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Published: 1/16/2005

Electricity deregulation falls short on benefits

BY JON CHAVEZ
BLADE BUSINESS WRITER
One analyst says he thinks electricity is among the few things not open to free-market competition. One analyst says he thinks electricity is among the few things not open to free-market competition.
HIRES / BLADE Enlarge

With just 11 months left before a five-year move to electric deregulation in Ohio is complete, competition hasn't materialized and it seems unlikely that state regulators can ever make it happen.

Deregulation was instituted in 2000 under a mandate by the Legislature. The initial promise was to lure outside suppliers to Ohio that would offer competing rates on electricity - and savings to northwest Ohio consumers who historically have paid some of the highest rates in the state.

But so far, the only benefits most customers have realized are a rate freeze since 2000 and a state-mandated 5 percent reduction of their bills.

About 50,000 customers got in on limited deals in the first few months of 2000, and large groups of customers have achieved some savings - up to $70 a year this year - by forming large buying coalitions known as aggregations.

Unless competition suddenly materializes, there isn't likely to be much more than that in the future, experts said.

Jim Halloran, an electric power analyst for NatCity Investments in Cleveland, said, "I've come to the conclusion that there are few things that are not open to free-market competition. One is electricity."

To consumers and consumer groups who have voiced displeasure at public hearings, deregulation may seem to have worked too much to the advantage of Akron-based FirstEnergy Corp., the parent of Toledo Edison.

Critics also may think that the Public Utilities Commission of Ohio has coddled the utility over the last four years. "The decisions they have made seem to favor FirstEnergy over the rate payers. I'm not seeing enough balance," said Janine Migden-Ostrander, the Ohio Consumers' Counsel.

But FirstEnergy spokesman Ralph DiNicola responded: "We think that's ridiculous."

However, in 2004 and 2003 studies, Lehman Brothers Global Equity Research ranked Ohio's first among all state utility commissions in the country as the "most shareholder-oriented."

Among other factors, the studies looked at rates cases and a subjective "friendliness" measure.

With FirstEnergy's rate plan expiring at the end of this year, state regulators had a decision to make last spring about whether to subject northern Ohio customers to electricity prices on an open market or lock in rates for three more years.

The PUCO, fearing a sharp rise in power costs, chose the latter, agreeing with a FirstEnergy plan to freeze rates in 2006 through 2008, with some increases possible, such as for higher taxes.

But the trade-off was permitting the company to charge a fee equal to one approved for the past four years that is aimed at paying off the firm's debts from building nuclear power plants. The past fee was to generate $8.6 billion, the new fee about $2 billion.

The decision drew criticism from consumer groups who contended that the fee was excessive, unnecessary, and possibly illegal.

But Alan Schriber, chairman of the PUCO, said the rate freeze was necessary to keep customer bills from skyrocketing.

"The law said we go to market at the end of '05 but we didn't feel the state was prepared to go to market for electric power," he explained. "We asked FirstEnergy to give us stable rates, and they asked us to give the company financial wherewithal to keep rates stable.

"There will be those who will say we're too soft. But if we can't get lower prices on the open market, then we have to look at alternatives."

As for the fee to help stabilize rates, the FirstEnergy spokesman said it was justified."If the commission had chosen the auction alternative, our customers' generation price would have increased by more than 20 percent," Mr. DiNicola said.

Mr. Halloran, the analyst, said the fee is likely to be used to pay for future investments. "If they didn't get that money now, when they go to replace plants they wouldn't have enough equity to borrow against. That's basically what that money is for," he said.

The state regulatory panel's decision also called for an auction to determine whether competitors could provide cheaper electricity. The auction, held in December, had firms bidding on power for 2006, a year ahead.

The lowest bid was to provide power for 5.5 cents a kilowatt hour, much higher than FirstEnergy's 4.6 cents.

After four years of deregulation and attempts to jump-start competition, Toledo area residents pay $82.98 a month for using 750 kilowatts of power, compared with $87.69 four years ago. Those in the bulk-buying groups paid $78.81 last month.

By contrast, residents in Marietta, Ohio, pay the lowest rate in the state: $49.83 monthly.

Robert Chilton, executive vice president of Gabel Associates, an energy consulting firm in Highland Park, N.J., and former public utility commissioner in New Jersey, said lack of competition and savings doesn't necessarily mean regulators are too cozy with utilities.

"The thing is, you have competing concerns," he said. Regulators must balance the needs of the utility, customers eager to switch and save, and those customers who prefer the status quo, said Mr. Chilton, who has been monitoring Ohio's deregulation efforts.

The competition in New Jersey "didn't take off" until the transition period was over, he said,

Mr. Schriber said the electricity market is too volatile to gamble on not having locked-in rates, as evidenced by no suppliers beating FirstEnergy's price in the auction last month. He said he is hopeful another auction to be held late this year will be more productive.

Critics of the 12-month advance bidding in December's auction said better prices would be likely if the auction were held after March.

By then, the organization that oversees the grid carrying electricity in the Midwest will have a system in place to track up-to-the-minute prices of power throughout the territory.

Even Mr. Schriber conceded, "Perhaps more competitors would have been better able to assess their risks and what it would take to come into the market" if the auction had been held this spring. However, he added, FirstEnergy insisted the auction be held last year so it could prepare for 2006.

The advance time was needed, said FirstEnergy's Mr. DiNicola, to give the company time to arrange to sell its power elsewhere and a competitor to set up use of the transmission lines.

Critics say New Jersey, which is deregulated, holds its power auction in February and implements results in June. Mr. DiNicola said New Jersey has conducted four auctions and is prepared for them.

Mr. Chilton, the energy consultant, said New Jersey uses standard contracts from its first auction, but a year's lag time seems excessive. "Our experience is that it shouldn't take that long," he said.

Deregulation in New Jersey has mainly benefitted commercial and industrial users, he said, and homeowners and renters have few choices.

Judy Jones, a PUCO member from Toledo, said deregulation in Ohio isn't a failure, noting customers saved money from the 5 percent rate cut and from the bulk-buying groups. But those measures were supposed to help spur competition, and that hasn't happened, she said.

Even key state lawmakers have expressed some concerns over how well electricity deregulation is working. Ohio Senate President Bill Harris said he may want to re-examine deregulation as part of an overall state energy policy.

Mr. Schriber, who still thinks deregulation can work, said Ohio needs to revisit it in 2009, when rates will be unfrozen and a second state-mandated fee will have expired.

"I don't think it can be reversed totally; the genie is too far out of the bottle," said the state's top electricity regulator. But some people think some regulation may be needed, he added.

Contact Jon Chavez at: jchavez@theblade.com or 419-724-6128.



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