Gray Expectations - energy deregulation scenarios - Industry Overview

Kiplinger's Personal Finance Magazine, June, 2001 by Jeffrey R. Kosnett

POWER | California gave DEREGULATION a bad name. Can it work anywhere?

WATCHING THE catastrophe engulf California in recent months--from flickering lights to rolling blackouts to power bills that look like luxury-car payments to the state-imposed surge in electricity prices--you may be tempted to zap utility deregulation as one of the dumbest ideas of modern times. But don't be too hasty. When you look behind the headlines, and beyond the Golden State, the picture gets fuzzy. As we prepare to enter a summer of power travails and another winter of shocking gas bills, it pays to look back at this latest winter of discontent.

Denise Rose and Annie Walker are homeowners who live a few blocks apart in the Lagrange section of Toledo, Ohio, a middle-income area of older, mostly two-story houses. Rose, a veterinary technician, can't help smiling as she tells how she dodged last winter's neighborhood scourge, the $250 gas bill. Two years ago, as "gas choice" spread in the city, a representative of Columbia Energy Services knocked on her door with an offer: Give us your business and you'll save 20% on the part of your bill that represents the cost of natural gas (about two-thirds of a typical residential bill). And if she made the switch, Columbia promised to lock in the current price of gas for one year.

Rose wasn't worried that natural-gas prices might triple (no one saw that coming), but she saw no reason to refuse. Answering the knock on the door that day was like winning the lottery. While everyone she knows was paying $200 or $300 a month to heat their homes last winter, her bill for December, a bitterly cold month in northwest Ohio, was $110. "I think it was $1 more than last year," she says.

Rose's service is up for renewal before next winter, so her bills may soar unless gas prices drop. But deregulation and the competition it brought to some Toledo neighborhoods has already saved her hundreds of dollars.

Annie Walker, on the other hand, found herself at the mercy of both the weather and the marketplace. When she moved into her house in December, deals like the one offered to Rose had all but disappeared. In Toledo, one of the first places in the U.S. to see residential gas competition, switching to a new supplier in mid-winter offered only a small discount.

So the former monopoly gas company, Columbia Gas of Ohio, supplies gas to Walker at twice the rate that Rose pays. Walker's bill for December was $270. The former city housing-department employee, who now lives on disability income, is resigned to her fate. "What else can I do?" she asks. "You have to pay this or they cut your gas off."

As this past winter ground on, and friends and neighbors complained and commiserated about something once as routine as their gas bills, discontent spread all over town, from the Java Mill, Jodi Jobuck's pin-neat coffee-house, to city councilman Peter Gerken's office on the 21st floor of Toledo's city hall. The state of Ohio publishes a list of approved gas suppliers. But before the winter was out, many had quit taking new customers, unable to realize a profit buying and reselling gas in an inflated market. A couple of firms even reneged on contracts to provide cheap gas and are being sued by the state.

Gerken, chairman of the city council's committee on utilities and the environment, got an earful from constituents who called to vent because, despite a big-time publicity campaign touting the glories of gas choice, they couldn't find inexpensive gas.

Gerken says he knows that the frustration is due in part to an unstable world energy market. But, he says, utilities, regulators, and state and local government officials share the blame by raising expectations that deregulation would save everyone real money. An influx of energy suppliers was expected to drive down prices in a free-marketplace battle for customers. Instead, when consumers needed relief from soaring bills, there wasn't any.

No rush to compete

THE PEOPLE of Toledo are now in the midst of round two of the energy shake-up. Since January 1, everyone in Ohio has had the right to sign up with an alternative electricity supplier. Boosters, billboards and a Web site proclaim Ohio Electric Choice to be the answer to Ohio's high power rates. Electric choice promises to bring more energy into the state and force unpopular monopolistic public utilities to kneel before a vengeful public. The law legalizing choice includes a 5% price rollback and a rate freeze until the end of 2005 on the portion of an electric bill that covers actual power generation--or about one-third of a residential bill. This is very different from California, which recently allowed two major utilities to raise rates by 40%.

But the law does not guarantee that outsiders will enter the market and offer reduced rates to lure customers, even though northern Ohio's power rates are among the highest in the Midwest. So until and unless wholesale costs fall--allowing competitors to buy power cheaply enough to resell it at a discount from monopoly rates and earn a profit--deregulation looks like a letdown, and not only in Ohio.