DEREGULATION
Electricity restructuring benefits consumers, environment, report says

Damon Franz, Greenwire staff writer

Deregulating electricity markets leads to lower retail rates for consumers and promotes use of renewable energy, says a new study from a Pennsylvania citizen advocacy group. Other consumer advocates, however, say the data cited in the study actually indicates the opposite conclusion.

The study, " Electricity Competition: The Story Behind the Headlines," says that despite the poor press deregulation has received in the past year because of California's electricity crisis and the Enron scandals, electricity restructuring has actually been a good deal for consumers and clean energy advocates.

"The report clearly shows that eliminating the monopoly that utilities have held over electricy customers results in both lower prices and more clean energy," stated John Hanger, president of Citizens for Pennsylvania's Future, which produced the report. "And best of all, it is the little guys -- the residential customers -- that are getting the biggest cuts in their electricity bills. Despite all the hype from ideologues of both the left and the right, the facts prove that electricity restructuring -- introducing competition with smart rules and protections -- is very good public policy."

The report compares retail electricity prices for all 50 states between 1996 -- when states first began restructuring retail electricity markets -- and 2001. In the 22 states, including the District of Columbia, where retail electric markets were restructured, residential rates declined 15.9 percent, compared with 11.6 percent for states that did not restructure those markets, the report says, using data from the Energy Department's Energy Information Administration.

Moreover, the report found that states that have deregulated retail electricity markets are more likely to establish renewable portfolio standards, which require a certain percentage of electricity to come from renewable sources like wind and solar power. Seventeen of the 22 restructured states have established a renewable standard, a clean energy fund, or both, the report says. By comparison, only two non-restructured states have enacted such laws. Hanger says the renewable portfolio standard and clean energy fund are the two most important things a state can do to promote clean energy.

Other consumer and environmental advocates dispute the study's findings, saying the customer savings and environmental benefits cited in the study result from government regulation, rather than deregulation. Tyson Slocum, research director of the Critical Mass Energy and Environment Program at Public Citizen, said the reason retail rates have declined in states that have restructured electric markets is that in the process of restructuring, the state legislatures froze retail rates.

"Regulated rates under deregulation have decreased," he said. "[The study] attributes that to deregulation when really it is a regulatory change. In Pennsylvania, rates have gone down since deregulation because regulators said rates would go down. It has nothing to do with market forces. ... There is no correlation between retail rates and deregulated markets, because in no state are consumers paying real rates for electricity."

And David Hughes of the environmental and consumer advocacy group Citizen Power said rates have declined more in restructured states because rates there were higher to begin with. "If you go back to 1996, retail electricity prices in the states that did deregulate were on average 25-30 percent above the rates of state that did not," he said. "If you have rates 25-30 percent higher in states that deregulated, the rate decrease in those states that are real high should have been dramatic. But it was not, it was only 4 percent below those that did not deregulate. That's meaningless when you consider the 25-30 percent difference to begin with."

And Hughes says that any savings seen during the period of transitioning to a deregulated market will disappear once rate caps are removed. "[Deregulation] allows utilities to consolidate, and then gouge customers once price caps are taken off," he said. "All bets are off once the transition period is over."

Slocum and Hughes also dispute the assertion that deregulation leads to greater use of renewable fuels. Mandating a renewable fuel portfolio, while desirable, is actually a regulation that has nothing to do with market forces, says Slocum. "Some states adopted renewable portfolio standards just because the states were overhauling their electricity markets," he said.

And deregulation can actually hurt small renewable fuels producers, he said, because large companies that use coal and nuclear power can exclude them from the marketplace. "In California, PG&E denied the small wind farms access to the grid because they didn't have the capital to negotiate contracts," he said. "Small renewable marketers have fallen by the wayside because they don't have the money to play with the big boys."

Hanger disputes these criticisms. Its true, he said, that retail rates are low because state governments have implemented rate freezes. But the rate freezes are merely the mechanisms by which states mandate that a utility's savings -- produced by deregulation -- are passed on to the consumer.

"Money doesn't grow on trees," he said. "If a legislature just cuts rates and there aren't real savings, you're going to bankrupt the utility. Those savings come from cutting inefficiency. The guaranteed rate cut is a way to ensure that the savings are passed on to the consumer. But the source of the savings is restructuring. If the costs were exceeding the savings, you'd bankrupt the utility."

He also disputes the assertion that retail rates were decreasing prior to restructuring, citing a number of Pennsylvania utilities that raised rates during the early 1990s.

And he defended the environmental record of deregulation, saying the deregulation of wholesale markets that took place in 1991 is giving power plants an incentive to become more energy efficient. "If you're inefficient at using fuel, you're not going to be competitive," he said. "Before deregulation, there was no incentive to be efficient in fuel. Competition is driving investors to be efficient with plants."