News: Power to the Businesses

Electric deregulation should save residents a few dollars, even though none asked for it

 
Southern Ohio electric customers now have a choice in who their power generator is; electric transmission and distribution remain a monopoly.



Although the public-relations campaign about electricity deregulation in Ohio talks a lot about freedom of choice, it fails to mention the driving force behind the law — businesses.

You might have already heard or seen the ads by Ohio Electric Choice (OEC), the $33 million campaign to educate citizens on the state law that took effect Jan. 1. One radio commercial jokingly asks the question we've all apparently been dying to know: Is skydiving as exciting as choosing your electric provider?

But companies such as AK Steel and Kroger — not residents — are the ones that want power companies to compete for their business, and they spent a lot of time in Columbus during the past several years telling state legislators so.

"It was certainly a (profitable) topic for lobbyists," says Shari Weir, consumer-issues director of Ohio Citizen Action. "There was certainly no shortage of them."

The deregulation law required the OEC ad campaign, which also includes flyers included with electric bills, billboards and TV and newspaper ads to communicate what residents need to know about picking a new electric company.

Sweeping the nation
Ohio is the latest in a wave of states to begin electric competition. As of January, 23 states have passed deregulation laws, two have proposed laws and 16 are investigating deregulation, according to the Energy Information Administration, the statistical wing of the U.S. Department of Energy.

Although the move toward deregulation began before the Reagan administration, the National Energy Policy Act of 1992 set the table for the state laws. The law requires power companies to allow other companies to use their power lines, among other changes.

This competition was impossible under the old system, which was a response to the chaos of the 1920s, when upstart power and phone companies began connecting homes with their own polls and wires, sometimes putting them next to their competitors'. Under the regulated system, utility companies served designated regions and were regulated in Ohio by the Public Utilities Commission Ohio (PUCO).

PUCO decided how much power companies could charge by figuring out how much they had invested in their power plants, how much it cost the companies to produce power and allowing some profit. In short, a company's return was based on how much it spent, not on its efficiency. That's why northern Ohio companies — which often built more expensive nuclear plants — charge higher rates than the southern companies, with their cheaper coal-fired plants. On average, southern Ohio companies charge 5 to 6 cents per kilowatt hour, compared to about 11 cents for northern Ohio companies. (A kilowatt hour is 1,000 watts used for an hour.) In general, every person or business paid the same rate, no matter how much people or companies used, although big users began negotiating discounts in recent years.

Lessons learned
Deregulation has been a bumpy process in some states, especially California, the first to try it. California forced utility companies to give up their power plants and buy from a power pool managed by a non-profit state organization, but didn't cap prices. When demand spiked, so did prices, especially in San Diego, where last summer's rates more than tripled in a few months.

But Ohio Citizen Action believes Ohio's deregulation law is written well enough to protect residential customers from the price spikes and other problems that surprised California.

"I think we can safely say no one will be worse off," says Weir, who has followed the issue closely.

Ohio has kept a residential price cap in effect through 2005, mandated a five percent cut in electric rates and allowed companies to buy and sell plants. But the key provision in Ohio's law is aggregation — or pooled purchasing of electricity by cities, counties and other municipalities. With voter approval, governments can sign pool-electric contracts for residents, who can still opt out if they choose. It's hoped this strength in numbers will produce better rates by saving companies the expensive trouble of marketing to individual residents. Only one other state, Massachusetts, uses an opt-out plan.

Voters in at least 123 communities, almost entirely in northern Ohio, approved pool-purchase plans in November, according to Robert Tongren, the Ohio Consumers' Counsel, who represents residents in utility issues. The only southern Ohio city to approve pool purchasing is Franklin, in Warren County, according to Rachel Belz, Cincinnati project director of Ohio Citizen Action.

Electric deregulation also introduces the potential for "slamming," the illegal, unauthorized switching of companies. Under long-distance telephone deregulation, scammers have switched customers, often the elderly, to new companies — usually with higher rates — without telling them.

Weir recommends residents interested in pooled power purchasing contact their local governments.

The bottom lines
Deregulation will take effect Ohio in stages. The first, from now until 2005, is expected to begin quietly for southern Ohio customers, with competition from outside utility companies expected in the summer as they decide how and where to market.

The law's first effect will be to split electric bills into three categories: generation, transmission and distribution. Customers can choose a new power generator, but transmission and distribution — getting the power into homes and businesses — will remain a monopoly until 2005 for most of Ohio, including the Tristate.

Residential customers will choose electric companies from a list of registered utilities included in their monthly bill.

Cinergy, for one, isn't targeting the residential market and instead is working on wholesale contracts with major electric buyers, according to Steve Brash, spokesman for Cinergy.

That's the attraction for business; big companies that use lots of power will get calls from utilities around the country interested in selling them power. Companies that can shift their power demands away from the usual peak times — when residents wake up and when they come home — will get even better deals.

For example, Cincinnati's Department of Water Works, which spends $6 million per year on electricity, negotiated a four-month contract with Allegheny Power of Pittsburgh that is expected to save $300,000 from January to April, in part because the department could switch its power use to non-peak times, according to Larry Moster, assistant superintendent of water supply.

