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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.

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"At best, at this point in time, no discernible overall benefit to retail consumers can be seen from restructuring," wrote Kenneth Rose, an independent energy consultant, in an analysis of deregulation last year.

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Consumer anger, others contend, is the surest sign that deregulation has not lived up to its promise.

Disappointment is strong in the PJM wholesale power market, which covers a region with 51 million people in all or parts of 13 states, including Pennsylvania, New Jersey, Maryland, Delaware, Ohio, and Virginia.

In Pennsylvania, which deregulated electricity in 1996, most households are still protected by retail rate caps until 2010. Yet even Irwin "Sonny" Popowsky, the state's consumer advocate on utility pricing and a one-time booster of electricity restructuring, is shaken. "I'm just really disappointed and shocked by the results in places like Pike County, Maryland, and Delaware," he says. "This isn't the way it was supposed to be."

Market prices in New York and New England (except Vermont), where rate caps have come off, are often set by the highest-cost facilities. "These generators all get paid as if they're running a natural-gas-fired machine at double or triple the rate - and that has thrown the equation off," says Gerald Norlander, executive director of the Public Utility Law Project of New York.

Analysts also blame poor competition in residential markets on the higher costs companies incur serving smaller customers. In Ohio, for instance, customers like Mary Babcock want to compare offers from the eight power companies doing business there. But she can't.

Instead of adding competitive pressure to sell electricity at lower cost, deregulation in Ohio has so far yielded just one company interested in selling Mrs. Babcock power - the same one that's sold it to her for years. "No competitive retail electric service providers are currently enrolling customers," says the Ohio Public Utilities Commission Web page.

That's bad news for Babcock. But it's far worse news for Bob Flygar, manager of Eramet Marietta, Inc., a southeast Ohio branch plant that makes alloys for hardening steel. Electricity rates that have leaped 50 percent since 2004 could mean "eventual demise of the Eramet plant" and 400 jobs, he testified before the state utilities commission last October.

"We need a healthy dose of real competition," says John Anderson, president of the Electricity Consumers Resource Council. "We were deregulation's first supporters. But all we've really done is go from one regulatory structure to a new one that is less customer friendly."

He and other critics also allege that a key negative feature in each market is "market power" - an oligopoly situation that may be allowing generating companies to whipsaw prices upward.

Market power worries Howard Spinner, director of economics and finance for the Virginia State Corporation Commission. In his analysis of PJM's market data from last year, Mr. Spinner found 41 generating units he says may be employing a strategy of "economic withholding," which could effectively cut power supplies and raise prices. But he's not certain, since PJM won't release critical data for analysis - something the transmission organization denies.

"We've heard these charges before," says Ray Dotter, a PJM spokesman. "Our independent market monitor has consistently said it is competitive."

Hockey-stick bidding: Market power in action?

But Dr. Rose, the energy consultant, sees what may be subtle attempts to influence prices through strategic bidding that, when graphed, resembles a hockey stick. He points to July 27, 2005 - one of the hottest days in PJM last summer - as a case in point.

A big power company started the bidding with a very low offer: 4,300 megawatts for zero dollars or other nominal amounts, Rose says. It offered the next 2,700 megawatts at gradually higher prices until it reached $100 per megawatt hour. But the last 1,000 megawatts were offered at $200 to $1,000, and it's those last high-cost blocks of power that often set the rate overall.

That, he says, could be evidence of market power.

PJM officials strongly reject allegations of tacit collusion. On the hot summer day in question, prices peaked at $512 per megawatt hour. Hockey-stick bidding is "a common market mechanism," says Joseph Bowring, PJM's internal watchdog. It ensures prices high enough to lower consumption and "keep the market from running out of power."

Back in Milford, officials will soon hold hearings into the power auction process. And hopes are growing that a new auction may be held and a lower-cost supplier found.

"All the consumers up here are saying: 'Now, I see how this deregulation works,' says David Wilson, executive director of the Pike County Chamber of Commerce.