Will rates ever drop? Savings have yet turn up on consumer’s bills

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The promise of deregulation is one of an open market designed to bring about competition among electricity suppliers. That competition, in theory, is supposed to result in savings for Maine residents.

But one year after the deregulation promise was made in this state, many Mainers are pondering when – if ever – the savings will be realized.

When the state deregulated its market last March it provided consumers with a safe haven where rates would remain relatively constant and affordable while the electric market acclimated itself to a competitive atmosphere. That haven is the “standard offer,” a rate established by the Maine Public Utilities Commission and applied to Maine residents who choose not to select a competitive supplier.

The standard offer is akin to an island in the ocean of the competitive marketplace. As deregulation took effect, the vast majority of Maine’s consumers were placed on the standard offer island, isolated from the turbulent waters of a newly deregulated market. While the market ebbed and flowed about the island, competitive suppliers were supposed to have sailed into the harbor with low rates meant to entice them to jump onboard.

But one year after being placed on the island, only a handful of Maine consumers have opted to catch a ride with a competitive supplier.

The problem, many suppliers say, is that the PUC locks in a standard offer rate below what

the market dictates for the cost of producing electricity. As a result, they say, it is simply impossible to compete against the standard offer in Maine’s marketplace.

“We would like to serve the residential marketplace,” said Joel Weinberg, a spokesman for Select Energy, “but it has to be at a time where it provides savings to the customer and allows the marketer to make a profit.”

The Connecticut-based electricity supplier is one of 10 companies licensed to sell power in the Bangor Hydro-Electric Co. service area. Most of those suppliers, including Select Energy, have shied away from the state’s residential market, choosing instead to compete for more lucrative commercial and industrial customers.

The standard offer, Weinberg maintains, actually has the effect of preventing competition because it doesn’t change in accordance with variations in the energy markets. “Until those standard offer and capped prices go away, it’s going to be very difficult for a marketer to come in and give competitive rates,” Weinberg said. “As that part of it changes, it will be a more competitive marketplace for pricing.”

Patrick Jeffery, vice president of Massachusetts-based SmartEnergy, said his company believes the Maine standard offer rate should be structured similarly to those in Massachusetts and Pennsylvania. In those states the standard offer prices rise and fall with variations in the energy markets.

“We are very interested in serving Maine residential customers,” Jeffery said. “However, wholesale energy costs are much higher than the price that exists in Maine right now.”

Suppliers who do agree to sell power to Maine’s residential customers must secure energy supplies from the generators that make their electricity available on the wholesale market. So as the wholesale market follows the upward surge of oil and natural gas prices, suppliers say, it is increasingly difficult to secure supplies at rates affordable enough to provide competitive rates to Maine customers.

The wholesale price of electricity is now above 7 cents per kilowatt-hour while the standard offer rate for Bangor Hydro-Electric customers is 6.1 cents.

“If the standard offer starts to reflect actual market prices,” Jeffery said, “then competition will be very healthy. Unfortunately, because of the problems with the standard offer, we’re just waiting for it to be more reflective of the market.” Jeffery said a market-based standard offer rate for electricity would result in an immediate price hike for all Maine customers, but over time it would bring lower prices through competition.

Susan Greenwood, a University of Maine sociology lecturer who also studies electricity issues nationwide, agrees with the suppliers who advocate changing or removing Maine’s standard offer.

Greenwood said regulators face a difficult task in a newly deregulated electricity market. In particular, she said, is the “delicate balancing act” of protecting the interests of the consumers while encouraging competition among suppliers. “Maine is perhaps walking a tightrope on that,” Greenwood said. “I’m not sure you can have it both ways … somebody has got to give a little bit.”

Regulation of the electricity market still exists, Greenwood said, because the PUC reviews bids for standard offer service and sets a price she believes is below what other suppliers are able to match. “I don’t think a real choice has been presented to the consumers yet,” Greenwood said. “We’ve gone this far with [deregulation] … let’s let open competition come in and see what really happens.

“These kinds of decisions are almost always a question between the balance of freedom and security,” Greenwood said, adding that the more the industry is regulated, the less freedom consumers have to choose among suppliers. Conversely, she said, the more freedom consumers have to choose among suppliers, the less price stability and security there are available to them.

The promise of lower prices down the road in exchange for higher prices now would be a hard concept to sell to consumers who already believe standard offer rates are too high.

“I’ve heard a lot of grumbling about high standard offer prices,” said Stephen Ward, Maine’s public advocate. Ward says moving to a standard offer price that fluctuates with the market will only harm consumers, and puts the inherent risk of a competitive market on the consumer instead of the supplier.

“They sound like people who believe they have a seller’s market,” Ward said. “They’ll be passing along the risk to the consumer.”

Ward said he believes the lack of competition in Maine is in large part related to the volatile wholesale electricity market. “The fact of the matter is that competition is developing much more slowly in Maine’s retail market than people expected,” he said. “The reason for that is the wholesale market is much less mature, and there’s still no vibrant and robust competition in New England.”

Ward said the market is already dictating the upward trend of the standard offer price for most Maine customers, and will likely lead to still higher rates. A standard offer structured similarly to those in Massachusetts or Pennsylvania could cripple consumers in this state, Ward said.

