Deregulation: Rates + prices = cost

A prominent headline in the Bangor Daily News recently screamed “PUC ups Hydro rates 8%.” The article itself – about the Maine Public Utilities Commission establishing the new Standard Offer power supply price effective March 1 – was accurate enough. But the headline was wrong.

Bangor Hydro’s rates have not gone up. We’ve worked hard to have people understand that there’s a difference between Bangor Hydro’s regulated rates and power supply unregulated prices. Now, if Maine’s people do not understand this distinction, then “deregulation” is doomed to fail. Certainly, in any event it’s off to a rocky start.

As of March 1, 2000, Maine’s larger electric utilities, including Bangor Hydro, became just transmission and distribution, or delivery, utilities. That is, we are no longer supposed to be in the power supply business. We continue, though, to provide the transmission and distribution facilities as a regulated monopoly delivery utility in a given service area – just as we always have.

Rates. On the bill, what we get paid is represented by the “delivery service.” Our customers pay at rates designed on the basis of the cost of providing the service and any other costs that by law or regulation are supposed to be recovered, all overseen by regulators. But that’s not the total cost, because our rates do not include the cost of power supply.

Our rates went down effective March 1, 2000 – to reflect, among other things, the fact that we no longer were in the power supply business. And our rates have not changed since.

Prices. Deregulation envisions that unregulated power suppliers will compete to sell power directly to you and me, or to groups of us. Consumers would pay agreed-upon prices, which would be based on a competitive market. It might even be billed separately, because power suppliers might want to advertise their separate identity.

But there has to be a “default” power supply, or a “supply of last resort,” to be available if consumers cannot choose (or choose not to choose). In Maine, it’s called the Standard Offer service. The law makes the Maine PUC responsible for acquiring it, by soliciting bids from competing power suppliers. Our involvement is supposed to be limited to doing the billing for it.

However, the reality is that competition for your power supply dollar has not developed. For most, the Standard Offer is not just a “last resort” source of power supply. It’s the only source. This isn’t good, but what’s even worse is that for all consumers in our area the PUC has so far been unable to secure any acceptable bids for the Standard Offer. (The same situation applies for the medium and large consumers in the CMP area.)

Under these circumstances, the PUC has had to turn to us for help in procuring the power supply to provide the Standard Offer service. Fortunately, we still have the people with the skills to navigate the wholesale power supply markets. And, working with the PUC and its Staff, they’ve done an outstanding job under terrible market circumstances. For the Standard Offer year that ended Feb. 28, they produced millions of dollars of savings compared with the PUC’s alternatives. For the current Standard Offer period, our people achieved what appears to be even greater savings compared to the prices the PUC was facing .

So, we at Bangor Hydro are not the problem. In fact, we’re a significant influence in easing the problem for consumers in our area.

Still, it’s not a good situation. Because power supply prices are too high. This is a function of two things – the regional power supply market, managed by the Independent System Operator for New England under rules overseen by the Federal Energy Regulatory Commission, and the impact of world energy prices in general.

We think that the latter can account for only about half of the increase in market prices for power supply in the last two years. The rest of it, we say, is due to imperfections in the regional market for power supply. This market began to operate in May, 1999. It substituted for the regulated utility way of establishing power supply costs – the theory being that competition does a better job than regulation at reducing costs and increasing efficiency. But prices – right away – went up, not down, and they’ve been going up ever since. That’s the wrong result. In my judgement, the FERC has not moved quickly enough to address concerns that have been brought to its attention.

As for Maine’s restructuring law, there are perhaps some ways it could be altered to produce better results, but Maine’s law doesn’t stand a chance of succeeding if the regional market in which Maine is only a small part doesn’t work right. The FERC isn’t under any public pressure to fix the situation (assuming this market can be fixed) because in general people aren’t particularly aware of the details of electric “deregulation.”

So we find ourselves caught in the middle. Deregulation ousts us from the power supply responsibility, but we bear the brunt of the customers’ unhappiness with the higher costs of a new system that isn’t working well. We can try to explain that we didn’t cause the problem and that, while there are things we are doing to help, there’s nothing we can do ourselves to rectify the situation. But that’s a difficult message to convey to a public that has a limited appetite for learning these details.

Anyway, getting the headline right would have been a step in the right direction.

Robert S. Briggs is president of Bangor Hydro-Electric Co.