Deregulation: A Work in Progress
States are learning that when it comes to deregulation programs,
one size does not fit all.
A lot of gas has passed through the pipes since the federal government
deregulated the utility industry. As states like Texas,
Ohio, and California have framed a new set of regulations to serve
both consumer expectations and market competitors, a lot of mistakes
have been made and a lot of lessons have been learned. Perhaps the
principal lesson to come out of all the chaos is that changes should
be unrushed and tailor-made.
It is difficult to separate natural gas and electricity
in Texas where 48.5% of the electricity is generated
by natural gas. The Railroad Commission oversees the still regulated
natural gas industry for residential and commercial customers, while
the Public Utilities Commission wrangles a herd of electricity providers
serving unbundled customer groups.
With 250,000 miles of gas pipeline, Texas is both the largest
producer and the largest consumer of natural gas in the nation,
using 23% more than California.
The Texas gas customer base consists of 10% residential/commercial
and 90% industrial and power generation. While residential and commercial
service is still regulated, most large industrial and electric generation
customers are free to negotiate their own rates. Because users are
so close to the source and supply exceeds demand, they have enjoyed
relatively low prices in comparison to other parts of the country.
The Texas legislature has seen fit to leave the rate-setting authority
with the individual cities, which in turn have no desire to give
up their jurisdiction. The RRC, meanwhile, sets rates for customers
outside the city limits or within the city on appeal. The result
of this split jurisdiction is a lack of rate consistency among cities.
Also, the process lacks efficiency since each city bears duplicate
costs for rate setting. However, this is an issue most agree is
a small price to pay for retaining local jurisdiction.
“Texas allows the market to work when it can,” says
Karl Nalepa, assistant director of the Regulatory Analysis &
Policy Section of the Texas Railroad Commission’s Gas Services
Division. “The RRC is a complaint driven regulatory agency.
When we receive complaints, we have the authority to investigate
and seek a solution that fits the problem.”
Prior to 1995, electric utilities in Texas were monopolies with
guaranteed, but regulated, incomes. Because utilities were obligated
to provide reliable electricity to all customers in their areas,
utilities maintained excess capacity.
More than 39 generation projects have been completed in the past
few years, giving Texas 25% excess electric capacity on average.
Wholesale deregulation took place in 1995 followed by retail deregulation
in January 2002. Retail consumers are no longer obligated to buy
power from their local utility but can choose to purchase power
from a list of competing licensed retail electric providers serving
their area. These REPs are required to disclose their fuel mix to
the consumer along with other purchase information. Consumers can
shop for a REP based on pricing, type of service contract, and/or
use of renewable resources.
The independent Electric Reliability Council of Texas, Inc., administers
the state’s power grid that serves 85% of the state’s
electric load with 70,000 megawatts of generation and 37,000 miles
of transmission lines. Areas outside of ERCOT’s control are
El Paso, Amarillo, and Beaumont as well as most co-ops and municipalities.
Municipalities can opt in to deregulation or not. So far, none
have and prices to consumers remain good.
Unlike other states, the Texas grid is not connected to other states
and is unable to bring in or send out electricity. This has served
to keep supplies up, making the market more competitive.
There is another benefit to this independence, according to Jess
Totten, Director of the Electric Division of the PUC. “We’ve
had an advantage in regulating wholesale and retail by developing
rules with one agency rather than trying to coordinate development
with separate agencies.”
Totten thinks one of Texas’s biggest hurdles has been setting
up the computer system that tracks customer switching. A customer
registration function notifies providers so that billing can be
stopped by the old provider and initiated by the new provider in
a timely fashion. At the same time, a change verification postcard
is sent to the customer as a means of preventing slamming.
When all is said and done, just about everyone thinks deregulation
is working in Texas. Totten believes Texas was able to learn from
other markets and had adequate time (two years) to develop rules.
In turn, all of this attracted good players.
Ohio: mixed reaction
The Gulf of Mexico supplies 90% of the gas used in Ohio.
Restructuring in Ohio has brought greater competition and lower
retail prices. In 1997, most residential and commercial customers
were given the opportunity to choose their gas supplier. Since then,
over 1 million Ohioans have switched to independent marketers.
Following this, in 2001, legislation was passed to unbundle electric
customers. In the Akron area alone, almost 25% of revenues has shifted
to independent marketers.
On the dark side, some customers say they have been switched against
their will and many others are not sure how to take advantage of
the new situation.
In other parts of Ohio, no independent marketers have chosen to
compete with local utility rates.
Some consumer advocate groups think the deregulation of Ohio’s
electricity has been more trouble than it is worth.
California is second in the nation in consumption of energy yet
produces only 16% of the gas it uses and 75% of its electricity.
In 1998, deregulation forced utilities to sell their generation
plants and to purchase electricity daily and hourly at spot market
rates. With the addition of a hot summer, supply shortages, and
policy disputes with FERC and the CPUC, the result was the perfect
Estimates of the cost of the ensuing blackouts around the state
were $2.3 billion. A National Federation of Independent Business
survey showed 44% of small-business owners surveyed believed electricity
deregulation was a bad idea. Another 3% faulted poor implementation
and 18% termed deregulation a political compromise doomed to failure.
On another front, Wall Street may no longer see California as a
good place to do business.
Interestingly, Los Angeles, which opted not to deregulate, has
experienced no blackouts or bill increases. If fact, energy costs
on average are 18% lower than in other areas. This has prompted
groups like TURN in the San Francisco area to call for a municipal
power company in the city by the bay.
Last year, in an interview with PBS, Governor Gray Davis admitted
deregulation has been a failure. According to Davis, the 1996 law
was flawed because it deregulated the wholesale market, but not
the retail market. In fact, it reduced rates to customers and froze
them for five years. In addition, it forced the utilities to sell
off their plants without requiring that California retain first
claim on the power produced in those plants.
Most observers look for the California Public Utilities Commission
to spend most of its energy this year settling outstanding financial
issues involving the three major utilities and planning California’s
upcoming massive bond sale. These items alone ensure retail rates
will see no relief from last year’s 40% hike.
California’s Governor Gray Davis and the state’s PUC
put together a deregulation plan destined for failure. One of the
key elements causing that failure was forcing utilities to sell
their power plants and deregulating the wholesale market without
the retail market. In Texas, deregulation has gone well, according
to Karl Nalepa, assistant director of the Texas Railroad Commission’s
Gas Services Division’s Regulatory Analysis and Policy Section.
The way the setup works, individual cities can set residential rates
within their jurisdictions; commercial and industrial customers
can negotiate their rates. This lets the market work when it can,
The good, the bad, and the ugly; deregulation turned ugly in California
when the state legislature forced utilities to sell their power
plants and set up a flawed plan, says Governor Gray Davis (left).
In Texas, Railroad Commission Gas Services Division Regulatory Analysis
and Policy Section Assistant Director Karl Nalepa says the Texas
plan lets the market work with deregulation.
by Karen Stidger, Contributing Editor