Quick fixes unlikely in power play Consumers unfamiliar with deregulation details

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Despite all of the uncertainties within electric deregulation, the Senate chair of the state Legislature’s Utilities and Energy Committee believes the best way to proceed with an open market is to be careful and cautious while trying to avoid making any large changes in the current rules.

Yet that hasn’t stopped anyone and everyone from offering suggestions for how to improve Maine’s competitive electricity market.

Sen. Norman Ferguson, R-Oxford, said recently that while his committee is certain to review parts of Maine’s deregulation law, he expects the committee will be hesitant about any change proposed to current regulations. “I don’t think there’s going to be anything earth-shattering” coming out of the committee, Ferguson said.

He said the current deregulation laws were established after much study and deliberation, and to change them in any substantial way wouldn’t be constructive. The current open market, Ferguson said, is a young and volatile one that should stabilize and bring lower prices to consumers.

“Deregulation should work in theory,” Ferguson said. “It should work to the consumer’s advantage.”

Others aren’t so confident that Maine will weather the deregulation storm unscathed.

“I have a difficult time believing that this market that’s been established is ever going to work,” said Robert Briggs, president of Bangor Hydro-Electric Co. Briggs said Maine’s deregulation law has created a litany of difficult concepts that are both complex and unfamiliar to Maine’s consumers. In addition, he said, there is little communication between energy suppliers and consumers.

As a consequence, Briggs said, the electricity market is so confusing for the average consumer that it has a chilling effect on the market. “It seems to me,” Briggs said, “that any time you have a market that is simply not feasible for an individual to understand then it’s going to be difficult for that to be a fully competitive market. The theory is that … regulations can never do a better job than the market. But [the market] hasn’t [done a better job] in this case – not yet. Maybe it will.”

Briggs advocates the inclusion of governmental and quasi-governmental agencies in Maine’s electricity marketplace as a means of stabilizing electricity prices.

Those agencies, he said, would make some state money available during high price periods to keep the cost of electricity to Maine consumers low. But establishing and funding such agencies would require taxpayer dollars, so the consumer ends up paying one way or another.

Briggs also believes Maine’s deregulation law should be altered to allow the state’s utility companies to produce some electricity in order to provide a hedge against price spikes on the wholesale electricity market. Maine’s utility companies aren’t allowed to generate electricity under the current law.

Bangor Hydro knows the consequences of high prices on the wholesale energy market. The company now buys power from that market to sell at the standard offer rate in its service territory. The standard offer rate is set by the PUC and is the rate charged to electricity consumers who opt not to select a competing electricity supplier.

During the year 2000, according to Bangor Hydro officials, the company lost about four-tenths of 1 cent for every kilowatt-hour of electricity it purchased on the wholesale market for standard offer supply. The company has projected it will lose about $4.3 million through the end of February as a result of paying more for power than it is allowed to collect from its retail customers.

Those losses could be recouped if the PUC approves an increase when a new standard offer rate takes effect March 1 in Bangor Hydro territory.

Briggs says he is convinced that a public power authority may be the best way to insulate customers from the price volatility of the energy market. “You know, a public power authority isn’t exactly the worst thing in the world here,” Briggs said of a state-run agency designed to actively seek the lowest electricity prices.

Again, however, costs are shifted to the taxpayer to build such facilities. But Briggs maintains that a public power authority could construct and maintain generation facilities cheaply – largely because state and municipal entities can finance large projects at lower rates than private businesses.

Carroll Lee, senior vice president and chief operating officer of Bangor Hydro, said current market prices dictate the price of electricity to be more than 7 cents per kilowatt-hour. With hedging strategies such as utilities being allowed to produce some of their own power, Lee said Bangor Hydro could bring that cost down to about 5 cents per kilowatt-hour. With lower oil costs, Lee said, Bangor Hydro could bring retail prices to Maine consumers down to about 3 cents per kilowatt-hour. The standard offer for electricity supply in Bangor Hydro territory is set now at 6.1 cents per kilowatt-hour.

Stephen Ward, Maine’s public advocate, said that while he hasn’t given a lot of thought to a publicly owned power authority acting to help keep prices down, he noted that the only electricity companies doing well in California are the municipally owned utilities. Those companies weren’t required to take part in deregulation, and therefore retained their generation facilities while the investor-owned utility companies sold off their electricity-producing assets.

“There are a number of reasons to consider that here,” Ward said. “I haven’t thought too much about that problem, but I see the wisdom of at least considering those opportunities.”

David Flanagan, former president of Central Maine Power Co., takes a different approach to changing the deregulated marketplace, opting instead to avoid more government action and to privatize some of the agencies now involved in the market. To mirror previous methods of governmental manipulation of electricity prices, Flanagan said, is to return to a system of electricity acquisition that was inefficient.

