Electric utilities have long operated as regulated monopolies, with the sole right to serve given areas. They are typically vertically integrated companies — with each company generating its own power, transmitting it via high-voltage lines, and distributing it to substations and customers. State and federal regulations govern all three functions.
Deregulation generally requires power companies to separate power generation from transmission as business entities. When deregulation is complete, power transmission will be open to all power generation sites on a transmission grid. These generators will compete to sell the power they produce to consumers who have access to the grid. In Virginia, deregulation will make power generation a competitive business, allowing producers to sell power directly to consumers in a variety of geographic areas at market-driven prices.
“When consumers have a choice about who to buy a commodity product from, price tends to be the deciding factor,” says Ragsdale. “In the electricity market, the consumer’s ability to switch between suppliers could foster the same competitive environment that recently has caused phone companies to offer $100 checks to entice consumers to change their long distance service provider.”
It is really more accurate to describe the changes as “restructuring” rather than “deregulation,” says associate professor Cliff Ragsdale. “Power generation will no longer be a monopoly, but there will continue to be some federal and state legislative and regulatory oversight at all three levels.”
For more information: Virginia Tech’s Dominion Center; Dominion about deregulation; The Virginia State Corporation Commission about utility restructuring.
... And why are we deregulating?
As Virginians face deregulation we can look back to a time when no one complained about regulation. Richard Hirsh, professor of history, can take us back to 1892, 10 years after Thomas Edison’s first power plant opened, when electricity cost $4.50 per kilowatt hour (kWh) in 1996 dollars. The first state initiated regulation of electricity in 1907, and the price of electricity went down over 98 percent due to the use of improving technology and management techniques to produce more electricity more cheaply. By 1970, electricity was down to eight cents per kWh. Few people complained about regulation.
In the 1970s, the world of electricity had changed. The energy crisis raised the cost of raw energy and the price of electricity started to rise. So did pressure on regulators to keep prices down. But lower prices hurt utility companies, which had trouble paying their own mounting bills.
Deregulation of electricity started innocuously, Hirsh says. President Jimmy Carter’s energy policy of 1978 allowed non-utility companies that produced electricity efficiently or with renewable resources to sell it into the transmission grid. Utility companies were then buying electricity from non-utilities and selling it to customers. “This was the first form of competition in an industry that had seen almost none whatsoever,” Hirsh says.
Academics and government officials began wondering why utilities were still regulated if they no longer produced the cheapest electricity, Hirsh says. This justification had become one rationale for deregulation, but, in the 1980s, the conditions under which regulation started no longer seemed to exist. Lobbyists for large customers of electricity, such as automobile companies, which wanted to bargain for lower rates, pushed for deregulation, says Hirsh, author of Power Loss: The Origins of Deregulation and Restructuring in the American Electric Utility System.
Environmentalists opposed deregulation at first, fearing it would result in the use of old power plants that would pollute the air. Advocates for small residential customers feared companies would sell cheaper electricity to big customers, leaving more expensive power for others.
The best effects of deregulation have occurred since the 1970s in several industries, including the natural gas and telecommunications industries, Hirsh says. Long-distance telecommunications and natural gas prices have dropped dramatically since 1980s deregulation.
But electricity is different. Companies cannot efficiently store electricity and sell it later as they can natural gas. Electricity also is fundamental to our nation’s economic and social infrastructures. “If the power goes off, business stops,” Hirsh says. Residential customers become upset with enforced conservation or rising rates.
“California’s well-intentioned deregulation law of 1996 had provisions that did not work as anticipated, so the state had blackouts and brownouts and people had to live without electricity an hour or more a day,” Hirsh says.
Not only was that disruptive to lives, but to the governor’s political career. Some businesses are talking about leaving the state, Hirsh says.
California’s government started purchasing electricity on the open market for utilities, which couldn’t afford to buy it, to sell to customers. A July 31, 2001 Wall Street Journal article said, “The system worked fairly well until May 2000, when wholesale rates began soaring amid tight electricity supplies and stronger-than-expected demand. Last year, the state’s cost of wholesale power climbed to $27 billion from $7 billion in 1999. In the first six months of this year, that sum hit $20 billion.” People worry there will be less state money left for social services and education, Hirsh says.
California’s law capped the amount residential customers could be charged, but not the cost of electricity on the open market. The average utility was paying 30 to 40 cents per kWh and selling for 12 cents, Hirsh says. When utilities asked for credit from wholesalers, companies would not sell to them and instead stopped producing as much electricity. The cost jumped even more, once up to $1 per kWh, devastating utilities. The governor essentially started running the utility industry, Hirsh says, and he was trying to float a large bond issue to pay for all the power the state is buying.
Hirsh does not believe Virginia will have the same problems with deregulation. Virginia’s laws do not have the same provisions that caused California’s problems, he says, and Virginia also has a good supply of electricity.
His major concern is for customers in Southwest Virginia, where electricity is cheaper than the national average. He fears utilities will sell to areas where people are accustomed to higher prices and leave less cheap electricity here. Often what happens, Hirsh says, is that people who have been paying more for electricity see prices come down and those who had been paying less end up paying more. “That’s what I’m concerned about here in the long run.”
— Sally Harris