Assessing deregulation

Assessing deregulation

While I’ve worked for a firm that specializes in energy and the built environment for many years, I haven’t often experienced, firsthand, many of the issues I research and write about. Outside of resetting a fuse or paying the electric bill, there weren’t many new innovative pricing plans or exciting product introductions where I lived in Tennessee. But I’ve moved to Texas, and it’s a whole new (deregulated) world.

Deregulation is not new to the electric industry. In the late 1800s and early 1900s, a variety of (often competing) companies started servicing towns. Unfortunately, many did a poor job, as power was often intermittent, prices were high, and infrastructure was built in a haphazard manner. For these and other reasons, the government took a hand and started regulating electricity service.

Fast forward to the late ‘80s and early ‘90s when a number of previously regulated industries were becoming deregulated, and passage of various orders issued by the Federal Energy Regulatory Commission and Congress allowed for the deregulation of the electric industry.

A number of states decided to try it, in the hopes of facilitating more options for customers and bringing the cost of energy down. The results have been mixed. Some states have reported success with deregulation:

  • In the Midwest, Ohio and Illinois are seeing competitive rates resulting in greater participation of retail choice (although Illinois’ program required additional state tax dollars to keep the program moving forward).
  • Michigan is considering lifting its 10% choice cap relative to total retail load, which would allow for more options.
  • Indiana has announced a new study on deregulation.

On the other hand, California suspended its program. And in Connecticut, many customers have experienced high electricity rates from their variable rate plan providers, and they’ve started switching back to their old utility (Connecticut Power & Light or United Illuminating).

Like many of them, I’ve had a less than positive experience.

First, and one of the most frustrating parts for me, was the myriad of options. You can see, in the image above, that when I entered my zip code in the state’s search engine, there were more than 250 choices for the Dallas area.

If you put each choice on a single sheet of paper, that’s half a ream. Or about a quarter of the length of a 19th-century Russian novel. That’s a lot to go through just to buy something I used to not have to think much about.

The choices now resemble old phone plans: nights and weekends free, etc. They have fixed rates for various time periods and include cancellation fees, minimum usage requirements and even tiered rates. It was very hard for me to discern which of these plans would be best for my family since I didn’t have a handle on our consumption patterns, and we really don’t operate laundry and dishes on a regulated time schedule.

Another big issue is that while electricity costs may be lower for the plan I selected, the second part of my bill, transmission and distribution, isn’t really deregulated. And because of the need to upgrade aging infrastructure, which includes expenditures for the smart grid, this portion of my overall energy cost is actually increasing. (Interestingly, a recent report revealed that, in Texas, providers like Austin Energy that are exempt from deregulation consistently have lower average prices than their deregulated competitors.)

On the positive side, deregulation has afforded green energy a platform to grow. Unfortunately, these plans are generally more expensive than electricity generated from more traditional sources.

So, the major promise of deregulation, lower cost, really isn’t being fulfilled for many consumers. And having hundreds of options actually makes the decision process harder. Bottom line: nothing I’ve experienced would make me advocate for deregulation, which is a big problem for an industry that desperately needs to be providing more choices and flexibility in order to maintain customer relationships and fend off non-regulated competitors in the future.

It’s got to be easier. People want choices, but we know that having too many choices creates analysis paralysis. Plus, the risk of making the wrong decision is high. We’ve seen this in our work with utilities trying to encourage customers to choose a retailer – many ultimately have to be “assigned” one because they never choose.

Regulators also demand objectivity; the transmission and distribution utility can’t influence retailer selection decisions. But while it is important to remain objective, you can’t just throw customers into the deep end and expect them to make the best choice without the proper consumption information and competitive rate trends/comparisons. Smart meter technology and time-of-use consumption reporting must go hand-in-hand with deregulation to create success.

Successful deregulation requires better communication, not more. Firms selling alternative plans have to explain clearly what they mean by lower rates, and that their charges are completely separate from the transmission and distribution costs. Additionally, they need to consult with new customers instead of trying to sell them. Other advice:

  • Use a web portal that includes a decision tree based on family and work status, typical energy use, etc., which will help guide customers to the most appropriate plan.
  • Show customers what their estimated charges would be for various plans and allow them a window of two or three billing cycles to switch (as a benefit for the company, the contract period could start anew from that point).

Better communication is the key to more satisfied customers and to getting states and PUCs on board to grant the flexibility utilities will need to remain relevant/competitive in the future.

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Posted on

October 2, 2014

About the Author

Jim Lyza

Jim is a former contributor to Shelton Insights.

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