Utility competition hasn't worked for average customers
BY MIKE FITZGERALD
News-Democrat

Three months have passed since Illinois launched its experiment in electricity deregulation, and a mixed picture is emerging.

Deregulation was intended to push down prices through competition. But neither has occurred for homeowners and other small retail Ameren Illinoiscustomers who have seen electric rates double and triple since a decade-long rate freeze ended Jan. 2.

By contrast, deregulation has proven a boon to the biggest electricity users, such as factories and steel mills. They are slashing power bills because of their ability to negotiate deals with outside suppliers.

The dual system that has emerged is evident in Illinois Commerce Commission figures.

For instance, Ameren IP, CIPS and CILCO serve more than 1 million residential customers. But not a single one has switched to an alternative electricity provider, ICC data show.

Jerry Anderson, a 66-year-old retired grocery manager in Dupo, said he would love to switch to a cheaper power provider but none have so far stepped forward, and it may be years before any do. Meanwhile, the monthly electric bill for the mobile home he shares with his wife, Marlene, has soared to $415 -- more than three times their bill in December.

"Now our electric bill is higher than our house payments," Anderson said.

Yet competition abounds for Ameren's biggest customers, those whose power appetites exceed 1 megawatt or more -- the equivalent of 1,000 homes. More than 78 percent of these corporate customers -- 428 out of 546 -- have switched to alternate providers, ICC figures show.

Deregulation's uneven track record is shaping lawmakers' views on how to overhaul the state electricity industry.

State Rep. Tom Holbrook, D-Belleville, is leaning toward a plan pitched two weeks ago by Ameren Illinois CEO Scott Cisel. It calls for big power users to remain free of regulation, but it would reapply cost-of-service regulation to homeowners and small businesses.

In a surprise "call to action" published in op-ed pages across the state two weeks ago, Cisel signaled that his company's enthusiastic embrace of deregulation had been premature.

Cisel wrote that re-regulation would provide "greater price stability and long-term certainty of electric supply, while still giving large users the option of alternative suppliers."

Holbrook echoed Cisel's point, saying "We need to re-regulate for the retail level until there's competition."

With the Illinois electricity market in turmoil, General Assembly members are pondering ideas that include rolling back electric prices to the levels of last year -- a move Ameren predicts will push it into financial insolvency -- and persuading Ameren and Commonwealth Edison to kick in $150 million in rebates to the hardest hit customers.

State Rep. Mike Madigan, the Illinois House speaker, stirred the pot even further last week when he proposed the launching of a nonprofit, state-run power authority. It would burn Illinois coal to generate and sell electricity to Illinois residents with little mark-up.

The debate in Illinois mirrors a similar controversy brewing nationwide. Like Illinois, California in the late 1990s embraced the free market model preached by Enron, the Pied Piper of energy deregulation. Its reputation a decade ago as the most innovative company in America gave it a rock star's glow.

But Enron's claims never panned out and the free-market movement it championed fell under a cloud in 2001, when the energy and trading giant imploded in bankruptcy and the criminal convictions of its top executives.

Today, deregulation is in retreat.

Lawmakers suspended California's market-based system after price spikes and an Enron-related scandal over the manipulation of power prices. Efforts to return to cost-of-service regulation are under way in Maryland, Virginia, Rhode Island, New Mexico, Colorado, Utah and Connecticut

Illinois is learning that electricity is "just not the right industry to leave to market pricing. You can't compare it to other industries that have become deregulated," said Richard Rosen, a researcher at the Boston-based Tellus Institute, which last month issued a study on what it described as the nationwide failures of electric deregulation.

Deregulation can't work in the electricity industry because electricity cannot be stored in large quantities, unlike other commodities, such as natural gas and oil. Instead, electricity can be likened to "a very delicate piece of machinery," Rosen said. "You can't have a market because the machinery has too many constraints."

In other words, an unregulated electricity market can be easily manipulated because the biggest players wield unfair "market power" over smaller players, such as their ability to bid up power costs, according to the Tellus study.

A market-driven electricity industry is not set up "to serve the ratepayer," Rosen said. "It's for the investors to make as much money as they can, like any other market-based business."

The claim of unfair market power lies at the heart of Illinois Attorney General Lisa Madigan's complaint made two weeks ago with federal regulators. Tainted by bid-rigging and collusion, the power auction in September that set electricity prices statewide should be overturned, according to Madigan's complaint.

Ameren has denied any wrongdoing and will challenge rate rollback efforts, according to Gary Rainwater, the CEO of Ameren Corp., the corporate parent of Ameren Illinois

Despite its setbacks, the deregulation movement still has plenty of defenders, who argue its problems stem from the uneven ways it was implemented. Case in point: The 10-year rate freeze in Illinois that deterred outside power suppliers because prices were set artificially low.

Illinois and other states embraced deregulation in the first place because "the lack of competition meant that a lot of old and inefficient and dirty power plants were operating throughout the country," said Jerry Bloom, a utility lawyer in Los Angeles. "So I think that when people argue that deregulation has been a failure, they forget ... that the good old days weren't good."

Contact reporter Mike Fitzgerald at mfitzgerald@bnd.com or 239-2533.