by Jennifer Taylor, June 2007

• Introduction
• Deregulation—An overview of the issue
• Deregulation—today’s concerns
• Deregulation and electric cooperatives
• North Carolina & Electric Utility Restructuring
• Download the full article as a

Beginning in 2001, increases in wholesale power prices drove many retail suppliers out of business; they simply could not acquire power at a price that allowed them to beat capped rates charged by local utilities. Then, as rate caps expired in a number of states, utilities began passing on the real cost of power. Needless to say, electricity prices skyrocketed. One investor-owned utility in Delaware adopted a 59 percent increase in residential power rates; in Maryland, residential customers served by Baltimore Gas & Electric experienced a 72 percent increase. States with rates caps scheduled to expire in the next few years, such as Virginia, began reconsidering their restructuring initiatives and looking for ways to avoid steep rate increases. Virginia likely will be the first state to enact a form of “re-regulation” legislation. With residential customers shocked and angered over their electric bills, industry experts and legislators wonder what happened to the benefits promised by deregulation.

Simply stated, deregulated electricity prices result from the basic laws of supply and demand. The population across the country has continued to grow since deregulation was implemented. The growth in population increases the need for more electricity. The demand for electricity, however, has not been sufficiently met by increases in base-load generation capacity, driving up the cost to purchase power. To meet demand, new power plants have to be built, along with transmission and distribution systems to deliver the additional load. Although some new power plants have been constructed, it has not been enough to keep up with growth and create a competitive market for retail electricity.

Also, rate caps were set when fuel costs and demand for electricity were lower. Since then, fuel costs have increased substantially, especially for natural gas, which is used to generate approximately 18 percent of the country’s power. Moreover, as wholesale markets have been restructured, natural gas has increasingly set the price for all power plants, including less expensive coal and natural gas generators. The dramatic increase in natural gas prices, therefore, has had a much larger influence on wholesale, and conversely, retail power prices. With an ever-increasing need for more electricity, coupled with higher wholesale power costs, utilities in restructured environments have had to significantly increase rates because rate caps did not allow them to meet operational costs.

Additionally, it is not economically viable for competitive electric generation suppliers to sell to small businesses and residential customers in rural areas when they could compete for large, industrial customers. Based on an analysis by Kenneth Rose, a researcher and energy consultant for state utility commissions, retail access remains technically available in many jurisdictions. However, retail competition has yet to develop for smaller customers.

Overall, rate increases have been higher in deregulated states than in states that maintained regulated systems. Rose remarks, “The national result continues to question the ability of retail competition to provide lower prices for electric service than would have prevailed under traditional regulation of the industry.”