The Cranky Consumer On Electricity “Deregulation”

Lynne Kiesling

Tuesday’s Wall Street Journal had an installment in its regular series called “The Cranky Consumer”, in which one of the WSJ writers goes out into the market and reports on the consumer experience. Tuesday’s installment was written by Rebecca Smith, the Journal’s regular electricity writer and one of the best energy journalists around.

Ms. Smith compares electricity “deregulation” in five of the 18 states that have restructured the regulation of their electric power industry.

We were curious how residential energy customers are faring in states that didn’t suffer the spectacular flameout of California. We looked at five states — Michigan, Ohio, New York, Pennsylvania and Texas — to see how many companies are currently providing electricity and what’s happened to retail prices. We also wanted to assess the quality of the state-run Web sites aimed at helping you sort through the options. (Check your state’s public utility commission Web site for more information.)

She finds that

… stirring up competition has turned out be much tougher than states expected, mainly because erratic wholesale electricity prices have pushed up retail rates as well. On top of that, a credit crunch has thinned the pool of competitors. …

One immediate conclusion from our test: Even in some deregulated states, competition remains largely a myth. In Michigan, for example, no power companies have stepped forward to provide residential service, because they aren’t convinced they can resell the electricity at a profit.

Pennsylvania, meanwhile, should be a hotbed of competition, as the state is home to large number of power companies vying for commercial accounts. (One would expect that would create some spillover on the residential side.) But the residential power market has actually become less competitive in recent years, as some of the start-up companies have dropped out of the game. Power providers other than utilities now serve fewer than half as many customers as they did in 2000, or 180,000 versus 430,000. …

The only market with plentiful competition for residential customers is in Texas. But the market is lively because the prices charged by the utilities are unusually high, which gives rival suppliers a rate they can easily beat. Consumers in Houston can choose from among 15 suppliers, but the prices range from 9.6 cents to 13.19 cents a kilowatt hour. …

Ohio stands apart from all this for one reason. Twenty percent of its residences get electricity from competitive suppliers as a result of something called “aggregation,” which lets customers band together and buy blocks of power. This gives them buying clout. Customers of the Northeast Ohio Public Energy Council, the biggest aggregator in the state, get electricity at a 6% discount to what First Energy, the local utility, charges.

As a representation of the retail options facing consumers, her summary is pretty accurate. I could pick a lot of nits in the article, but I’ll stick with just a few. First, Ms. Smith erroneously continues to use the word “deregulation” to describe what has happened in these states, which is a gross misnomer. Even in the state that does the best in her comparison (and which routinely earns the highest ranking in the Center for the Advancement of Energy Market’s Retail Electricity Deregulation Index), Texas has a multi-year phase-out of retail rate caps and other regulatory circuit breakers that dilute the changes and make them very much not deregulation, but rather a restructuring that very slowly phases in retail market liberalization. The restructurings that have been implemented are such a weak, pale shadow of how robust markets create opportunities for entrepreneurs that it’s little wonder that there’s not a lot of action in most places.

Second, in addition to the wholesale price volatililty (due largely to natural gas price volatility) and capital crunch in the industry that Ms. Smith mentions, the diluted nature of the restructurings that have taken place tends to make entry unattractive for new suppliers. Thus she finds that utilities are still the only game in town in Michigan, and that Pennsylvania’s robust supplier entry and customer switching have not been sustained. Gee, d’ya think that Pennsylvania’s retail rate caps phase out over ten years has had anything to do with that? The sad political reality of the feeling of entitlement to cheap, highly reliable power is that robust competition is emasculated, robbing customers of the ability to choose among a variety of price points, levels of quality, and service combinations because creative entrepreneurs have little or no incentive to bring such offerings into reality in this watered-down restructuring environment.

If federalism really does mean we can learn in the laboratory of the states and implement better ideas through institutional and jurisdictional competition, the lesson here is that we can do better. We can even do better than Texas. But it requires political leadership, a strong stomach, and the ability to say to the deeply-vested stakeholders, “imagine a world of variety and choice, in which consumers are empowered through technology and transparent institutions to be in charge of their own energy choices in a variety of dimensions that weren’t even feasible five years ago.”

Imagine.