State regulators, as might be expected, vigorously oppose the assertion of FERC jurisdiction over issues currently subject to state regulation. “There is simply no basis for FERC to take allegations of discrimination in the wholesale market and impose remedies that displace state jurisdiction and have the potential of impacting the retail market,” says Arkansas Public Service Commission Chair, Sandra Hochstetter.
The Consumer Federation of America recently weighed in with a study that concludes that the federal push for deregulation could increase the price of electricity by tens of billions of dollars. “Rather than charging ahead with restructuring and deregulation, Congress and FERC need to step back and fully understand the implications of the massive fraud and financial meltdown,” says Mark Cooper, CFA’s director of research.
Regardless of how these issues are ultimately resolved, the reality remains that overall, customers have shown very little interest in competition and choosing new suppliers. New laws and NOPRs won’t change that.