Why Turn Back the Clock on Competitive Energy?

The numbers are in. The United States will need tens of thousands of megawatts of new power generation over the next several years extending through the next several decades, requiring the investment of hundreds of billions of dollars in the new technologies that will be needed to meet the power demands of the future while respecting environmental and other important public values. As a result, who builds that generation is pivotal to the future of the competitive power sector and, more importantly, to whether consumers will get the best possible deal — or be left holding the bag. That happened all too frequently in the “good old days” before competitive wholesale power supply choices were available.

While opponents to competitive markets would have you believe that the old traditional, one utility, “our way or the highway” approach to selling power is the best and only option for consumers, the competitive markets that have already emerged from their transitional phases after electricity restructuring in various regions of the country are thriving and benefiting consumers by way of clean, affordable and reliable power.

Look at the markets in New York and New England as just two examples:

In New York, competition has improved efficiency, reduced outage times for power plants, and reduced costs that translate to at least $100 million — some estimates say as high as $200 million — in savings to consumers each year.

The rate reductions we’re seeing in New England also prove that robust, competitive markets, particularly those that have already emerged from their periods of transition or are in the process of doing so, are fulfilling the promise of cost savings to residential, commercial and industrial consumers. All classes of consumers in New England are benefiting from cost reductions that are the result of more efficient generation in the wake of restructuring.

Last week, the Electric Energy Market Competition Task Force’s “Report to Congress on Competition in Wholesale and Retail Markets for Electric Energy” cited a number of examples of how competition, still in its early stages nationally, has been successful. Perhaps most striking, however, were its assessments of the old traditional form of regulation: “Historically, regulators had encouraged local utilities to build or contract for sufficient generation to serve customers within their territories. Regulators blocked entry by independent generators or allowed the utilities to do so. This resulted in utilities owning nearly all generation assets within their service territories and discouraged competition among generators. While the intent of these policies was partly to keep price down, the unintended effect was to dampen incentives for cost reduction, investment in new capacity and innovation … Ultimately, ratepayers were left to bear much of the investment risk, as they had to pay for regulator-approved projects resulting in overinvestment as well as any subsequent higher costs from underinvestment (for example, costs of running higher cost generation more often than is economically efficient).” (p. 45-46)

The report went on to say that traditional regulation”does not provide the same market discipline that effective competition provides. Under regulation, ratepayers may bear the risk of mistakes resulting from where and how investments are made. In competitive markets, the penalties for such mistakes fall on management and shareholders. Future accountability for investment decisions can lead to better decision-making at the outset.” (p. 73)

The task force also called attention to the fact that market restructuring does not occur overnight. The task force affirmed that “experience with restructuring in other industries indicates that consumer switching from a traditional supplier to a new one can be a slow process. It took 15 years before AT&T lost half of its long-distance service customers to alternative suppliers.” (p. 108) That said, non-utilities were recognized to be a “growing presence in the industry. In 2004, nonutilities owned or controlled approximately 408,699 megawatts (MWs) or 39.6 percent of all electric generation capacity, compared to about 8 percent in 1993.” (p. 14)

The report also concluded that artificial, administratively imposed rate freezes, included in most of the state’ restructuring laws passed in the 1990s, have been the cause of a perceived lack of competition: “More than any other policy, this requirement that distribution utilities offer service at low prices [artificial rate caps] unwittingly impeded entry by alternative suppliers to serve retail customers. New entrants cannot compete against a below-market regulated price.” (p. 84)

The benefits of competitive electricity markets are becoming more apparent every day. The remaining markets that have recently seen their artificial rate freezes come off, or even still have them in place for the next several years, should be allowed to progress and provide the benefits to consumers originally intended under electricity restructuring. Those states restructured for a reason. Why turn back the clock and repeat the mistakes of the past?