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Power Struggle

PowerlinesShowdown looms over electrical deregulation

For a century, public utilities have produced and delivered electricity to homes and industries in a system that guarantees their profit and ensures steady service to residents.

Now, the Arizona Corporation Commission is considering whether to shake up the monopolies and bring competition to the state.

In May, the commission took the first steps toward electricity deregulation by officially asking the public to weigh in on the benefits and disadvantages of breaking up the state’s system of “regulated monopoly,” under which a handful of public utility firms are in charge of generating and distributing power.

Specifically, the commission wants to know if bringing competition to Arizona would result in cheaper rates for all customers.

What is at stake is control over Arizona’s electricity market. In the next several weeks, the state’s energy regulators will decide whether Arizona plunges into the waters of competition or settles in monopoly’s familiar terrain.

At the heart of the issue are two conflicting concepts of America’ success: One observes that competition has ushered in an era of innovation, producing smart phones and more airline choices.  The other contends that only tightly regulated monopolies can deliver satisfactory results in capital-intensive industries like electric service.

The deregulation bandwagon

The Corporation Commission, which is constitutionally tasked to set rates and regulate public utilities, is expected to meet this fall to decide whether to push ahead with electric deregulation.

A “yes” vote to retail competition would jumpstart the process of creating the rules to govern a deregulated market.

Those rules would spell out the requirements for new players to sell electricity here and dictate the shape of Arizona¹s competitive electricity market.

In fact, this wouldn’t be Arizona’s first foray into electricity competition.

Buoyed by the successes in the telecommunication and airline industries, the state jumped on the deregulation bandwagon in the 1990s. The Corporation Commission rewrote the rules to begin dismantling the monopolies while legislators enacted a law - the Electric Power Competition Act - to allow competition in jurisdictions not regulated by the commission.

But two developments waylaid Arizona’s experiment - California’s disastrous foray into deregulation, which led to rolling blackouts and spiking rates and which effectively poisoned the political environment for deregulation for years to come, and Phelps Dodge Corporation v Arizona Electric Power Cooperative Inc., the lawsuit that struck down key provisions of the commission’s rules over Arizona’s deregulated market.

Showdown ahead

The recent discussion of deregulation is in its early stages. The rulemaking process - should the commission decide to press forward - could take months.

But already, public utilities and other defenders of the current system are gearing up for a showdown that could dwarf other issues before commission.

A group called the Arizona Power Consumers Coalition is preparing an aggressive public campaign to defend the regulated monopoly system.

Other groups, such as AARP Arizona, wasted no time telling its members that competition is the wrong move. AARP advocates for the interests of senior citizens.

“There will be a very pointed attempt to explain to people why it is a bad idea,” Jay Heiler, a lobbyist for Arizona Public Service and chairman of the Arizona Power Consumers Coalition, told the Arizona Capitol Times this month.

The other camp isn¹t standing idly by. The Goldwater Institute, a conservative think tank, envisions a dynamic market where consumers have a menu of options and can easily switch between electric retailers, choosing the service that best suits their needs.

“What this would help do is put consumers, all Arizonans, in the driver’s seat in terms of how the electricity is provided to us,” said Byron Schlomach, an economist with the institute, adding that he can guarantee that if done right, deregulation would unleash innovation and efficiencies that will benefit customers and companies.

In a position paper, Goldwater cited cheaper rates in competitive markets and suggested steps to dismantle the monopolies here.

Some legislators have also begun to weigh in.

“This transition is expensive to implement; in addition, deregulation has a long record of power shortages, rolling blackouts, and price manipulation,” Sen. Steve Pierce, R-Prescott, told the commissioners in a letter last month.

Meanwhile, the Grand Canyon State Electric Cooperative Association, Inc., doubted whether electric retailers would venture into rural areas where the population density and electric use is low.

The association fears that electric retailers would target larger consumers, such as grocery chains and hotels, offering them better rates while leaving behind residential users and other “unattractive customers.”  Without a stable customer base, the cooperative said, it would be more difficult to finance capital-intensive projects.

Others are wary that deregulated markets would fail to deliver electricity in critical times, creating dangerous conditions for residents.

APS chairman and CEO Don Brandt told the Corporation Commission that reliable electric service can be a matter of life and death in Arizona, the hottest state of the nation. In a letter preceding his company’s official comments, Brandt said the current system has kept the lights on in Arizona for more than a century. Under a regulated system, elected officials - the commissioners - balance the interests of customers and businesses.

“We should be cautious about pursuing a model that offers customers no such protection,” he said, adding that Arizona’s electricity rates are lower than the national average and below those in 13 of 17 deregulated states.

SRP general manager and CEO Mark Bonsall echoed Brandt’s comments.

“Deregulation would place Arizona ‘at the mercy of forces that show no mercy’,” he said, citing former California Gov. Gray Davis’ comments following his state’s disastrous foray into deregulation.

This issue of reliability cannot be overlooked, SRP executives also said, noting that electric usage during the summer here is higher than the consumption in New York City, where more than 8 million people live.

Rob Taylor, another SRP executive, said Arizona already offers lower rates than many states and that consumers give high satisfaction marks to choices for customers and utilities.

Even the president of a large energy generator in deregulated Texas relayed some doubts about reliability there. In a column to the Houston Chronicle, John Ragan, an officer with NRG Energy’s Gulf Coast Region, disclosed that his company is bringing back an old plant - a relic from the 1950s - to meet energy demand.

The benefits of choice

But large employers and others in Arizona are eager for the change.

Chris Hendrix, a Wal-Mart executive, said a well-designed competitive electricity market would result in “substantial savings” on electric costs, allowing companies to pass those savings onto customers.

“The benefit of competition at the retail level can be summed up in one word, ‘choice’,” he told the commission, explaining that competition gives consumers the ability to purchase the electric service that best tailors their needs.

Others rejected the claim that deregulated markets face problems of reliability -  the ability to ensure that demand would be met regardless of circumstances.

William Massey, the counsel for COMPETE Coalition, a group of electricity stakeholders that includes businesses like 7-Eleven and J.C. Penney, said there¹s no evidence to suggest that reliability is a problem in the 17 states and the District of Columbia that have deregulated markets.

The Retail Competition Advocates and the Retail Energy Supply Association also submitted rebuttals to critics’ claims that deregulation results in unreliability.

The pro-deregulation groups said the claim that this is a zero sum game is fallacious. “The fear (of cherry-picking) has no basis for several reasons,” they said, referring to the charge that retailers would go after larger consumers and leave behind residential users.

The groups said utilities that don’t sell their electricity to customers could still sell it in the “wholesale market.” Deregulation also encourages efficiency, and utilities could, for example, buy electricity from the wholesale market, if the latter¹s price is cheaper than what they produce, they said.

The groups cited data showing that generation capacity increased in areas in the northeast that have competition.

“The contention by some, most recently by opponents of customer choice in Michigan, that retail choice discourages investment in new generation, and that generation resource reliability may be undermined by customer choice, is belied by the facts,” they said in their statement.

While both sides agree on the broad outlines of what happened in the mid-1990s, those who are pushing for deregulation said it¹s time to revisit the issue.

Stan Barnes, a lobbyist for Arizonans for Electric Choice Competition, whose members include large employers like Wal-Mart, Honeywell and Intel, said customers still benefit from the aborted drive to competition in the 1990s. He said today, deregulation is no longer an experiment but a reality that has “matured.”

“Why now? Because next year is the 20th anniversary of Arizona seriously thinking about this issue. Customers from the residential level to small businesses up to large employers are missing out on the benefits of competition,” he said.

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