Gray Expectations - energy deregulation scenarios - Industry Overview

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

Utility competition used to be an arcane topic for gas and electric companies, regulators and financial analysts. Then came California's rolling blackouts, $400-a-month power bills and businesses scrambling for on-site generators. Suddenly, all eyes turned west to watch the worst of what deregulation had to offer. Because of the way California's power system works, when electricity got scarce, state utilities had to buy monstrously expensive power on what's called the spot market.

To treat this self-inflicted injury, California has since lurched from one plan to another to try to get control of prices and supplies. The situation changes almost daily as the state pays billions out of its budget surplus to buy electricity. In April, Gov. Gray Davis, who had maintained he would find a solution to keep residential bills from going any higher, conceded that he couldn't. Davis's latest plan requires conservation and provides for new power-plant construction--but also imposes rate increases on about half of California's households, with those who use the most power suffering increases averaging about 35%. Davis also labeled California's power reform a failure.

Other states and utility companies are anxious to distinguish their plans from the California disaster. They note that gas and electric deregulation actually dates to the early 1990s, when big energy users--chiefly industrial manufacturers--started to question why light and heat should be monopolies when telecommunications, airlines, banking and the financial markets were thriving under deregulation. Governors and legislatures ordered studies, formed task forces and, beginning in 1995, started to enact laws allowing competition in gas and electricity. With energy plentiful, the time seemed right. Experts believed that even in California, suppliers would rush to compete across regions and push down high rates.

Some utilities decided to participate in shaping the new system rather than fighting to preserve the old one. In Ohio, several monopoly gas companies, including Columbia Gas, pitched in to design a choice program as early as 1996. By 1999, 25 marketers were offering gas in Toledo, and 31% of consumers eligible to switch from Columbia Gas of Ohio to its free-market arm, Columbia Energy, or to some other competitor, did so. Denise Rose is just one of thousands who have saved money; the state estimates that Columbia Gas of Ohio customers who switched have saved $124 million.

Gas choice, then, has a track record. Its growing pains can be blamed mainly on high wholesale gas costs that have idled would-be competitors. But electricity is a different story.

Every state seems to have its own idea of how to open its electricity market. The arguments (and this gets technical faster than you can blow a fuse) often concern financial issues such as "stranded costs," which are the big reason that outside power suppliers are not rushing into Ohio or other states. Stranded costs are debts and other costs an established utility fears it cannot cover if customers depart.