Rising Price of Electricity Sets Off New Debate on Regulation

Rising Price of Electricity Sets Off New Debate on Regulation

Having lived in Norwood and Peabody, Massachusetts, where the electricity for those municipalities are provided by electrical plants owned and operated by the municipal governments, I know that the difference between the cost of electricity provided by a for-profit corporation with record breaking profit margins (often in spite of regulatory efforts) and the cost of electricity provided by a municipal plant is approximately a 40-60% difference on the bill received by the end consumer. One would think that with the requirements for a municipal government to pay prevailing wages and deal with entrenched unions, the cost of running an electrical plant would not allow such a significant difference. But that just illustrates the amount of gouging and profiteering that the utility and fuel industries engage in at our expense.

A good example of this is the Public Service Company of New Hampshire (PSNH). When I lived in Mason, New Hampshire, our electrical service was interrupted 34 times in the first year of our living there. Sometimes the interruption would be momentary (which played hell with my electronic equipment and computers) and other times it would be hours. We had a generator to support outages, but that wasn't the issue.

The issue was that PSNH was charging a "infrastructure fee" in the amount equal to the actual charges for the electricity used, the delivery fees and the fuel costs, which amounted to doubling our bill, in order to pay for its mistakes regarding an aging and improperly managed nuclear power plant in Seabrook, New Hampshire. What made it worse is that PSNH had sold the nuclear plant and it was being considered for closing. The argument made by PSNH to the regulators was that this "infrastructure fee" would allow them to assure that quality electrical service would be provided throughout its service areas.

Now that just wasn't the case. The electrical grid maintained by PSNH was old and poorly maintained. The effort to cut back trees and brush that interfered with power lines was poorly managed and never complete. The industry standard of "N plus 1," meaning a standard delivery route plus at least one redundant route in case of failure, was never established, never mind maintained.

My efforts to deal with this often got comments from the customer service people like, "Well, you live in the country, so what do you expect?" When I tried to explain to these folks that when I pay that kind of money for a service, I expect to get service that reflects the amount of money I was paying... and besides, I lived along a major state highway and not along one of the many dirt roads that branched off of it that are common in New Hampshire.

When I finally got hold of the chief engineer for PSNH, and demonstrated my knowledge of the industry standards, he admitted that the company had failed to establish a grid that even came close to the industry standard... and that PSNH had misrepresented that fact to the state regulators... but that he could not say anything because of fear of losing his job.

My point is that unless there are stringent regulatory controls--and regular on site and systemic inspections--on the utility companies, these folks will rip us off at will. PSNH is not an isolated case. PG&E in California has an equally bad reputation among consumers, not to mention its problems with polluting the environment and placing people's lives and health at risk (c.f. Erin Brackovich). In Indiana, NIPSCO (Northern Indiana Public Service Company) shares a bad reputation with customers... but has consistently posted profits over the last fifteen years. In Illinois, Commonwealth Edison is famous for manipulating the regulatory oversight process, even to the point of making a false case for not being able to continue service in Cook County without rate hikes, despite posting significant overall profits.

We need to re-establish the past trend of having municipal and/or county run electricity plants, as well as stringent regulation and oversight of all utility, fuel and water/sewerage service delivery. These things are not niceties in our lives, but necessities for living. The fact that many of these companies and industries have been allowed to screw us over and treat us like jerks is a statement on the level of corporatism, big business bias and bad government we are experiencing.

One has to ask what has happened to the vision and planning that went into such projects as the TVA, the Hoover Dam, Niagra Falls and the Grand Cooley Dam as government projects designed to improve the production of electricity and the overall improvement of regions and communities... The answer is found in the fact that far too many projects funded with our tax dollars were abandoned by our governments and turned over to private enterprise... and the winner has been those big businesses that got in early and often, grabbed a ton of rights-of-way deeds, obtained tons of tax breaks and still screwed us along the way.

