Number of states with electric deregulation initiatives under way keeps increasing

Dec 06, 1999 01:00 AM

The number of states with electric deregulation initiatives under way has more than doubled during the past two years, with most of the restructuring momentum coming from states with relatively high electricity rates, according to a new GRI study. The study, "Update -- Summary of Electric Utility Regulatory Developments through October 1999" (GRI-99/0240), found that 24 states have enacted legislation or issued regulatory orders on electric industry restructuring, up from 10 states in 1997. The 24 states represent more than 73 mm consumers and account for 60 % of electricity customers in the United States.

Electric industry restructuring picked up momentum in 1999, with nine states adopting deregulation plans vs. only two new states in 1998. Still, 26 states have not adopted electric restructuring plans, including three states with significant electricity sales -- Georgia, North Carolina, and Florida. At least five states -- Colorado, Idaho, Louisiana, Kentucky, and Alabama -- have balked at restructuring, contending that deregulation will increase electricity prices in their states.
In a number of states that previously enacted restructuring programs, opposition to implementation has grown. While this opposition has generally been unsuccessful, it has acted to delay implementation. Significant opposition has arisen in 10 states -- California, Massachusetts, New Hampshire, Arizona, Pennsylvania, Vermont, Nevada, Michigan, New Jersey, and Montana.
The increased activity at the state level has increased pressure on the federal government to pass major deregulation legislation. The Clinton Administration proposed the Comprehensive Electricity Competition Act last April, and 23 bills dealing with electric restructuring have been introduced in Congress. However, the timing on any federal legislation and its impact on state initiatives remain uncertain.
"Despite significant changes over the past two years, electric restructuring remains a work in progress," said Paul Holtberg, GRI project manager. "The industry is sailing into uncharted waters and has probably reached the point of no return. While some major issues and roadblocks have been addressed, other problems have yet to be resolved. Thus, the final framework of the competitive U.S. electric industry remains highly uncertain at this point."
Recovery of stranded costs -- estimated to exceed $ 150 bn nation-wide -- has proved the most contentious issue in states where deregulation initiatives have been debated. The issue has generated opposition by customers, business and utilities through ballot initiatives and other legal actions. Nuclear power plants account for about 13 % of U.S. generating capacity and a large percentage of stranded costs. Continued operation of these facilities will depend on their ability to operate competitively.

Among the study's other key findings: 8 of the 24 states with deregulation initiatives now allow customers to choose their electric suppliers, with three more states expected to launch retail competition. No states offered retail competition in 1997. Only a small number of consumers have switched to another electricity supplier in the states with retail competition -- Arizona, California, Massachusetts, Montana, New Jersey, New York, Pennsylvania and Rhode Island.
Some energy service providers have charged that it is difficult to compete in those states because of market constraints, including rate caps, standard offers and competition transition charges. Other service providers have little incentive to serve small customers, especially in residential markets, and instead offer services only to customers with large, stable loads.
Jurisdictional disagreements have begun to mount among the legislative, judicial and executive branches of governments. Prolonged disputes could postpone the benefits of competition for consumers or lead to judicial intervention. Transition processes adopted by the states are also likely to face court challenges from one or more major stakeholders.
A number ofnew market players have emerged in response to deregulation, including power marketers, energy service companies (ESCOs) and customer aggregators. For example, there were only 9 Federal Energy Regulatory Commission-approved power marketers in 1992. There are 365 independent power marketers, 112 power marketers affiliated with utilities and 89 power marketers associated with other power generators.
Twenty of the states that have deregulated their electric industries have opted to fund public benefit programs, with all states supporting low-income assistance. Funding of renewable energy programs is popular while energy efficiency activities have support in most states. The least supported program is research and development.

Deregulation of the electric industry has implications for the natural gas industry in three primary areas, the study concludes: Downward trending electricity prices -- The gas industry will be forced to meet competition from downward trending electricity prices, which will vary by state. Lower electricity prices will increase competition with gas in key end-use markets, but demand will also grow for gas for power generation. The gas industry will need to develop and promote cost-effective end-use options that will compete with electric-based equipment.

Electric and gas industry convergence -- Market opportunities during the transition will be complex and tempered by state-level actions. Managing a total energy portfolio will become more commonplace and critical to success, including transferring resources among gas, oil, coal and electricity; buying and selling energy resources in futures markets; and hedging transactions against price volatility.

Uncertainty about the future of electricity capacity -- The gas industry should take advantage of opportunities where higher peak-time electricity prices give advantages to gas. Distributed generation technologies, gas cooling and peak-shaving generation technologies could be promoted, especially where high electric transmission and distribution costs offer incentives to transport energy in the form of gas rather than electricity.
In addition, when a shutdown of nuclear plants is inevitable and where gas is sufficiently available, gas could be promoted as a replacement for nuclear capacity. Likewise, the growth of merchant power plants has led to growth in gas-fuelled generation systems. As states open retail competition, the merchant power segment is expected to grow substantially. Existing pipeline and storage capacity will need to be expanded to meet the needs of these electric generators.

The study is GRI's biennial look at electric industry restructuring. The study tracks the progress of deregulation and examines how states have handled key restructuring issues, including customer choice, stranded-cost recovery, rate caps, divestiture and non-utility generators. A special section is devoted to electric deregulation in California, a bellwether state on the issue.
The study also examines how new market forces such as wholesale marketers, independent system operators, power exchanges and futures markets are reshaping the industry. Also featured are in-depth assessments of the implications of market uncertainties and current deregulation actions, and tables summarising bills introduced in the 106th U.S. Congress.
GRI, based in Chicago, conducts RD&C that benefits the entire industry and its customers as well as targeted RD&C efforts in partnership with individual organisations and consortia. GRI technologies improve the competitiveness of natural gas and provide cost savings and other benefits for customers.

Source: Gas Research Institute via Newspage
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