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1.1.4 “Restructuring” and “Deregulation”

Many utility companies and their industries have undergone fundamental changes in organizational and regulatory structure. Once typified by regulatory oversight and protection, utility investment and pricing decision, particularly at the wholesale level, are increasingly guided by market forces and competition. As described more fully in this chapter, utility industry “restructuring” or “deregulation” changes the ways in which utility companies are organized and operated and ways in which customers receive utility service.

At the wholesale level, restructuring involves implementation of what has come to be referred to as “open access,” through which natural gas pipeline owners and electricity transmission line owners are required by statute and Federal Energy Regulatory Commission Order to provide access to “transportation” facilities at a fair price. Thus, natural gas producers and electric utility generators are now allowed to compete at the wholesale level without being constrained by discriminatory pricing behavior of pipeline and transmission line owners.

“Electric industry restructuring” generally describes any one of a number of ways of introducing competition between independent power producers and existing monopoly utilities to sell power to retail customers. The key here is the concept of retail competition. Currently, sixteen states plus the District of Columbia have embraced electric restructuring. It is important to note that rapidly-increasing prices, concerns about system reliability, and failure of deregulation to provide customers with viable supplier options prompted legislators in eight states that had initially adopted deregulation to suspend or repeal the legislation.15

Since the turn of the century, as the electric industry has evolved, a majority of areas in the country have had a single entity with a monopoly on sales to provide service to retail customers. That entity might be an investor-owned utility (IOU), a municipal utility, or a rural electric cooperative. With the advent of restructuring, those states now allow competitive suppliers to sell electricity directly to retail customers. In such cases, the traditional, “vertically integrated” electric utility structure—in which a single company owns generation, transmission and retail distribution resources—is fundamentally altered. Under restructuring, a company’s generation supply resources are sold off or otherwise separated from other company operations and customers are allowed to purchase power from competing suppliers. While state regulatory oversight of distribution functions (for example, maintenance of poles and wires, provision of customer service, metering, and billing) continue, the role played by state regulatory commissions in overseeing retail price of power supply has been drastically diminished.

Thus, under restructuring, customers either take power from an unregulated competitive supplier or through some form of standard or “provider of last resort” service offered by the regulated utility distribution company. Distribution companies meet the energy and peak demand requirements of their standard service customers usually through short-term wholesale market purchases and pass the costs of this procured power along to consumers.

This “market-based” approach to providing retail customers with electricity service subjects customers to the volatility of short-term wholesale market prices. In addition, the approach fails to provide a vast majority of retail customers with the benefits and stability otherwise achievable through asset management, identification of all available supply- and demand-side options to meet customer requirements, and the procurement of a portfolio of resources that best meets a defined set of policy and pricing objectives.16

In a majority of the states that approved electric utility restructuring, only a small fraction of residential customers received electric supply from a competitive supplier that is lower priced than that provided through the local distribution companies. As a result, in a majority of the deregulated states, the “migration” rate of customers to competitors is very low.17

Electric deregulation has in fact not provided long-term rate reduction benefits in any of the states that have adopted deregulation legislation.18 In addition, many of the states that adopted electric industry restructuring provisions imposed temporary rate caps or freezes to be in effect during the transition to a competitive pricing structure. However, there have been major retail electricity price spikes in states as price caps have expired. Furthermore, with the failure of competition to develop at the wholesale or retail levels, the hoped-for downward turn of retail prices after expiration of transitional price caps has not materialized. In Illinois, when rate caps expired for Commonwealth Edison customers January 2007, residential rates increased by over 22%. Bills for some Ameren residential customers in Illinois rose by as much as 170%. In Texas, after 2002, “prices to beat” offered by incumbent utilities’ increased from 67% to 114% depending on the service territory.19

Footnotes

  • 15 {15} See www.eia.gov/electricity/policies/restructuring/restructure_elect.html (map and table summarizing the status of restructuring in each state).

  • 16 {16} See Barbara R. Alexander, U.S. Dep’t of Health & Human Servs., Default Service for Retail Electric Competition: Can Residential and Low Income Customers be Protected When the Experiment Goes Awry (Apr. 2002) (full discussion of “portfolio management” and procurement electricity resources for residential electricity customers in states that adopted restructuring), available at http://liheap.ncat.org/pubs/barbadefault3.doc.

  • 17 {17} Seth A. Blumsack, Jay Apt, & Lester B. Lave, Lessons from the Failure of U.S. Electricity Restructuring, Electricity J. 15–32 (Mar. 2006).

  • 18 {18} Seth A. Blumsack, Jay Apt, & Lester B. Lave, Lessons from the Failure of U.S. Electricity Restructuring, Electricity J. 15–32 (Mar. 2006).

  • 19 {19} Nancy Brockway, Delaware’s Electricity Future: Re-Regulation Options and Impacts, Presented to the Delaware Office and Management and Budget and the Controller General (May 2007), available at www.dnrec.delaware.gov (enter “Nancy Brockway” in search box at top left-hand corner of webpage; then click on appropriate link).