US Northeast Using Power Auctions To Rework Deregulation
By KRISTEN MCNAMARA
Of DOW JONES NEWSWIRES
NEW YORK -- The looming expiration of caps on electricity rates has led utilities and regulators in the Northeast U.S. to rework their deregulation schemes in a manner that may point the way for other regions facing similar difficulties.
The original vision of competitive retail markets offering customers options and prices they can't get from their incumbent utilities hasn't panned out in most states. Few suppliers are competing actively with incumbent utilities for residential customers, and without them regulators aren't comfortable fully exposing customers to volatile wholesale markets.
As a result, several states are acknowledging that incumbent utilities will serve most customers and are allowing them to lock in rates to shield customers from volatility. But to preserve an element of competition and bring rates into line with wholesale market prices, they are requiring utilities to hold competitive auctions for their power.
"This seems to be the new thing," said Robert Burns, senior research specialist at the National Regulatory Research Institute at Ohio State University. "Over the last six months or so, people are doing supply procurement of one sort or another. If this seems to be working, I'm sure it will be copied."
New Jersey, Maryland, Maine and the District of Columbia are allowing generators and power marketers to compete for contracts to supply utility customers' projected demand.
Supporters say the Northeast's approach gives competing suppliers a better chance to sell their power, gives customers access to competitive power prices and levels the playing field for competing retail providers, which had trouble getting under artificially low rate caps some states put in place after restructuring their markets.
Support From Generators
About half of the states have started restructuring their electricity markets; and 17, including almost every one in the Northeast, are moving ahead with their plans, the National Regulatory Research Institute wrote in a report last September.
States in other parts of the country, including Ohio and Arizona, have put competitive bidding systems in place, but it's too soon to say whether others will also adopt the model. Suppliers have expressed hope they will.
"We're in favor of them," Calpine Corp. (CPN) spokesman John Flumerfelt said. "They fill the gap in the evolution between where we started - being regulated - and moving toward a fully competitive market."
Properly run solicitations offer transparency and an opportunity for suppliers to diversify their portfolio of contracts, he said.
Competitive bidding is more viable in the Northeast than other parts of the country, because centralized wholesale power markets in New England, New York and the Mid-Atlantic are relatively developed.
The system is needed in less mature markets, too, Flumferfelt said. Calpine is one of two companies that want the Federal Energy Regulatory Commission to cancel large power contracts two Southern Co. (SO) regulated utilities signed with Southern's merchant power subsidiary in 2002, saying the utilities favored the Southern affiliate.
Maryland Under Way
Maryland utilities, including units of Constellation Energy Group (CEG) and Pepco Holdings Inc. (POM), have finished buying the power they need to serve their customers when fixed electricity rates begin expiring this summer. Suppliers bid last week on approximately 50-megawatt slices of the utilities' projected demand in the state's third round of bidding, said Calvin Timmerman, director of rates and research for the Maryland Public Service Commission.
The utilities ran the process under the supervision of state regulators. They accepted offers in ascending price order until they covered their expected demand. Selected suppliers will be paid the prices they offered, while customers will pay a volume weighted-average, Timmerman said.
The state said it spread the process over three days and staggered the lengths of the power contracts to help diversify the utilities' portfolios.
Allegheny Energy Inc.'s (AYE) utility didn't purchase enough power during the three days to cover its projected needs, so it will hold a fourth round of bidding on Monday, Timmerman said.
Maryland expects to use this system to secure power for residential and small commercial customers for the next four years and for midsize commercial customers for two years, he said. It has also offered industrial consumers the option to pay hourly wholesale power market prices.
New Jersey completed a similar process last month through which the state's utilities, including units of Public Service Enterprise Group Inc. (PEG) and FirstEnergy Corp. (FE) bought power for their customers for up to three years beginning in June. It was the third such auction held by the state following the expiration of rate caps last August.
The District of Columbia's Public Service Commission cited the favorable results of the New Jersey auction in an order earlier this month and said it would use a similar process when capped generation rates for Pepco, which serves the district, expire next February. The details of that competitive bidding process are still being worked out, Pepco spokesman Robert Dobkin said.
Others May Start
Maine has been using a competitive bidding process since 2000, when legislation allowing customers to choose their power supplier went into effect, Phillip Lindley, a spokesman for the state's Public Utilities Commission said.
The commission, which runs the process there, will request a new set of proposals later this year to replace the contract for residential and small customers that expires in February 2005, he said.
The commission seeks bids for medium and large commercial and industrial customers, which are better able to manage price volatility, every six months.
Massachusetts is preparing to use a similar system. Fixed electric rates for customers in the state who haven't switched to an alternative supplier will expire in February 2005.
Unless the state legislature or utilities commission puts another system in place, utilities will seek bids every six months for half their residential and small customers' projected demand for a 12-month period, said Barry Perlmutter, senior analyst with the electric power division of the Massachusetts Department of Telecommunications and Energy.
Utilities already use this system to buy power for customers who migrated back to their local utility from a competitive supplier or who moved into their utility's service area after March 1998.
In Pennsylvania, where generation rate caps for most utilities begin expiring in 2008, state regulators voted earlier this month to hold a series of public meetings over the next few months to weigh their options for providing electric service to customers who don't switch to a competitive supplier.
Ohio's electric restructuring law required state utility regulators to establish the framework for a competitive bidding process by the end of 2003, said Shana Gerber, a spokeswoman for the Public Utilities Commission of Ohio. Capped rates for three of the state's four investor-owned utilities, including FirstEnergy and American Electric Power Co. (AEP), expire at the end of 2005.
But with the region's wholesale power market still developing, the utilities instead filed proposals to continue fixed rates for their customers. The commission is evaluating those plans.
Arizona utilities have used a competitive bidding process to secure the power they need above what their own generators can provide for relatively short periods. |
