New
Jersey Wins Praise for Regulatory Model
August
27, 2004 -- When some New Jersey-based chemical manufacturers
complained about their high energy costs, their trade
association fought to reduce those expenses, which in
some cases came to 80 percent of their operational overhead.
The state's Chemical Industry Council decided its membership
could save money if the companies were to pool their
energy needs to achieve more buying power.
Of
the council's 100 members, about 60 of them chose to
participate in the aggregation program. With more than
200 megawatts put out for bid, it had become the largest
manufacturer-based aggregation unit ever formed. Altogether,
in the first six months that the strategy was implemented
in 1998, those manufacturers that include Bristol-Meyers
Squibb, Hoffman-LaRouche and Mobil Corp. saved $20 million,
says Hal Bozarth, executive director of the council.
“In
those states where you can shop, aggregation is a wonderful
tool to allow you to get economies of scale,”
says Bozarth. “It's bringing the Wal*Mart concept
to energy buying.” The plan, however, had to disband
a few years back because of regulatory constraints.
Now that those constraints were lifted about a year
ago, the association has resumed its pooling efforts.
The idea is to avoid the volatile hourly markets by
using third party suppliers for “basic generation
service.”
Like
a lot of states that had tried deregulating their electricity
markets, New Jersey maintained its rate caps as a way
to prevent price volatility in the marketplace. But
the caps served as a deterrent to attracting alternative
suppliers that could not beat the price offered by the
incumbent utilities. Thus, competition stagnated. New
Jersey, though, had committed itself to removal of rate
caps. It then decided to create a model whereby it would
identify groups of similar customers. That “load”
was then put out to auction or bid, allowing customers
the opportunity to pay a competitive rate for electricity.
Altogether,
the New Jersey Board of Public Utilities says that commercial
and industrial customers have saved 11 percent over
what prices might have been since the rate caps were
withdrawn a year ago. About 78 percent of the power
load consumed by the state's largest users is now sold
by alternative suppliers. There are about 30 such providers
operating in the state that bid on commercial and industrial
businesses only.
“Conceptually,
this is a state sponsored 'aggregation' of customers,”
says Branko Terzic, regulatory policy leader for energy
for Deloitte Services in Washington, D.C.
Viable
Markets
For
the foreseeable future, the focus nationally is on creating
a viable wholesale electricity market and not on trying
to woo small business and residential customers from
their native providers. While the choice movement says
that reduced prices would be welcome, it is more important
that such rates are a factor of supply and demand, or
getting the price right. A marketplace that operates
without subsidies for electrical suppliers is also one
that would afford commercial and industrial users betters
services and a well-rounded portfolio of new products.
According
to Ken Malloy, head of the Center for Advancement of
Competitive Markets, there is no stomach in the competitive
energy movement to plow new ground. The focus is therefore
on the 15 to 20 states with restructuring laws on the
books and to look at ways to perfect those programs.
It's been a tedious process, he admits, but the overall
consensus is that the emphasis must be placed on the
biggest users, although the most aggressive free marketers
like Malloy want to see all customers including residential
ones assigned to alternative providers.
If
commercial and industrial users become the focal point,
then Malloy and others say that there ought to be requirements
to have real-time metering installed as a way to show
such customers they can save money by running their
key machinery at different times of the day. And, the
bids must be targeted to customers of similar size and
load patterns so to be sure one group does not subsidize
another. The overall idea is to avoid any type of financial
assistance that might creep into the rate.
At
the same time, state regulators don't want to throw
up barriers that would harm competition. That means
allowing suppliers to enter the market without having
to spend a fortune and without enacting onerous rules
that make it troublesome to enroll new customers. Meantime,
public utility commissions should enact standardized
rules and approaches and employ fair consumer protection
orders that don't strangle the suppliers.
“If
utilities are going to offer a standard electric product,
then it has to be priced as if it was an actual retail
product,” says Cal Timmerman, chief economist
for the Maryland Public Service Commission in Baltimore.
Maryland also has a deregulated electric system, although
it uses a system whereby all bids are “sealed”
or filed electronically.
“Structured
competitive markets are the trend of the future,”
adds Timmerman, which refers to the holding of auctions
or bids so that alternative suppliers can try and win
the business of large users. The deals are not negotiated,
he adds, but come with rules that all must live within.
“The wholesale component of price is what the
market says it is and not what the public service commission
says. It's what people bid, and they stand by them.”
Bogus
Formulas
To
be sure, the deregulated markets in New Jersey and elsewhere
still have many kinks to work out. Critics say that
the hype surrounding their successes is just PR—not
sound public policy. For example, such states use a
dubious formula to determine any savings customers have
realized, says Wende Nachman, with Citizen Action in
New Jersey. They rely on a “magic number game”
and say that rates would have risen had deregulation
not been enacted, allowing them to boast of enormous
comparative savings. Some have seen $300 jumps in their
monthly bills, she adds.
The
only fair way to evaluate the vitality of deregulation,
says David Hughes, head of Pittsburgh-based Citizen
Power, is by measuring the load switched and the number
of suppliers offering services. It also involves looking
at savings based on a comparison of what rates were
when choice began and what they are now as well as how
much new generation capacity has been constructed. “Even
where there is some wholesale competition, the savings
have not been passed on to retail customers.
“The
savings that have occurred have not come from competition
but from regulatory impositions,” says Hughes.
Indeed,
the differences between the free marketers and its critics
remain sharp. But, the trend toward competition in the
wholesale markets is inexorable. Now regulators are
paving the way for alternative suppliers to sell to
commercial and industrial customers. Toward that end,
New Jersey will now become a model for other states.
by
Ken Silverstein
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