OPINION
Consumers not benefiting from deregulation

By Jerrold Oppenheim, 1/26/2003

Consumers do not care whether they can choose among competitive retail electricity or gas suppliers. Most find the choice about as welcome as a dinner interrupted by dueling long distance carriers. What matters to consumers is the long-term reasonableness and stability of the price they pay for electricity and gas. But, in the last two years, Massachusetts electricity and gas prices have varied by about 50 percent. For most families, it is very hard to budget for such wide unpredictability in bills for necessities.

Deregulation sent wholesale electricity prices in California up by 1,000 percent, with rolling blackouts. Right here in the Commonwealth, deregulated wholesale prices of natural gas almost quintupled two winters ago and, so far this winter, have doubled. Deregulated wholesale New England electricity prices hit $6 per kilowatt hour in 2000. This compares to average wholesale prices of about 3 or 4 cents.

Meanwhile, competitive suppliers have shown approximately zero interest in residential electricity or gas customers here or anywhere else in the country, according to a US Department of Energy survey. ''[T]here are no offers of any kind being marketed in Virginia,'' that commonwealth's regulator observed this month. ''With rare exceptions, retail competition is not providing meaningful benefits anywhere in the nation.'' In the United Kingdom, where the idea for utility competition began, residential electricity competition was created by fiat. Residential retail prices went up.

A big reason for the failure of utility competition is that price volatility is as bad for competitors as for consumers. Right after deregulation and those $6 kilowatt hours, a burst of competitive exuberance led to construction of a 33 percent expansion in New England's electricity generation fleet - far more than needed. The immediate impact of this flurry of activity was to provide a surplus of electricity at relatively reasonable prices. But this is temporary - the low prices have also resulted in a halt in new plant construction, which will not resume until demand growth creates summer electricity shortages that, in turn, drive prices back up to the $6 rate that provides the incentive for construction of new capacity. A recent analysis predicts this will occur in about three years. It is this boom-and-bust cycle that - much like the stock or real estate markets - makes prices volatile.

The effect is magnified by a similar cycle in the natural gas market, since natural gas is becoming a leading fuel used for the production of electricity. Indeed, all the new generation built in New England has been gas-fired.

Also contributing to price inflation when supplies are tight is the fact that, in New England, ownership is consolidating into fewer hands. Such market power is even worse in the sections of New England, including metropolitan Boston, that are physically cut off from large parts of the grid.

The electricity boom-and-bust cycle is a national phenomenon. Its fallout is displayed in the headlines of the Business pages chronicling the distress of competitive electricity suppliers: Williams borrows money at 30 percent; shares of AES, Calpine, Dynegy, and Mirant sink by more than 90 percent; nearly all bond ratings drop to ''junk'' status while yields hit 30 percent. The high capital costs from this financial debacle, along with electricity shortages from decisions to stop building capacity, increase both prices and price volatility. The construction strike also makes less reliable the long-term supply of an essential service.

The solution, for both gas and electricity, is for the new administration to apply good business practices for the benefit of all residential consumers. This means supervising a mix of electricity and gas supplies, including some long term and at set prices, to enhance price stability; locking in good prices when they are relatively low; and facilitating the financing of reasonably priced plants made possible by long-term customers. It also means expanding efficiency programs that prevent shortages by controlling demand and continuing to provide assistance for low-income families to pay their bills.

Electricity and gas deregulation brought lower prices only to very large Massachusetts businesses. Now it is time to provide such benefits to Massachusetts consumers.

Jerrold Oppenheim is a Gloucester lawyer and co-author, with Theo MacGregor and Greg Palast, of ''Democracy And Regulation'' (2003, Pluto Press). This story ran on page D8 of the Boston Globe on 1/26/2003. © Copyright 2003 Globe Newspaper Company.