Robert Butler has seen and heard a lot in his 44 years as mayor of this small southern Illinois town. But not even the blizzard of 1987 compares with the distress many residents expressed after they opened electricity bills for January that were double or even triple December’s.

“This is just flabbergasting,” Mr. Butler, 80, said. “People should not be in the position of choosing between keeping warm or buying medicine and food, and I fear that too many are going to be in that situation.”

Utility rates had been capped in Illinois for 10 years, but the state agreed last year to raise them as part of an effort to open up its electricity markets to competition. Maryland, New Jersey and a half dozen other states are also removing caps. But residents in this part of Illinois are seeing some of the biggest rate spikes in the country — in some cases, increases of 100 percent to 200 percent.

The higher rates are touching off a fresh round of national debate over unleashing competitive forces on traditionally regulated electricity markets. Opening up the markets was supposed to lead to savings for consumers. But that did not turn out as regulators predicted. The anticipated competition among energy suppliers never fully emerged as natural gas prices more than doubled in the last decade.

Yet even as the pain of higher utility bills is setting in, the electric power industry is warning of an energy crisis that could rival California’s if higher fuel and plant construction costs cannot be passed onto consumers.

Commonwealth Edison, which keeps the lights on for 3.3 million residents in the Chicago area, could lose $1.4 billion a year, or $4 million a day, and put the company “on the path to bankruptcy,” said Anne R. Pramaggiore, senior vice president for regulatory and external affairs.

But that means little to residents who are clamoring for public officials to do something. In Illinois, the House speaker, Michael J. Madigan, plans to introduce legislation next week that would freeze rates for three more years. A similar effort was never taken up by the state Senate last year after a tough political battle in which Ameren, another utility company serving Illinois, and Commonwealth Edison lobbied furiously against it.

Marion’s mayor has joined public officials in more than 60 other towns who are looking to buy power from someone — anyone, it seems — that can provide it for less than Ameren.

In Maryland, the decision by the public utility commission to allow a rate increase of 72 percent this year prompted a special session of the General Assembly to provide relief. And in Virginia, lawmakers voted Feb. 6 to abandon the state’s decade-old experiment by halting its planned market opening in 2011.

“There has now been more than a decade for this deregulation experiment to work, and as each state implements it, it just gets worse and worse,” said Tyson Slocum, director of the energy program at Public Citizen, a consumer advocacy group.

Mr. Slocum has invited officials from several states to Washington on Feb. 26 for a “Take Back the Power” conference, in which participants will discuss deregulation laws and hold closed-door strategy sessions on how to combat the rate increases.

Since California botched the opening of its power industry to competition in 1998, suffering a spate of rolling blackouts in 2000 and 2001, criticism has mounted against the deregulation models. Expectations of stable or lower gas prices set off a building boom of natural-gas-fired plants, with some 200,000 megawatts of capacity built from 1997 to 2003 — far more than what was needed to cover expected growth over 10 years.

In the end, when natural gas prices rose sharply, companies that invested in coal and nuclear plants like Exelon, ComEd’s parent, became the big winners, reaping big profits under the frozen rates by dominating the sale of power to their regulated utilities.

“The idea at the time was that by the time the rate freezes would expire, the competitive pressure would drive prices down and they would expire with a whimper rather than a bang,” said Lawrence J. Makovich, managing director for global power at Cambridge Energy Research Associates.

But that has not happened. In Illinois, ComEd’s residential rates increased an average of 24 percent in January, while those in the Ameren service areas rose by up to 55 percent.

Rate increases are far higher — 100 to 200 percent in the winter, and about 80 percent over the whole year — for residents who for years had received discounted rates for electric space heaters. The discounts were taken away in January. (Ameren recently told customers they could opt to phase in the increase over three years if they pay 3.25 percent interest a year.)

Over the last decade, fuel costs have risen. Coal costs 31 percent more than in 1996, while natural gas prices are two and a half times what they were then, according to the Energy Information Administration, which is part of the Energy Department.