But in order for Cincinnati Gas & Electric (CG&E) customers to save money, they will have to find a company selling electric at less than 5 cents per kilowatt hour, even though CG&E charges $5.29 cents. That's because CG&E's compensation deal with PUCO includes a "shopping credit" of five cents.

In May, Cinergy — the holding company CG&E and three other local utilities — settled with PUCO on how the company would carry out deregulation. The deal allowed Cinergy to recover about $1 billion in costs over the next decade, including previous investments and the costs of starting its electric-choice program, according to Brash.

The shopping credit relates to a competition-boosting part of the state's deregulation law that requires companies to shed 20 percent of their residential, business and industrial customers by 2005. If they don't, utilities such as Cinergy will lose a percentage of their settlements.

The shopping credit of 5 cents per kilowatt hour only applies to the first 20 percent of CG&E customers who switch. Later switchers will get a 3.9-cent credit. For example, if a resident switches to a company selling at 4 cents, the 5-cent credit is deducted, giving the resident a 1-cent surplus. But CG&E still receives .29 cents for generation, so the customer keeps .71 cents per kilowatt hour, which is applied toward the rest of the bill.

Although residential and small-business customers aren't likely to save more than a few dollars per month for the next few years, deregulation will eventually allow customers to buy power from utility companies that use renewable resources, such as solar power. For some, the expected extra cost of those companies may be worth it.

Ohio's law also allows residential customers who produce more electric than they need with, for example, solar panels, to sell the extra power back to their company at the rate the company charges, according to Weir.

Meanwhile, the Federal Energy Regulatory Commission (FERC) is working on the next heady task — how to, in essence, change utility companies' power lines from private roads into public highways. So far, however, Tongren says FERC seems to be leaving that job up to the power companies, which are forming their own groups. The system must be worked in advance of 2003, when Dayton customers are scheduled to switch to a true free market. ©

For more information about Ohio electricity deregulation, visit the electric deregulation sections of:

www.ohioelectricchoice.com — Ohio Electric Choice, the ad campaign funded by utility companies, regulatory groups and others to educate residents on deregulation;

www.state.oh.us/cons — the Ohio Consumers' Counsel, the person appointed by Ohio's attorney general to represent residents in utility issues;

www.cinergy.com — Cinergy, the holding company for CG&E and three other Tri-state utilities;

www.puc.state.oh.us — the Public Utilities Commission of Ohio, which regulates utility companies.

 
Southern Ohio electric customers now have a choice in who their power generator is; electric transmission and distribution remain a monopoly.



Although the public-relations campaign about electricity deregulation in Ohio talks a lot about freedom of choice, it fails to mention the driving force behind the law — businesses.

You might have already heard or seen the ads by Ohio Electric Choice (OEC), the $33 million campaign to educate citizens on the state law that took effect Jan. 1. One radio commercial jokingly asks the question we've all apparently been dying to know: Is skydiving as exciting as choosing your electric provider?

But companies such as AK Steel and Kroger — not residents — are the ones that want power companies to compete for their business, and they spent a lot of time in Columbus during the past several years telling state legislators so.

"It was certainly a (profitable) topic for lobbyists," says Shari Weir, consumer-issues director of Ohio Citizen Action. "There was certainly no shortage of them."

The deregulation law required the OEC ad campaign, which also includes flyers included with electric bills, billboards and TV and newspaper ads to communicate what residents need to know about picking a new electric company.

Sweeping the nation
Ohio is the latest in a wave of states to begin electric competition. As of January, 23 states have passed deregulation laws, two have proposed laws and 16 are investigating deregulation, according to the Energy Information Administration, the statistical wing of the U.S. Department of Energy.

Although the move toward deregulation began before the Reagan administration, the National Energy Policy Act of 1992 set the table for the state laws. The law requires power companies to allow other companies to use their power lines, among other changes.

This competition was impossible under the old system, which was a response to the chaos of the 1920s, when upstart power and phone companies began connecting homes with their own polls and wires, sometimes putting them next to their competitors'. Under the regulated system, utility companies served designated regions and were regulated in Ohio by the Public Utilities Commission Ohio (PUCO).

PUCO decided how much power companies could charge by figuring out how much they had invested in their power plants, how much it cost the companies to produce power and allowing some profit. In short, a company's return was based on how much it spent, not on its efficiency. That's why northern Ohio companies — which often built more expensive nuclear plants — charge higher rates than the southern companies, with their cheaper coal-fired plants. On average, southern Ohio companies charge 5 to 6 cents per kilowatt hour, compared to about 11 cents for northern Ohio companies. (A kilowatt hour is 1,000 watts used for an hour.) In general, every person or business paid the same rate, no matter how much people or companies used, although big users began negotiating discounts in recent years.

Lessons learned
Deregulation has been a bumpy process in some states, especially California, the first to try it. California forced utility companies to give up their power plants and buy from a power pool managed by a non-profit state organization, but didn't cap prices. When demand spiked, so did prices, especially in San Diego, where last summer's rates more than tripled in a few months.

