united states: January 22, 2008

The debate regarding the deregulation of the electric utility industry in the United States continues to rage. One can easily be led in either direction by the mountain of arguments and statistics that both sides present to support their arguments.

Supporters argue that deregulation has provided customer choice, added price transparency and kept prices lower than they otherwise would have been. The opposition, however, counters that deregulation has been the cause of higher prices, general consumer confusion and shortages in electricity supply. The battle has been most acute in the states of Maryland, New York and Pennsylvania all of which have deregulated their electricity markets.

In Maryland, the state’s Public Service Commission (PSC) has issued a report identifying a deficiency in electricity supply by 2011 or 2012. While the Maryland restructuring model provided incentives for independent investment, the desired results have not been forthcoming. As a result, the PSC will be playing a greater oversight role in the capacity auction in 2008 in order to ensure that all available supply becomes part of the bidding process as well as promoting utilities to enter into longer term purchasing contracts. Additionally, the PSC will require new and more aggressive demand-side management and energy conservation programs. While the Maryland PSC sees its efforts as necessary to correct deficiencies in the deregulated market, others view their intervention as an attempt to “re-regulate” the industry.

Similarly in New York, 2008 is likely to witness much interest and controversy concerning the re-regulation of its electricity market. A lack of conclusive evidence whether retail deregulation has lowered prices for consumers has prompted opponents as well as influential lawmakers to get the issue of re-regulation back on the legislative table.

In Pennsylvania, most utilities’ rate caps have yet to expire as they will be lifted over the next few years. The overriding concern is that once lifted, consumers are likely to suffer from sticker shock One of the state’s utilities, Duquesne Light, has had its price caps lifted and so far, has been able to hold down prices. However, the utility complains that its continued membership in the Pennsylvania Jersey Maryland (PJM) interconnection will likely lead to increased electric pricing for its customers. At controversy is that the PJM wholesale model seeks to balance price levels and stability with the need to encourage greater investor interest (i.e., higher transmission costs). Accordingly, the utility wishes to join the smaller Midwest Independent System Operator in an effort to keep prices down.

In each of these areas, a pattern has developed—that is, price caps are introduced as a means of protecting the consumer against a newly introduced market-based pricing model. In the short term, consumers are protected; however, once those caps are lifted, electricity pricing skyrockets causing critics to blame deregulation, not the initial artificial price caps, for the increases.

While deregulation is a tricky and complex endeavor, one thing is for sure—the regulation of the deregulation process through artificial market benchmarks will always be a recipe for failure.