On Monday the Chicago Tribune published an editorial about electricity policy in Illinois (registration required). We’ve got a lot of electricity policy issues on the table right now. Nine years ago, the political bargain struck to allow wholesale market competition in electric power was a ten-year retail rate freeze, at a discounted rate relative to 1996 rates. At the time this was seen as compensation for inefficiency and cost overruns associated with nuclear plant construction, which meant Illinois retail rates were some of the highest in the country (and thus the impetus for introducing competition).
Nine years ago Illinois lawmakers voted to slash and freeze Commonwealth Edison’s electricity rates while the state prepared to move to a competitive market for power. Residential rates were cut by 20 percent, bringing ComEd customers closer in line to what neighboring states were paying.
In the ensuing decade, fuel prices have risen due to increased domestic demand, increased foreign demand, and environmental regulations that have constrained supply and have shifted out the demand for fuels like natural gas.
At the end of 2006, these heavily-discounted retail rate caps in Illinois expire. We have had much administrative procedure over the past two years trying to figure out “what to do” once the retail rate caps expire. One thing that is moving forward is a long-term wholesale procurement auction. I have reservations about the wholesale auction that I won’t elaborate on here (yes, auctions introduce market processes and price signals, but the structure of the wholesale auctions and having the incumbent as the purchaser may simultaneously lock customers into long-term prices/contracts that they might not otherwise have chosen, and it may also provide a substantial entry barrier to competing retailers who have to compete against this incumbent product offering). But the auction is coming, and it will reflect market values for electricity and expectations of those values for the next 1-3 years, so it will mean price increases.
One thing you can’t do is avoid the inevitable. Illinois and other states are going to move away from the old system of government-regulated electricity rates and into a competitive market. And they should. Over the long run, that’s going to be the best way to govern supply and demand–and encourage conservation–of power. …
The cost of electricity in Illinois does seem destined to rise sharply, at least in the short term. The wholesale price of electric power in much of the nation has increased in the last two years, driven by soaring prices for natural gas, which fuels nearly all the new electric generating capacity built here in the last decade. That marginal capacity largely governs the price in the wholesale markets. ComEd’s auction will reflect that rise in price.
The editorial correctly points out that supply is part of the story, but so is demand:
The price of electricity for ComEd customers right now is 8.67 cents per kilowatt hour–every hour of every day. But the market price fluctuates depending on how much power is needed at what time. Most of the time though, the market price for electricity is somewhere around 6 cents. In the middle of the night, it’s just a penny or two. On a steamy July afternoon the price can spike well above 10 cents. The need to have enough power available, whatever it costs, for the hottest minute of the hottest day is what drives up the overall price.
Consumers haven’t had price information to respond to a spike in electricity like they can respond to a spike in gasoline. (That is, use less of it.) But that might be coming.
Under a pilot program set up as part of the 1997 deregulation law, ComEd installed meters that gave real-time price signals in some homes. The result: On last summer’s hottest day, July 25, participants cut their peak-hour electricity consumption by an average of 15 percent.
You KP readers are already familiar with this program, the much (and justifiably) touted Energy Smart Pricing Plan from the Center for Neighborhood Technology.
The editorial closes by essentially saying we can’t go backward, nor should we, because the regulated past wasn’t that great a place to begin with!
Those who want to delay the move to an electricity market seem to have a mistaken nostalgia for the old days. ComEd consumers were paying the highest prices in the Midwest in the mid-1990s, in large part because of the government-protected monopoly’s notoriously poor management of its nuclear fleet. Exelon, the successor to ComEd, has been a much more nimble and efficient firm as it moves toward a market-driven power system.
As you would expect from someone who knows way too many of the details of topics such as this, I have quibbles with some of the editorial’s claims, but in general I think this is a useful commentary, and valuable for Illinois customers and politicians to consider.