Point of View: We Need a Rate Freeze Now

Electricity

I was mystified by the huge increase in our ComEd January bill — an increase of 62% in the unit cost per kilowatt-hour. Ten years ago, we all agreed to a rate freeze with the caveat that rates eventually would be based on competition after that time, but we were also told that deregulation would benefit us. We were told deregulation would mean lower rates for us as consumers of electricity and would improve our country's competitiveness. But has it?

Deregulation

Ten years ago when we accepted the rate freeze, we did see some of the advantages of deregulation in other industries, particularly airlines and communication. A friend of mine who used to work for Bell Telephone (now part of AT&T), managing one of their purchasing divisions, told me that as soon as his division was able to buy from suppliers other than the in-house supplier, the cost of equipment to maintain and extend the Bell system went down by a minimum of 30%. We've seen much the same with the cost of airline tickets. Clearly, deregulation in these industries, and the resulting competition, has benefited us all.

So can this same outcome be achieved in the electric power industry? Based on what we have seen so far, since we agreed to the freeze, the signs are not good. We all recall the deregulation fiasco a few years ago in California, including power shortages, huge increases in costs, and near bankruptcy of utilities. In retrospect, it is generally agreed that that the poor design of the deregulation process had a lot to do with that outcome. But we have also learned from that experience that private producers of electric power have no hesitation in taking advantage of poor government decision-making, profiting excessively when following poorly designed rules for deregulation and profiting enormously (read Enron) when manipulating the rules.

Competition

Electricity

Competition, so fundamental to the success stories in the airlines and communication industries, does not exist in the electric power industry. ComEd has said that the rates we are now being assessed were a result of a competitive bidding process called a “Reverse Auction,” where utilities request quotations for daily kilowatt-hour power requirements and ask vendors to provide their lowest price. It is reported that some 15-20 power producers took part in the bidding process, a number that on the surface implies good competition. However, the limited information that has so far been released by ComEd leads us to question this implication.

Exelon, current owner of nuclear plants in Illinois and the holding company of ComEd, was limited to 30% of the electricity market by the rules of the auction. However, Exelon is allowed to sell their surplus low-cost nuclear power over and above that amount to other bidders. These bidders put their markup on the Exelon power and compete in the auction. Thus, the number of pure bidders, providing supply from their own power plants is unknown. The development of new electric generation plants in the U.S. has been moribund in the last few years, a condition that may continue for some time. Thus, future competition as well as the degree of competition in the just completed “Reverse Auction” is questionable. And, needless to say, without competition, deregulation will not achieve the goal of lower electricity rates.

Conflicts of Interest

Just a few more points that bother me about the current situation affecting electric rate-payers in Illinois: It has been reported that the “Reverse Auction” procedure for establishing rates was designed by the competitors themselves! This implies that the Board appointed by the Governor of Illinois is incompetent to oversee the process on behalf of the public or, even worse, that they see no conflict in letting the industry design their own rate-setting procedure. Finally, I am bothered and find it a certain conflict that ComEd is lobbying for the high rates, which will greatly enrich its parent company, Exelon.

ComEd remains a regulated utility for electricity transmission and distribution (T&D). As a regulated utility, its rates for the T&D are fixed by the regulator as in the pre-deregulation days, and there is no way that the regulator will allow ComEd to go into bankruptcy. I'm sure ComEd knows this. Yet ComEd is conducting a very strenuous lobbying campaign in favor of the high rates, suggesting to the public that its actions are driven by the threat of bankruptcy. A far more likely explanation is that ComEd is lobbying on behalf of Exelon, their parent company, to whom ComEd nominally sold our very efficient nuclear generation plants a few years ago.

Rate Freeze Now

Dollar Bills

The possibility of a rate freeze to study the situation must be especially galling to Exelon. For the last ten years, it has played by the rules, contributing to our political process as required and hiring the sons, daughters, and friends of influential people. Now it is time for the process to deliver. But our representatives are waffling. The people are angry; they were promised rate decreases, or at least the prospect of decreases, and instead they get a 62% increase. Is this exorbitant increase necessary or is the theory flawed? We need to be better informed to answer this question. A rate freeze is urgently needed.

Images: http://www.freedigitalphotos.net

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