But in Maryland and Illinois where big rate increases have been approved, nuclear plants generate about half of the power. The average price of uranium used in nuclear plants has risen by only 2 percent in the last decade, and the fuel represents less than a quarter of the cost to operate the plants. As Exelon has told its investors, the cost to produce nuclear power has gone down, not up, as plants have become more efficient.

In Illinois, however, this matters little, because under the state’s deregulation plan, power contracts are priced according to “bundled” contracts pegged to keeping the most expensive plants running, which are now natural-gas-fueled plants.

Mr. Makovich said it would not be off base to compare the situation in Illinois to the experience in California. Pacific Gas and Electric, one of that state’s three major utilities, filed for bankruptcy protection in 2001 when it could not push through soaring wholesale prices because of a cap on retail rates. Energy traders at Enron and elsewhere made matters worse by trying to manipulate the West Coast power market.

A bankruptcy in Illinois would not mean the lights would go off but it would hurt investors and could cause the restructured company to cut back on planned maintenance and investments in new plants. For the moment, however, there is no imminent shortage of power in the Midwest, analysts said.

Still, in some parts of the country, like the Virginia-Carolinas region, there could soon be supply problems. And costs there are rising fast. Last year, Duke Energy, citing surging prices for skilled labor and for raw materials like steel, increased its cost estimate for two new coal-fired plants in North Carolina to $3 billion from $2 billion. Then, this month it said those costs were likely to rise still higher.

“The costs of building new plants is skyrocketing,” said John Shelk, president of the Electric Power Supply Association, a trade group. “In a year or two those costs are going to dwarf what is happening now with rate increases.”

Consumer groups and many politicians in Illinois and Maryland, however, have little sympathy for the claims by utilities of imminent financial ruin, pointing to record profits at Exelon in 2006, mostly from generating and selling power to its regulated utilities.

“The notion that they faced hardship under the rate freeze is just absurd,” said David Kolata, executive director of the Citizens Utility Board in Chicago, a consumer advocacy group that has been working to keep rates frozen. “If you have this relationship where the biggest buyer of electricity is owned by the biggest seller, then customers need to share some of the benefits of that.”

Consumer advocates denounce the utilities’ marketing tactics. Last year, Consumers Organized for Reliable Electricity, a lobbying group almost solely financed by ComEd, spent more than $10 million on a television ad warning that Illinois could be heading toward a “California-style energy crisis.”

In October, a group dressed in red T-shirts appeared on the steps of the Illinois statehouse and sang “We Shall Overcome” in support of higher utility rates.

Avis LaVelle, a spokeswoman for the lobby, said the efforts were a “dose of hardcore reality.” She said the utilities were already in a precarious situation because bond-rating agencies, concerned last year that the governor of Illinois would stop the unfreezing of rates, downgraded the ratings of both ComEd and Ameren to junk or near-junk status.

Critics of the utilities, including the Illinois lieutenant governor, Pat Quinn, countered by urging residents to put tea bags in the envelopes with their utility payments to symbolize the Boston Tea Party.

In Marion, with a population of 17,000, dozens of residents continue to stop Mayor Butler at the grocery store and in church to complain. Robert Barnett, a local county commissioner, showed Mr. Butler a bill for $2,540 for the Veterans of Foreign Wars clubhouse — more than twice the previous month’s bill of $1,260.

“I guarantee you there will be a lot more people using fans this summer than air-conditioning,” Mr. Barnett said. “That is like rolling the clock back 35 years.”

Mr. Butler said he was worried not only about residents on fixed incomes who will not be able to afford the increase but also about skyrocketing municipal power rates forcing officials to cut back on other services.

The mayor and dozens of other local officials from other small towns recently met at a civic center in Marion to discuss their plan to buy power from an independent supplier. With summer only a few months away, there is little time to waste.

Mr. Butler acknowledged that local officials should have heeded the warnings of the utilities that rates would shoot up after January and taken action earlier. “But we were creatures of habit,” he said. “Now the wheel has come off the cart.”