Competitive market structure crucial as Ohio considers electric regulation

12/1/2007

NEARLY everyone agrees with Gov. Ted Strickland's vision that Ohio's energy infrastructure must modernize to preserve and create jobs. This vision is embodied in Senate Bill 221 now being considered by the Ohio House of Representatives.

The question is, "How do we get there from here?" This is a journey that will require billions of dollars in investment over a decade or more.

We all want energy sources that are reliable, sustainable, and low-cost. Unfortunately, most economic data indicate commodity fuel prices will continue to trend upward and the cost of building new power generation is rising rapidly.

Given the ominous data on climate change, low-cost fossil power generation may not be viable environmentally or economically. The overwhelming need in Ohio, and across most of the United States, is for investment in clean, sustainable energy sources. It is certain to come with a hefty price tag.

Who will pay?

As Senate Bill 221 is now written, the Ohio Consumers' Counsel estimates some Ohio residential customers will pay an extra $600 per year. That's a lot of money.

In the weeks and months ahead, lawmakers and energy regulators will explore that question more closely. The core issue is whether Ohio will preserve and enhance a competitive market structure for energy or return to the old days of government regulated utilities.

The choice represents a fundamental split in economic philosophy - competition or government controls. We can't make an informed choice without challenging conventional wisdom on Senate Bill 3, the 1999 law that restructured Ohio's energy markets and ushered in electric competition.

First and foremost, the law has not failed. Nor is it as deeply flawed as some critics contend. The underlying principle is as valid today as it was eight years ago. Across our economy, competitive pressure leads to a relentless focus on efficiency and new technology.

What failed in Ohio was implementation of the electric restructuring law. The fine-print regulation that established day-to-day market rules. Overly restrictive guidelines, constant regulatory intervention, and uncertainty stunted the growth of the marketplace before it could blossom.

In addition, utilities were allowed to recoup their investments (stranded costs) associated with building power plants while they operated as a monopoly. This stranded cost was added to the price for electric generation making it virtually impossible for a competitive market to develop.

Another assumption that must be challenged is that Ohio's electricity users would be better insulated from rising energy costs under a government regulated system.

History shows, in Ohio and across the country, that this premise is dangerously false. Price control translates to 100 percent financial responsibility for ratepayers of a monopoly utility. They are on the hook for every dollar spent on power generation and transmission. Lost is any incentive for the utility to control the cost of new construction.

In a competitive market, energy customers share costs with generation company shareholders. Investors, not ratepayers, underwrite the costs for billion dollar power plants and research into renewable products and services. Any law that turns back the clock on Ohio's competitive electricity market will transfer much of the financial risk and responsibility back to utility ratepayers.

Finally, it's wrong to assume investors and innovators are disinterested observers in this debate. The governor's plan relies heavily on development of renewable energy in Ohio and to achieve those goals the state will need to attract investors.

In 2006, 71 percent of the new wind capacity added to our nation's power supply was developed by independent and competitive power producers. These companies invest where they can make a reasonable rate of return and that requires a predictable regulatory environment and a competitive marketplace.

It would be unproductive and short-sighted to abandon Ohio's restructuring law in favor of government-controlled energy monopolies.

To achieve Governor Strickland's vision for new jobs in a vibrant economy, Ohio must pursue energy policies that support renewable energy innovation and long-term investment in power generation. Competition will ensure that these goals are achieved.

The governor got it right: energy and the economy are inextricably linked in Ohio. The unfortunate flip side is that if we get our energy policy wrong, the economy will suffer for years to come.

With energy infrastructure, there are no easy do-overs. Ohio consumers - small and large - deserve a complete, thorough, and deliberative effort from the General Assembly on this crucial bill.

Lynn Olman, of Maumee, is chairman of the Alliance for Real Energy Options, a coalition of companies that market natural gas and electric service in Ohio and other states. Mr. Olman is a former state representative and chairman of the House Public Utilities Committee.