But Ohio Citizen Action believes Ohio's deregulation law is written well enough to protect residential customers from the price spikes and other problems that surprised California.

"I think we can safely say no one will be worse off," says Weir, who has followed the issue closely.

Ohio has kept a residential price cap in effect through 2005, mandated a five percent cut in electric rates and allowed companies to buy and sell plants. But the key provision in Ohio's law is aggregation — or pooled purchasing of electricity by cities, counties and other municipalities. With voter approval, governments can sign pool-electric contracts for residents, who can still opt out if they choose. It's hoped this strength in numbers will produce better rates by saving companies the expensive trouble of marketing to individual residents. Only one other state, Massachusetts, uses an opt-out plan.

Voters in at least 123 communities, almost entirely in northern Ohio, approved pool-purchase plans in November, according to Robert Tongren, the Ohio Consumers' Counsel, who represents residents in utility issues. The only southern Ohio city to approve pool purchasing is Franklin, in Warren County, according to Rachel Belz, Cincinnati project director of Ohio Citizen Action.

Electric deregulation also introduces the potential for "slamming," the illegal, unauthorized switching of companies. Under long-distance telephone deregulation, scammers have switched customers, often the elderly, to new companies — usually with higher rates — without telling them.

Weir recommends residents interested in pooled power purchasing contact their local governments.

The bottom lines
Deregulation will take effect Ohio in stages. The first, from now until 2005, is expected to begin quietly for southern Ohio customers, with competition from outside utility companies expected in the summer as they decide how and where to market.

The law's first effect will be to split electric bills into three categories: generation, transmission and distribution. Customers can choose a new power generator, but transmission and distribution — getting the power into homes and businesses — will remain a monopoly until 2005 for most of Ohio, including the Tristate.

Residential customers will choose electric companies from a list of registered utilities included in their monthly bill.

Cinergy, for one, isn't targeting the residential market and instead is working on wholesale contracts with major electric buyers, according to Steve Brash, spokesman for Cinergy.

That's the attraction for business; big companies that use lots of power will get calls from utilities around the country interested in selling them power. Companies that can shift their power demands away from the usual peak times — when residents wake up and when they come home — will get even better deals.

For example, Cincinnati's Department of Water Works, which spends $6 million per year on electricity, negotiated a four-month contract with Allegheny Power of Pittsburgh that is expected to save $300,000 from January to April, in part because the department could switch its power use to non-peak times, according to Larry Moster, assistant superintendent of water supply.

But in order for Cincinnati Gas & Electric (CG&E) customers to save money, they will have to find a company selling electric at less than 5 cents per kilowatt hour, even though CG&E charges $5.29 cents. That's because CG&E's compensation deal with PUCO includes a "shopping credit" of five cents.

In May, Cinergy — the holding company CG&E and three other local utilities — settled with PUCO on how the company would carry out deregulation. The deal allowed Cinergy to recover about $1 billion in costs over the next decade, including previous investments and the costs of starting its electric-choice program, according to Brash.

The shopping credit relates to a competition-boosting part of the state's deregulation law that requires companies to shed 20 percent of their residential, business and industrial customers by 2005. If they don't, utilities such as Cinergy will lose a percentage of their settlements.

The shopping credit of 5 cents per kilowatt hour only applies to the first 20 percent of CG&E customers who switch. Later switchers will get a 3.9-cent credit. For example, if a resident switches to a company selling at 4 cents, the 5-cent credit is deducted, giving the resident a 1-cent surplus. But CG&E still receives .29 cents for generation, so the customer keeps .71 cents per kilowatt hour, which is applied toward the rest of the bill.

Although residential and small-business customers aren't likely to save more than a few dollars per month for the next few years, deregulation will eventually allow customers to buy power from utility companies that use renewable resources, such as solar power. For some, the expected extra cost of those companies may be worth it.

Ohio's law also allows residential customers who produce more electric than they need with, for example, solar panels, to sell the extra power back to their company at the rate the company charges, according to Weir.

Meanwhile, the Federal Energy Regulatory Commission (FERC) is working on the next heady task — how to, in essence, change utility companies' power lines from private roads into public highways. So far, however, Tongren says FERC seems to be leaving that job up to the power companies, which are forming their own groups. The system must be worked in advance of 2003, when Dayton customers are scheduled to switch to a true free market. ©

For more information about Ohio electricity deregulation, visit the electric deregulation sections of:

www.ohioelectricchoice.com — Ohio Electric Choice, the ad campaign funded by utility companies, regulatory groups and others to educate residents on deregulation;

www.state.oh.us/cons — the Ohio Consumers' Counsel, the person appointed by Ohio's attorney general to represent residents in utility issues;

www.cinergy.com — Cinergy, the holding company for CG&E and three other Tri-state utilities;

www.puc.state.oh.us — the Public Utilities Commission of Ohio, which regulates utility companies.

www.ohiocitizen.org — Ohio Citizen Action, a statewide watchdog organization.

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