Exchanging One Form of Regulation for Another

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Exchanging One Form of Regulation for Another: Is it Worth It and What’s Accomplished?

The effort to reignite competition in the retail electricity market in Arizona is definitely heating up. Wednesday, Constellation Energy, a large energy conglomerate headquartered in Baltimore, hosted a roundtable discussion on competition at the Tempe Buttes Resort and Spa. Constellation invited Commissioners and staff from the ACC and key legislators to a half-day session to hear presentations from its corporate executives, big box retailers, and former federal officials on the merits of retail electricity competition.

I was there too, because it was noticed by the ACC as a Special Open Meeting. I enjoyed the presentations and thought the audience’s questions very insightful.

I came away from the session with my previous thoughts on retail electricity competition reinforced: The transition to competitive electricity markets is complex; it’s very costly; and it’s fraught with opportunities to deliver results that are vastly contrary to expectations. At the end of the day, you exchange one form of regulation for another and are left wondering who really benefits.

In my last post, I wrote about energy supply issues in Texas—arguably the most competitive market for retail electricity. Owing to wholesale price caps and floors put into place through market restructuring—coupled with Texas’ fenced-off transmission grid—the state has failed and is failing to attract adequate investment in new generation facilities. While it searches for a fix to that problem, Texans face rolling brown-outs and black-outs potential.

Pennsylvania’s deregulation effort (often pointed to along with Texas as a model of successful deregulation) has also suffered several bumps in its road. Pennsylvania’s restructuring rules led many suppliers to exit the market since they couldn’t operate profitably. Other restructured states like Illinois and Maryland have suffered through major headaches arising from the automatic elimination of price ceilings enacted as part of the bargain for deregulation. And, I’d be remiss if I didn’t once again mention the California deregulation debacle of 2000-2001, which led to market chaos and removal of a sitting governor from office.

So, what’s my point?

Well, I have a couple points to make.

First, experience has shown, and the roundtable discussions reinforced, that electricity markets are complex, and restructuring requires very careful and costly examination and transition efforts. Without new regulations in the form of wholesale and retail price caps, service quality requirements and standards, customer education programs and market exit rules, customers can be harmed—big time. In other words, for the possibility that these “competitive” models might work to the benefit of consumers, one form of regulation must be replaced with another form. The mantra we hear of “get government out of the way and let markets work” just doesn’t fit when it comes to the adequate, safe, and affordable delivery of electricity.

And, let’s face it—electricity is one product in which competitive market failure would have dire consequences.

Point two: I don’t think that retail competition will produce a better result for residential customers than the current regulatory paradigm. At least not here in Arizona.

The best question of the roundtable session was posed by Stan Barnes, the event’s chief organizer. Barnes asked the panel of policy experts to address what they believed was the compelling reason driving their support of competition despite the complexities in transitioning to competition. Federico Pena, former U.S. Secretary of Energy and current Co-Chair of the Compete Coalition, responded that high rates, declining service quality, and mismanagement by utility companies were his reasons to support competition. Both Pena and former FERC and Pennsylvania regulator Nora Brownell cited “bringing competitive markets to the last significant segment of American commerce still under a regulated monopoly structure.”
But, it seems to me that the reasons offered to restructure electricity markets point much more to a failure of current regulation in certain states rather than the need for an “Invisible, but very pervasive and complex, Hand” of competition.

The reality is the 17 states that have embarked upon the competitive path have just exchanged traditional regulation for a surgically-repaired and quite “visible hand” encased in a protective glove. It’s not deregulation. It’s the design of new regulations for promoting an artificially competitive market. True “Deregulation” would be an unmitigated disaster.

So, let’s look at what the proponents of competition say we get with restructuring and what the current regulated monopoly system has provided us in Arizona.

-    Proponents of competition say if we restructure the market, we get investment in renewable energy like wind and solar. Arizona utility companies have been investing in renewables for years and are planning to exceed the ACC’s 15 percent renewable portfolio standard before 2025. So, we’ve already got that.

-    Competition proponents say if we restructure the market, we get investment in energy efficiency services, which customers like. Arizona utility companies are investing in energy efficiency programs and plan to meet the ACC’s requirement to reduce sales by 22 percent over the next 10 years. So, we’ve already got that.

-    Competition proponents say we get innovation. Arizona utility companies have been innovating. APS, for example, has been developing technologies to use algae in generating electricity and all Arizona electricity providers are implementing technologies such as smart metering to gain billing efficiencies and provide customers with information about usage so they can reduce their bills. So we’ve got that.

-    Competition proponents say monopoly utilities are mismanaged, inefficient, and wasteful. Arizona utility companies, under present regulation, have always been required to reduce costs. APS is required under the terms of its ACC-approved rate settlement agreement to reduce its costs by $150 million over 5 years. So, we’ve already got that.

-    Competition proponents say if we restructure, our rates will be lower.   However, the average retail price for electricity in Arizona is already lower than the national average. For residential customers, the average price for electricity in 2010 was 9.66 cents per kWh—lower than the national average of 11.53 cents per kWh. And, guess what? We’re also 28 percent lower than the average residential price in Texas and 13 percent lower than Pennsylvania. So, we already are lower than most, including the two most heavily cited examples of “successful” competition. Check the map below: