January 13, 2010

Restructuring of the electricity sector has gotten lost in the national energy debate. But the matter is still important in many states and especially Pennsylvania and Texas.

The freeing of wholesale energy markets to allow generators to sell their power to other utilities or other industrial sites has borne fruit but the success of competition in the retail sector has been an ongoing question. Advocates say that open access has brought down prices and given consumers more choices. But critics say that it has only benefited a few well-healed energy marketers while raising rates for most.

Voracious users of electricity have more of an incentive to shop. But smaller consumers have less motivation. The issue, in fact, has ramifications in today's energy environment in which regulators are touting intelligent utilities and the positives that new technologies bring to electricity users. In other words, those who gain the most from making changes will move first, helping to drive those efficiencies throughout the value chain.

As for electricity competition, consumers in central and eastern Pennsylvania that comprise the territories of PPL will now have the opportunity to shop for their providers. If they choose not to do so, they can buy their power at default rates that may or may not be competitive. If the past is prologue, however, only a small percentage of homeowners will take the time to buy from alternative suppliers.

That said, PPL rates that have been suppressed because of regulatory mandates are about to go up. And the competitive generators are trying to recruit the incumbent's customers by offering prices that are a third less. If the process goes well, the whole state will convert to a competitive system by year-end.

"Pennsylvania must stay the course and fully implement electricity competition," writes Andrew Kleit, a professor of energy and environmental economics at Penn State and a consultant to PECO Energy, in an op-ed. "This will reward innovation, reduce costs for businesses, and lower prices for consumers. Free and competitive markets will induce innovation, encourage investment in environmentally friendly energy sources, lower costs, and create benefits flowing to the state's electricity consumers."

he state sought to deregulate its electricity markets about a decade ago. But when the national markets went topsy-turvy during this time, many other states thinking about doing the same became nervous while Pennsylvania decided to protect consumers through a capped default rate. That prevented other competitors from entering the market.

But with natural gas prices falling and the onset of smart metering that allows consumers to receive price signals from their utilities, Kleit insists the timing is right. Markets can function properly, he says, noting that the Pittsburgh area has fully deregulated, giving birth to 14 suppliers and prompting 20 percent of residential users to switch.

Public Interest

A similar discussion is occurring in Texas. Dozens of competitive suppliers now dot the state, although the U.S. Energy Information Administration says that the average citizen there pays 12.43 cents per kilowatt-hour compared to those around the country who pay 12.05 cents for the same unit. In the scheme of things, Texas' rates rank 34th.

Critics say that the discrepancy can be attributed to electricity's properties. Because it cannot be stored, they say that marketers have more power to massage prices. The Cities Aggregation Power Project says that the rates for both residential and industrial concerns are higher than the national average and specifically compared with nearby states. Texans pay 53 percent more than Oklahomans and 44 percent more than Louisianans.

All of those states rely on higher priced natural gas as a fuel source, it says. So, the rate differential can be traced to the fact that Texas is deregulated while the other two are not. "Instead of misleading the public, electric industry groups should be working to make electricity more affordable for all Texans," says Geoffrey Gay, general counsel for the cities aggregation group.

Comparisons of Texas with the rest of the country, though, are not entirely appropriate. For starters, Texas' population rose by more than 16 percent last decade with much of that occurring in urban regions that are naturally more susceptible to price spikes. That, in turn, puts excessive pressure on the existing infrastructure, which can only grow so fast.

To combat the constraints, the state is building out its generation and transmission networks. Texas is continuing that effort by channeling an increasing level of investment into transmission so as to bring wind power to the cities from the rural regions.

Advocates of deregulation will no doubt credit freer markets for the influx of new capital while skeptics will complain that the energy companies are the primary benefactors. Regardless, unregulated merchant generators that sell their power to other utilities or large industrial concerns are now prevalent and are here to stay.

The goal then is to create a fair market that enforces equal access to the grid and permits at least big buyers the option of where to buy their power. Any efficiency gains would then be passed down to smaller users.

"We continue to urge states that restructured to appreciate that re-regulation is unwise, especially in a rising cost environment for anybody building new power plants," says John Shelk, president and chief executive of the Electric Power Supply Association, in a speech. "It makes more sense to stick with competitive suppliers who have every incentive to control costs and operate plants more efficiently."

Retail energy markets have struggled. The growing pains will no doubt continue. But some states are nevertheless marching forward. Over the long term, they remain convinced new participants will enter markets and give consumers more choices.

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Ken Silverstein EnergyBiz Insider Editor-in-Chief
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