“Massachusetts is the worst of both worlds,” Ward said. “You have a deregulated industry, an unregulated supply sector, and 100 percent of the total cost is passed along to the consumer. The generators are making top dollar. It’s a situation where you have two winners and one loser, and the loser is the consumer.”

Phil Lindley, spokesman for the PUC, said there is little reason to believe that the standard offer rate set by his agency is lower than what the market is capable of competing with. “It’s a delicate situation that the commission is dealing with,” Lindley said, adding that the PUC staff seeks to lock in a low standard offer rate which provides Maine consumers with price stability over a period of a year or two at a time. “It kind of insulates the consumer from [price] fluctuations,” Lindley said.

While the residential market may not be rife with competitive suppliers, large industrial customers are finding that there is some interest among suppliers for large load accounts.

Glenn Poole, energy manager for International Paper’s Bucksport mill, said his company has selected a competitive supplier through an aggregation of industrial customers and believes that may have helped the mill save as much as 10 percent on its electricity costs as opposed to a regulated marketplace. Deregulation, Poole said, has also helped his company to install a natural gas-fired turbine to produce about 174 megawatts of electricity at the mill and further cut power costs.

But Poole said the lagging residential market has negative implications for the industrial market, and therefore means there are fewer competitive suppliers to choose from. “We’d like to see a few more people in the retail market,” Poole said. “If you don’t have people in the residential market you’re going to have fewer people in other markets.”

Robert Briggs, president of Bangor Hydro, said he believes the current lack of competition for Maine’s residential customers is a function of the small size of the state. With Maine’s 1.6 million people divided into three service areas, Briggs said, there is little incentive to offer rates to small groups of customers in mostly rural areas.

David Flanagan, former president of Central Maine Power Co., said Maine should have waited a bit longer to deregulate. Doing so, he said, would have given Maine lawmakers a chance to observe the progress of deregulation in larger states before Maine jumped into open energy markets.

“In the last analysis, we’re in a small market,” Flanagan said. “It made it tough for people to compete.”

Ward, Maine’s public advocate, also says Maine may be too small a state to see immediate benefits from deregulation, adding that the current apportionment of Maine’s residential customers provides no real attraction to suppliers. “That’s not such a plum that you’re ready to drive up from Houston, Texas, to meet with people in Bangor, Maine,” Ward said of suppliers’ view of the Maine marketplace.

If Maine’s three major utilities had somehow joined forces before deregulation, Ward said, Maine would have a far more competitive marketplace. “If they had somehow merged,” Ward said of Maine Public Service, Bangor Hydro and CMP, “I think it’s quite likely that we would have seen attractive standard offer prices.”

Still, most suppliers remain convinced that they simply cannot compete for Maine’s residential consumers as long as the standard offer remains structured the way it is. “Right now we’re just serving the commercial and industrial markets in Maine,” said Cynthia Lammers, spokeswoman for Niagara Mohawk Energy Marketing Inc.

“Standard offer isn’t a bad thing,” Lammers said, “but you really need something to jump-start competition.” Standard offer rates, Lammers said, should only be used to give customers a place to stay while the market evens itself out. Beyond that, she said, consumers should take it upon themselves to seek out the best deals.

John Brodbeck, director of marketing and regulatory policy for the Pennsylvania-based PPL EnergyPlus LLC, said his company is selling electricity only to New England’s commercial and industrial customers. Maine is an attractive market for those consumer classes, Brodbeck said, because Maine adopted a standard offer rate for businesses that was higher than that for residential customers.

By charging a higher standard offer rate for businesses and industrial customers, Brodbeck said, “the Maine PUC and Legislature have leveled the playing field between the standard offer service provider and market providers like ourselves.”

But Brodbeck said he couldn’t criticize the nature of the residential standard offer in Maine, saying that the PUC has done well by its efforts to protect Maine electricity consumers. That is particularly true in CMP territory, Brodbeck said, because the PUC locked in a very low rate for CMP customers.

“I think the Maine PUC made the right decision in establishing a standard offer service rate for Central Maine Power,” Brodbeck said, adding that consumers in the Bangor Hydro region didn’t have the same benefit because they are a much smaller customer base. “Bangor is much smaller,” Brodbeck said, “it’s tough to justify the marketing cost unless you’re going to collect a significant amount of load.”

Customers served by Maine Public Service, Brodbeck said, are insulated from the same market pressures because their region is served by power generated and sold in northern Maine and Canada. Those markets, Brodbeck said, have been less volatile than the New England market.

Yet Brodbeck said Maine residents are fortunate to live in a state with a surplus of power, and as energy prices ease the state should see lower energy rates. In addition, he said, New England is expected to increase its production capacity in the next few years. The New England market “is expecting 5,000 to 10,000 megawatts of new generation,” Brodbeck said, “Maine consumers should start to see the benefit of that very quickly.”

Ward also said that deregulation may well lead to lower prices in the years to come, largely because utility companies’ stranded costs will decline and energy prices could fall as well. Stranded costs are the cost of investments utility companies made in electric generation before deregulation. The added fees, folded into the cost of transmission on a residential electricity bill, are used to recoup those lost investments.

“A year from now, this could be a happier story,” said Ward, who added that the best way to save money on electricity is to make an effort to reduce the use of electricity in the home. “My own view, and it’s a firmly held one,” said Ward, “is that anything the consumer can do to reduce power use will end up paying off in spades. The kilowatt-hour you never use is the one that saves you the most.”