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Restructuring Revisited

What we can learn from retail-rate increases in restructured and non-restructured states.

Fortnightly Magazine - June 2007

After significant rate increases in many retail-access states, regulators and policy-makers are asking two critical questions: (1) Do the sharp increases in rates mean that customer choice and electric utility restructuring have failed? and (2) What can be done about these rate increases? The concerns about restructuring and retail access in the electric utility industry today are quite a change from 10 years ago, when it was widely anticipated that customer choice and competition would lead to lower rates, enhanced services, improved efficiency, and environmental benefits. 1

To be sure, restructuring always was a controversial issue in terms of implementation. However, back in the mid- to late 1990s few questioned the prospect of significant economic benefits that competition and customer choice would provide. For many today, that “conventional wisdom” seemingly has shifted almost 180 degrees. Much of that shift in sentiment is triggered by the rate shocks experienced in many retail access states as market prices increased and restructuring-related rate freezes expired.

In 2006, for example, Baltimore Gas & Electric’s retail rates increased 72 percent, which provoked a political uproar that almost resulted in the dismissal of the state’s five public utility commissioners by the governor. Similarly, after heated and politically charged debates, United Illuminating is phasing in a 50-percent rate increase for its Connecticut customers, and Delmarva is phasing in a 59-percent rate increase in Delaware. Most recently, after a decade of reduced and frozen retail rates in Illinois, a move to market-based retail pricing of customers’ generation service in January 2007 increased residential retail rates by an average of 21 percent for Commonwealth Edison and between 36 and 53 percent for the three Ameren distribution utilities. The fact that some of Ameren’s electric-heating customers, who enjoyed frozen rates as low as 2.5 cents per kilowatt-hour, saw their monthly bills double or even triple only added to the political upheaval that has spurred legislative efforts to roll back Illinois retail rates to their previously frozen level. This proposed extension of the 10-year rate freeze now threatens to bankrupt the Illinois utilities and already has forced their credit ratings below investment grade. To some observers these developments are a sure sign that retail restructuring has failed and that re-regulation of the industry may be the only way out.

Retail Rates Put Into Perspective

Just how unusual are these increases in

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