“Lest we forget,” Flanagan said, “the old system was not a very good system. It was prone to shifting the power supply to serve political obligations. That was the system that got New England the highest [electricity] prices in the country.”

Flanagan said he is in favor of a for-profit alternative to the independent system operator for New England, the private, but nonprofit agency that monitors the transmission of electricity to 6.2 million customers in the region. The agency monitors 7,000 miles of transmission lines and 330 generating facilities to ensure that there is enough electricity available on the market to meet demand.

A private equivalent to ISO New England, Flanagan said, could help to normalize the energy rules in the New England states, enhancing New England’s appeal as an “energy island” for which suppliers may compete. New England, Flanagan said, “is an energy island that abuts Quebec, New York and the Maritimes.” Such an island, he said, has the potential to tap into vast energy supplies from its neighbors in addition to the electricity produced in the six states in the region.

Flanagan said a private, for-profit ISO is better situated to promote efficiencies in energy transmission because of the monetary incentives available to such an entity. The better managed the system, Flanagan said, the larger the share of the profits to be returned to the ISO.

“Free enterprise is not free of flaws or difficulty,” Flanagan said. “but it does have a tendency to be more efficient.”

But such sweeping regulatory changes, which would have to be mandated by the Federal Energy Regulatory Commission, don’t appear to be on the radar of federal lawmakers. Dave Lackey, spokesman for Sen. Olympia Snowe, said recently that Snowe will review and consider proposed changes to the federal deregulation laws, but changes won’t be made without careful study.

Meanwhile, Ward and others worry about the implications of the current regulatory system. Ward says CMP customers were “very fortunate” to have a low standard offer rate locked in last year, but that rate is unlikely to be matched when the contract expires in March 2002.

“In the near term,” Ward said, “I think we’re seeing big and painful increases in the standard offer rates.” Those increases, Ward said, should be tempered as oil prices fall and the market fully appreciates Maine’s surplus of electricity.

Maine produces more electricity than it consumes. The state expects to have a production capacity of 3,800 megawatts by year’s end. At peak demand, Maine consumes about 1,800 megawatts of power. “We have plenty of supply,” Ward said, “so Maine is not in any trouble in terms of access to supply. It should, in theory, benefit us.”

But electricity produced in Maine isn’t necessarily Maine’s electricity. A kilowatt-hour of electricity produced in Veazie may, in fact, be earmarked for sale in Boston or Hartford. In turn, power produced in those regions may flow to Bangor for use. And the demand for power in Boston may be making the price of electricity higher in Maine with generators preferring to sell to the highest bidder on the spot market.

Anthony Buxton, an attorney for the Industrial Energy Consumers Group, said his clients have seen mixed results from Maine’s deregulation law. Of particular concern to Buxton, among many, is that one agency – the Maine PUC – is charged with establishing a standard offer rate for all Maine consumers. In such a situation, Buxton said, consumers are left out of the decision-making process but pay for any mistakes through higher electricity rates.

Without the standard offer, Buxton said, consumers are forced to be accountable for their energy choices.

“If one person makes the decision,” Buxton said, “the odds are 50-50 that they are completely wrong. And they are wrong for everyone.” If people are allowed to lock in their own rates for service, Buxton said, “then the laws of probability dictate that one-half would be right and one-half would be wrong.”

Allowing customers to make more of the decisions about where they get their power, Buxton said, prevents them from feeling helpless about deregulation and helps them to accept the costs of free market electricity. “If customers are going to pay the cost,” Buxton said, “they have to have a role in the decision-making process.”

Briggs also recognizes that individual consumers have little, if any role, in the current electricity market. That phenomenon, Briggs said, is a consequence of the way the electricity market was deregulated. In essence, Briggs said, people were told by lawmakers and the PUC not to worry about deregulation.

“They said to the consumer, ‘We’re going to change the system – but don’t worry about it. Everybody’s itch is going to be scratched,'” Briggs said. “Consumers were basically assured they didn’t need to worry about this … so they didn’t.”

Too much emphasis was placed on people staying with the standard offer, he said. Consumers were left to be passive participants when they should have been told they would soon have to become active players in choosing whom to buy their power from.

Flanagan sees a larger choice facing consumers.

He said the future of Maine’s deregulated market depends largely on how Maine residents view the role of government in their lives. “I think society has to make a judgment about whether they are more confident in the government running the electricity systems or the market,” Flanagan said. “There are some things the government is very good at doing, and things they aren’t good at doing.”

Meanwhile, Sen. Ferguson says it is important to remember that Maine has only begun its tenure with a competitive market, and it will take time for the dust to settle. Until that time, Ferguson said, the legislature should be careful about making any changes to the deregulation law.

“I think we ought to give it a little more time,” Ferguson said. “If you do [make changes], you take the chance of upsetting the apple cart as well.”