October 11, 2007 in Business

Bert Caldwell: Energy deregulation still costing consumers

Bert Caldwell The Spokesman-Review
 

Deregulation was supposed to deliver more, cheaper power to American homes. Instead, says Marilyn Showalter, it has extracted $66 billion from consumer pockets.

Showalter, former chairwoman of the Washington Utilities and Transportation Commission, now heads Power in the Public Interest, which was formed in February to fight the good fight for electricity prices based on cost, not market. Funded by public utilities such as Tacoma Power, PPI’s mission might be considered reactionary: the restoration in many states of a regulated utility model that served the United States well for more than 100 years.

It wasn’t broke, but half the states and the District of Columbia fixed it anyway. They are paying for that mistake, Showalter says.

Electricity rates have climbed in every state but West Virginia since 2000. As we have plugged in more home theaters, cell phone chargers and air-conditioners, utilities have responded by building new generating plants. The costs have been passed along to customers.

Same thing with fuel costs. With increased demand, coal and natural gas are more expensive. New wind farms are pricey as well as environmentally friendly. Even hydropower, thanks to relicensing and fish and wildlife protections, is not the bargain it was.

Open your own utility bill, and you know it hurts.

But we are lucky, relatively speaking. Washington and Idaho were among the states that did not buy into deregulation. The increases area ratepayers have absorbed are far less than those elsewhere, and consumers living in states that embraced deregulation have been especially hard hit.

Showalter, using Energy Information Administration figures, has charted the course of utility rates since 2000. States that deregulated electricity markets did so because rates were high, about two cents per kilowatt-hour higher than rates in states that did not deregulate.

Collectively, consumers in those states paid $26 billion per year more (in 2006 dollars) for power than consumers that stuck with regulated rates.

In theory, deregulation was supposed to close that gap by bringing other electricity suppliers into the system that would offer lower prices to customers weary of high utility bills. Or, at the wholesale level, sell to utilities cheaper power than they could generate themselves, or buy from other utilities.

Prices would be set by that old free enterprise standby, the free market.

The result: Residents of states that deregulated now pay four cents per kilowatt-hour more than those who live in states that did not deregulate. The spread, in other words, about doubled, and the annual toll hit $48 billion. The damage over seven years hits $294 billion if adjusted to include a 5 percent return on money that would not have ended up in utility coffers.

Had there never been deregulation, and rates tracked those in regulated states, the total cost would have been $66 billion less, Showalter says.

“That money could have gone to much better uses,” she says. “Consumers in the deregulated states and their officials are becoming increasingly aware the very high prices that deregulation has brought them puts them at a competitive disadvantage.”

Regulation like that imposed in Washington and Idaho holds rates to the cost of producing and delivering power, plus an allowed profit margin. As the Northwest so bitterly learned during the 2000-01 energy crisis, demand drives markets, sometimes setting prices bearing no relation to costs. California made a hash of deregulation, and the rest of the West suffered the consequences.

But Thomas Rawls, director of the Alliance for Free Choice, blames increased rates on higher fuel costs and defective deregulatory schemes that promised way more than they could deliver. The alliance represents utilities fighting to preserve market-based rates. The tide is against them, with several states scrapping or modifying their deregulation programs.

Without addressing the specifics of Showalter’s calculations, Rawls says results will depend on what electricity product or service is included, over what time period. Focusing on price assumes electricity comes only in vanilla, but deregulation can reveal more flavors, just as it has in telecommunications, he says.

“Would you entrust to regulators the job of innovation?” he asks.

Not a bad point. But think how innovative consumers could have been with an extra $66 billion in their pockets.


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