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.

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.

"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.

"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.

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.

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