Chicago Tribune: Enable Free Markets in Electricity in Illinois

Lynne Kiesling

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.

10 thoughts on “Chicago Tribune: Enable Free Markets in Electricity in Illinois

  1. I knew Lynne would like that editorial.

    I am interested in the raw politics of this issue. You have Lisa Madigan, a Democrat of the over-educated, urban professional kind, essentially shrilling for a policy that:

    1) Makes electricity artificially cheap

    2) Thus increasing demand for that electricity

    3) Thus causing less conservation

    This increases both carbon emissions and Mercury emissions as well (I believe that about 50% of Illinois power is from coal, the rest is nuclear).

    How can a politician who is supposed to be an environmentalist be against conservation?

    Yes, rates are going to go up 25%. But that only means they’re 10.75 cents per kilowatt hour, not 8.6. And if they pushed through smart meters and variable pricing, it might not have to go that high on average for the average person.

    Look across the country. 10.75 is not a lot. People in New York and California pay nearly twice that amount.

    Power in Illinois is cheap (because of all those nukes. Thanks Exelon!) and still will be after de-regulation. Keeping rates frozen just means more waste.

  2. There are several companies that supply residential retail electricity to Illinois, but each company has a regional monopoly. They own and maintain the lines and boxes and supply the electricity. How does this policy keep these monopolies from charging $0.20 or more per kwh?

    I would really like to see companies go to real time pricing. I usually run the AC only at night since it cools down the house a whole lot faster than when the sun is out during the day. With good insulation the temperature stays comfortable through the day. I’m already paying way too much for this nighttime electricity, and will only be paying more in the future. How much are these meters? I doubt the expense out-ways the savings.

  3. Ammonium,

    Regulation of utility rates does not end under this policy.

    Wholesale competition allows the market to establish the wholesale price of electricity, as a function of supply and demand. If the electric utilities still own powerplants, their wholesale selling price is still regulated to produce an allowable return on net physical plant, so they are not free to raise their selling price. The rates for transmission and distribution are also regulated and cannot be raised without regulatory review. Wholesale competitors can adjust their prices in response to changes in supply and demand. With the exception of regulatory set-asides for renewables, the utility purchases the lowest cost electricity available and passes that commodity cost directly to customers without any mark-up.

    If a utility moves to realtime pricing, it still passes commodity costs directly to customers without markup. However, customers consuming electricity during peak or super-peak conditions pay the real cost of that power. You would benefit significantly by not consuming power during peak periods, because you would only be consuming off-peak power at its realtime price.

    The meters are not inexpensive, but would typically be owned by the utility, in the case of wholesale competition. The cost of the meters would be included in the utility’s ratebase and earned on and depreciated over their expected useful lifetime. Were Illinois to implement retail competition, the meter would typically be owned by your retail electric commodity provider.

  4. Chicago Tribune: Enable free markets in electricity in Illinois

    Enlightened comments and analysis of the electric-regulation situation in Illinois from an energy economist.

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