Why 'competitive power' generates few bargains
Lots of Americans switch telephone companies, especially when they get a good deal. But relatively few householders, if they have a choice, are selecting a new electricity supplier.
"The competitive marketplace has not produced benefits for consumers," says Mark Hooper, research director of the Consumer Federation of America in Washington.
When states began introducing competitive power about five years ago, many imposed regulations to cut power-generation prices by 10 to 15 percent. That saves a typical household a few dollars a month.
But since the power business has narrow profit margins, the price cut left new power providers with little room to offer more savings.
"Power marketers have a hard time beating the standard offer price," notes Sharon Reishus, an expert at Cambridge Energy Research Associates (CERA), Cambridge, Mass.
Only 750,000 to 1 million US households have left their old utility for a new supplier.
That's a disappointment for firms hoping to become an electrical Sprint or MCI.
So far about half of the states have passed legislation or enacted regulations to make electricity a competitive industry. But these measures have gone into effect in only a handful of states.
Farthest along is Pennsylvania. PECO Energy in Philadelphia has seen 250,000 of its 1.5 million customers switch to a new provider. In California, fewer than 2 percent have switched suppliers.
The battle for residential customers is tough. Conectiv, a utility based in Wilmington, Del., has just pulled out of the Pennsylvania market. "They could not buy power and sell it retail at a profit," figures PECO spokesman Michael Wood.
A number of Internet-based companies, such as Electric America, Online Choice, and Energy Choice, are still having a go at it. Their use of the Web keeps costs down.
Other states with full or partial competition include New Jersey, New York, Maine, Massachusetts, Connecticut, Delaware, and Michigan.
States with relatively low power costs, such as those in the Northwest, may see little advantage in abandoning their utility monopolies to the market. In a free market, some of their cheap power might just get routed down to California, say, where the price is higher.
Nonetheless, where competition has arrived, it is a story "of surprisingly smooth evolution," says Pietro Nivola, a senior fellow at Brookings Institution, a Washington, D.C. think tank.
One major fear was that reliability of power would decline in a competitive industry. Utilities would have little incentive to build the surplus power facilities needed for hot summer days when air conditioners are running full blast.
The nation did experience widespread power outages in the summer of 1999. Last week, Pacific Gas & Electric Co. shut off electricity in the Bay Area on a rotating basis as it tried to deal with a searing heat wave.
The North American Electric Reliability Council sees New England, New York, and the Southwestern area of the US as "areas of concern" this summer.
But increased competition is not to blame for the outage problem. In fact, deregulation has led power companies to apply to build hundreds of new power plants.
But because of problems with getting permits or connections to power grids, not all of these plants will be built, notes Joseph Sannicandro, also of CERA.
And if they were all built, the new plants would produce twice the power needed to meet anticipated demand.
"The market is responding with supply," he says.
In the 100-year-old regulated electrical industry, most companies were "vertically integrated," as economists put it. They generated power, transmitted it by high-voltage lines, and delivered it door to door to customers.
In competitive areas, these three activities are separated. Many utilities sold their generating plants. "Merchant" companies have been set up to build new generating plants and to sell power to retailers according to demand.
In summer, there have been occasional wild price spikes. The cost of power rises briefly by 50 to 100 times the normal rate, or worse, as power retailers scramble to meet demand.
Charges have been made of price manipulation by suppliers.
So far, though, those extra costs have not been passed on to residential customers.
(c) Copyright 2000. The Christian Science Publishing Society