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In deregulation of electric markets, a consumer pinch

Competition was supposed to lower prices in deregulated states. But faster-rising rates there are spurring a backlash.

By Staff writer of The Christian Science Monitor / April 25, 2006



It's the slow season for the laundromat in tiny Milford, Pa., yet owner Darryl Wood has raised the price of a wash by 50 cents this year, to $2.50. The reason? Electric rates have more than doubled since January, threatening to close the lid on a business his family has run for decades.

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"I've already seen an electric bill higher than anything that I've ever gotten," he says. "I thought deregulation would bring rates down. Now, I'm just hoping we can hang on."

His ordeal reflects the fresh dismay many consumers are feeling about the deregulation of the electric utility industry. When deregulation was implemented in the 1990s, supporters said it would drive rates down through competition.

But data so far suggest that rates in deregulated states are rising faster than those in regulated states. That trend could expand as caps on retail electric rates, which have held prices down, are lifted in at least six deregulated states this year.

The issue is heating up:

• In Maryland, where homeowners were threatened with a 72 percent rate hike this summer, deregulation is suddenly a major issue in the governor's race.

• In Delaware, where Delmarva Power set forth rate jumps of at least 59 percent, lawmakers responded by phasing them in over several years and requiring power companies to do long-term planning.

Price comparisons are limited because rate caps are only just being removed. But in New England, where many caps came off last year, retail electric rates surged about 15 percent - except for Vermont, where regulated rates are roughly flat. In the Mid-Atlantic region, rates in deregulated New York have risen 16 percent since 2002, while rates in still-regulated West Virginia were about flat.

Such unexpected disparities are prompting a backlash in states that recently allowed markets to set wholesale and retail pricing. And it's fueling a debate over what went wrong.

Industry officials blame price spikes on higher fuel costs and rate caps set too low years ago. But fuel hikes are only a partial explanation, analysts say. Lack of competition and the ability of companies to sway markets to maximize profits may be factors, too, they say.

"There has been and is today no true competition in wholesale and retail electricity markets," the Electricity Consumers Resource Council wrote in a filing with the Federal Energy Regulatory Commission in November.

Power companies strongly disagree.

"Competition has been incredibly robust," says John Shelk, president of the Electric Power Supply Association. "People believe if prices rise something is wrong.... But the reason is the cost of [fuel] increased."

That hasn't cooled the anger in Pike County, Pa., which includes Milford, where residents are telling regulators that the doubling of their rates is outrageous. Just two suppliers bid in an auction to serve the area last October. "It seems a little fishy to some people," Mr. Wood says. "It's very bad for the economy here and for morale."

Some states are even considering re-regulation. But getting the "genie back in a regulated bottle" may be difficult or impossible, says Christie Rewey, an energy specialist at the National Conference of State Legislatures in Denver.

Many states sold their generating stations for a song in the 1990s, she says. Now these same states find that those old plants are a gold mine for their owners and would be very costly to buy back.

Today, 16 of 23 states that initially passed electricity deregulation offer a fully deregulated power system, studies show.

At least 34 states have repealed, delayed, suspended, or have limited retail access to just large customers or are no longer considering deregulating electricity for retail customers, according to a study last year.

Take Montana. It once had the region's lowest electric rates, but sold off its hydro-dams and deregulated in 1997. Some legislators there want the state to buy back those dams. "The power those dams generated for less than $20 per megawatt hour has jumped to over $31 since deregulation," says Don Judge, a political consultant in Helena, Mont. "It's ironic that we sold them in the first place, and now we're paying the price."

Industry defends benefits of deregulation

The re-regulation push worries some industry officials. "Absolutely, we are worried states will try to turn back the clock," Mr. Shelk says. "It would be bad for us, but in [the] long term bad for states, too."

Industry officials have launched a campaign called COMPETE to tout the benefits of competition. And they cite two studies showing that deregulation has saved consumers between $16 billion and $34 billion so far. But other studies by academics and power consumers dispute those findings.

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