The reality of utility deregulation


by Mike Kroll


“Ever since the administration of Ronald Reagan there has been a growing movement away from government regulation and toward the viewpoint that free-market economic forces are a better means of balancing the competing interests of utilities and consumers. All the available evidence shows that this has been a wonderful development for utility company executives and shareholders and an economic nightmare for consumers. The huge pending increases in electric bills are just the most timely example of how this approach has failed with Ameren customers facing rate increases of 50 percent or more because after 10 years no real competition has developed.” Randy Fritz, president of the Illinois Citizens Utility Board and a high school teacher in Williamsfield.

The state of Illinois deregulated electric utilities in 1997 as the result of the Electric Service Customer Choice and Rate Relief Law of 1997. At the time this law was passed many Illinois communities were paying some of the highest electric rates in the country. This included the entire Illinois Power and Commonwealth Edison service areas. The Galesburg area has long been served by Illinois Power (IP) and both residential and commercial electric bills reflected IP's high rates. Meanwhile, Peorians served by Central Illinois Light Company (CILCO) benefited from some of the lowest electricity rates in the state. A key facet of the 1997 deregulation was rate relief, the honey if you will, and a 10 year freeze on residential rates.

Proponents of deregulation said that it would result in new power suppliers entering the marketplace creating competition and resulting in continually lower rates due to “market forces.” To make this possible most of the electric utility companies serving the state were permitted, in fact encouraged, to separate out the parts of the company that generate electricity from those that service and deliver the power to individual homes and businesses. The delivery of electricity would remain a largely monopolistic and regulated enterprise but power generation would evolve into a commodity-like marketplace where lots of players would compete for your business.

The vision was for a two-part electric bill. The first part would be to the utility company who controlled the electric lines serving homes and businesses and that would remain regulated. The second part would reflect the cost of electricity actually used and it could in turn be purchased from any of a number of power generation sources who would vie for the privilege of selling power only. These alternative electric suppliers would be available to large commercial power users (over four megawatts per month) beginning in October 1999. By the start of 2001 any non-residential power user could contract with an alternative electric supplier and as of May 2002 this option became available to residential customers. Customers who did not make arrangements with alternative electric suppliers would continue to buy from their local utility company who would in turn purchase power from among the various “independent” generating suppliers.

Perhaps not surprisingly, this system never evolved as explained above. Do you remember any alternative electric supplier soliciting your business? Excepting for the largest customers this system never developed as anticipated and a series of corporate sales and mergers has actually resulted in a less diverse universe of electric companies. In the case of companies like Excelon, corporate owner of Commonwealth Edison, the same parent continues to own and operate both the generator of electricity and the supposedly independent local utility that delivers the power.

The 10 year freeze on residential electric rates ends this year and the largest utilities proposed a “reverse auction” plan to control the cost of electricity they purchased for their residential customers and which in turn determines what those customer will pay after January 1, 2007. “This reverse auction scheme was an amazingly complicated process that was developed by the utilities themselves,” explained Fritz. “They proposed the reverse auction as the one and only alternative to the Illinois Commerce Commission, nothing else was even considered. With almost no public discussion of input the ICC accepted the plan and the auction itself was conducted behind closed doors. They may have called it an open auction but only the buyers and approved bidders were permitted to attend. When the results of the auction were presented to the ICC the commission had only days to study and determine whether or not to accept the auction outcome. This is a group that takes months to rule on far simpler and less critical matters but approved the auction results in days. And still no details of the process have been made public.”

After the ICC approved of the auction both Ameren (current corporate owner of the former Illinois Power and Cilco) and Commonwealth Edison announced sizable rate increases to go into effect January 2, 2007. Residential electric customers in Galesburg will see their bills increase by about half meaning that if you today pay an average of $100 monthly it will go to about $150 with this increase. The increase is somewhat higher for Peoria area customers because they previously paid less and Ameren is looking toward equalizing its rates across the various service areas.

In a press release last Friday Ameren's president Scott Cisel was quoted as saying, “We are concerned about the price increases on our customers. Since Ameren's Illinois utilities' own no generation, we must purchase power from the competitive market to provide our customers' energy needs. We will pass these costs along to our customers – dollar-for-dollar with no mark-up. Working with a number of stakeholders, we are searching for an approach to soften the impact of these increases, while allowing us to safely and reliably deliver electricity and recover costs in a timely manner.”

Fritz remains unconvinced and questions the entire process. “The utilities may call this reverse auction 'very competitive' but how can anyone know when it is conducted in secret? Why should the utilities themselves have been allowed to single-handedly create this process? Why was this the only option presented to the ICC and why on earth would they blindly accept it? And something Ameren didn't point out in their press release is that they have already quietly petitioned for a rate increase in their delivery rates on top of this increase! And consumers and voters alike should know that far from suffering financially during the last few years under the rate freeze Ameren has posted nice profits and Excelon has enjoyed record profits making it the most profitable utility company in the country!”

“Deregulation did not end the monopoly status of these companies and they still need to be overseen to insure that consumers are not gouged. And the entire process should be open and conducted in full public view. Secret backroom deals certainly don't inspire my confidence in the system and the commission seems to have forsaken its oversight role in the process. At CUB we are contending that this entire process violates the consumer protections built into Illinois law. Utilities are required to provide service as the lowest possible cost and to assure that rates are reasonable and the result of prudent business practices.”

Fritz says CUB is now attempting to make this an election issue for Illinois state representatives and senators in November. “We want voters to ask their state representative of senator to support an extension of the electricity rate freeze until a better system can be developed because free market competition certainly didn't materialize as promised. We have a bill before the Illinois house right now [HB5766] that would extend the freeze three more years if it can be passed during the fall veto session.