Electric Utility Restructuring:
Hard Lessons Give Way to Caution
By Mike Sorohan
Just five years ago, electric utility restructuring, also known as "deregulation," "retail wheeling," or, in its most idealistic form, "customer choice," appeared to be on a course toward adoption nationwide. But since then, the retail electricity restructuring landscape has changed.
While some states, such as Pennsylvania and Texas, have made fairly smooth initial steps toward a deregulated electricity marketplace, California’s restructuring attempt did not fare as well. Would-be energy suppliers either failed to materialize, got hamstrung by rules and regulations, or did not deliver on their promises. Congress, meanwhile, which earlier entertained several bills that would mandate certain retail restructuring tenets by a set date, has distanced itself from that idea.
Today, electric utility restructuring in most parts
of the country is in a holding pattern. A number of states that passed
restructuring legislation have delayed implementation.
California was supposed to be the model. By the end of 1998, California
and more than half of the states had approved restructuring plans, with
most other states taking the issue under consideration.
Enron Corporation, EnergyOne LLC, and other major energy suppliers began to position themselves as new competitors in the electricity marketplace. A variety of non-traditional utility companies, such as Boston-Finney, Amway, NuSkin International and Southland Corp. (owner of the 7-Eleven convenience store franchise), contemplated selling retail electricity, much the way one could purchase long-distance phone service today.
But California’s problems began cascading even before it formally rolled out its plan. Even now, the state produces less power per resident than any other state; at peak demand, California is still forced to import at least 25 percent of its power. Worse, the state’s restructuring law—despite substantial input and lobbying from its three investor-owned utilities—forced these utilities to sell nearly all of their fossil fuel generation facilities and prohibited them from entering into long-term contracts for wholesale power.
It was indeed a gamble. The summer of 2000 proved unusually hot in California, producing record demand for power. Coinciding with this demand was a sharp spike in the cost of natural gas, and record low water levels. The state’s utilities were forced to purchase power in the short-term market—in one case, paying nearly $4,000 per megawatt-hour. The utilities had no choice but to pay the market prices until the state government stepped in and imposed price caps. But blackouts and brownouts became the order of the day. By December 2000, California’s wholesale electricity prices were 11 times higher than before the law went into effect. In January 2001, the state of California, through its Department of Water Resources, took over the job of purchasing wholesale power for the nearly bankrupt investor-owned utilities (one of which, Pacific Gas & Electric, did end up declaring bankruptcy in April of 2001). In September 2001, the California Public Utilities Commission voted to end retail electricity competition indefinitely.
California was not the only problem. Boston-Finney and NuSkin were forced to settle charges that their mid-level marketing operations were really "pyramid" schemes. EnergyOne, which spent $25 million trying to build a residential retail marketing operation, shut down before it could sell a single state franchise.
And Enron began to pull back on its promises almost as soon as it made them. Enron’s $10 million effort in California attracted fewer than 30,000 consumers, and it abruptly ceased operations there in 1998, barely three months after the retail market opened. Three years later, in October 2001, Enron collapsed.
Pennsylvania was initially considered a success story. All of the state’s utilities—investor-owned, municipal and electric co-op—worked together to craft legislation that, while not giving everyone what they wanted, gave most utilities what they needed.
The Department of Energy said that since Pennsylvania implemented a pilot restructuring program in 1999, residential electricity prices have dropped by 15.9 percent. But some are skeptical as to whether the reductions are the result of restructuring. The law that created restructuring in Pennsylvania mandated the rate reduction, so it isn’t necessarily the result of competition. Suppliers also pulled out of the states, giving consumers little or no choice in some cases.
Restructuring proponents now point to Texas as the model. With electric co-ops established in 240 of the state’s 254 counties and represented in virtually every state electoral district, the Texas plan could not move forward without the co-ops’ collective blessing. The Texas plan protects the territorial integrity of the co-ops’ service territories and gives co-ops the option of participating.
But Mike Williams, president and CEO of Texas Electric Cooperatives, said that just because co-ops had a place at the table in crafting the Texas law, a sense of wariness still exists. "There’s no reason to assume, even today, that the big investor-owned utilities will want to serve rural electric customers," he said.
Around the rest of the country, restructuring remains on hold as states, mindful of the California debacle, appear wary of moving too quickly.
On Hold in North Carolina
In 1997, the North Carolina General Assembly created The Study Commission on the Future of Electric Service to study whether North Carolina should implement "customer choice." The Study Commission issued a report in April 2000 recommending that North Carolina offer choice to half of its consumers in 2005 and the remainder in 2006.
Since then, no legislation has been introduced in the General Assembly. The state's policymakers are monitoring activity in other states and federal actions to re-write national electricity rules.
For more information on restructuring the nation’s and North Carolina’s electric utility industry, consult the following Web sites:
Mike Sorohan is a Certified Cooperative Communicator and a freelance writer and editor based in Alexandria, Virginia.