Are customers better off?

Are customers better off?

David O`Connor

Massachusetts Commissioner of Energy Resources

Efforts to restructure a state`s electric industry can be measured in several ways. One way is to compare the speed with which it has implemented retail choice to the speed of others. Another is to measure the extent to which a state has stimulated competition for customers or resolved disputes over stranded cost recovery. By these measures, a handful of states have made notable progress and a few are gaining momentum. The majority however, are only in the earliest stages of framing the issues and beginning a dialogue.

California, Massachusetts, Illinois, Pennsylvania, Maine, Rhode Island, Connecticut and Montana are among the most advanced, with legislation enacted, rules written and implementation underway. Others, such as New York, Wisconsin, and Arizona have utility commission orders that begin a process to restructure their electric industries. Still others, such as New Hampshire and Vermont, started the process only to become bogged down in partisan bickering and litigation.

The problem with this measurement of success is that speed of implementation is not the most important criteria. Moreover, restructuring should not be measured by the degree to which it streamlines inefficient monopoly utilities, or by the number of customers who have migrated to competitive suppliers. Nor should it be measured by the degree to which it has reduced the amount of government regulation.

The measure of success should be the well-being of electricity customers. Has restructuring improved their lives? Has it strengthened the economy that serves them and improved the environment that sustains them? Competition should not be an end in itself. It should be a means to benefit customers by delivering them lower prices, more choices, and cleaner supplies of electricity. The evaluation of any state`s restructuring efforts should begin with a simple question: “Are customers better off after restructuring than they were before?”

I am pleased to report that in Massachusetts` case, the answer is yes – customers are better off. On top of that, the state`s economy and environment are better off as well. Others, whether nation, province, state or municipality, that are working towards a deregulated electric industry, might look to Massachusetts` experience in order to chart a course whereby the same customer benefits might be attained.

During our process, customers were told restructuring would improve their lives through savings on their electricity bills – a promise on which we delivered. Since March of this year, every customer in Massachusetts is paying an electric bill that is ten per cent lower than the previous year. These residents and businesses will spend $500 million less on electricity after the first 12 months of restructuring. In 1999, these savings will grow to more than $750 million a year and will continue for at least another five years. The economic benefits of our law were recently confirmed in a study conducted by Standard & Poor`s DRI. In it, the authors predict real discretionary income gains of $1.56 billion and the creation of 37 218 more jobs by 2005.

Customers were also told restructuring would benefit them through the siting of a new generation of cleaner, more efficient power plants. Since passage of our restructuring law, proposals for new plants totaling more than 30 000 MW have been filed with our regional transmission system operator. Meanwhile, utilities have sold their existing fossil and hydroelectric power plants to new competitors who have announced plans to re-power and expand their capacity, largely using combined cycle gas burning technology. Expanded use of natural gas and the rapid construction of new plants will reduce the wholesale price of power and virtually eliminate the use of our oldest, most polluting plants.

Minimizing utility transition costs and eliminating them as soon as possible were other key promises of the Massachusetts plan.Utilities that have sold their power plants received payments far in excess of their book value, with the proceeds credited to the benefit of customers. In the first eight months of restructuring, total transition costs were reduced by more than 30 per cent – a rate faster than anyone expected. Further, having sold more than 90 per cent of their power capacity, utilities cannot use their once dominant position to drive up electricity prices. Our utilities are now distribution companies that have no preferences among the suppliers that use their wires to compete for customers.

We also promised customers that energy efficiency programmes, low income customer discounts and other public benefit programmes would be strengthened. The Massachusetts law mandates funding for these programmes and provides for improved coordination in their delivery. Utilities have developed five-year plans to deliver efficiency programmes that will transform markets and leverage even more energy savings and environmental benefits. Additionally, we expanded eligibility for low-income and farm discounts which will increase customer participation in these programmes, thereby delivering additional protection and savings to the most vulnerable customers.

On the other hand, we have not yet delivered on all our promises. As a consequence of the strategy used to guarantee savings to all customers, retail competition for residential customers has hardly begun. Competitive suppliers simply cannot now improve on the low generation price provided by the distribution companies as part of their “standard offer” service. However, this can and will change. The rapid elimination of transition costs creates room for a higher standard offer generation price – without jeopardizing the overall savings guarantee. As the standard offer price increases, suppliers and marketers will be able to offer new competitive products and services.

In the meantime, there are signs that benefits will be delivered through the assembly of large numbers of customers to buy electricity in bulk. Also known as “aggregation”, some business and non-profit groups have already secured prices below the standard offer for their member institutions. Extension of these benefits to their employees, as well as aggregation of residents by municipal governments, should deliver additional price discounts and more service options to large numbers of residential customers in the near future.

Restructuring promised to deliver more supplies of clean, renewable energy to customers but has not yet done so. With oil at its lowest price in 30 years and new gas supplies coming into the region, it will be some time before our energy mix shows substantial contributions from renewables. Still, the prospects for delivering on that promise have never been brighter. For the first time in history, retail choice of suppliers will allow customers who are willing to pay a premium for renewables to do so. Additionally, a renewable energy “portfolio standard” will require every wholesale generator to purchase renewables or the equivalent in “credits”. Also, a trust fund, paid for by customers, will leverage investment in renewable energy sources and reduce the price differential of renewables compared to conventional energy supplies.

Where does all this activity leave us? While we are among the first to enact a complete restructuring, speed is not our chief accomplishment. Among those who have already restructured their electric industry, Massachusetts has experienced a slower development of a competitive retail market. Again, for Massachusetts, competition was never an end in itself. Rather our promise was that electric utility restructuring could help customers obtain lower prices, more choices, and cleaner supplies of electricity.

There is already substantial evidence that Massachusetts customers are better off today than they were before restructuring. And by all indications, there are more benefits yet to come. Customer benefits were, and still are, our most important goal. Others about to set out on their own restructuring efforts should keep this goal in mind.

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