Dayton Daily News Dereg Article

DAYTON DAILY NEWS

Article published June 17, 2007

Tackling Ohio‘s electric rates
Experts work to keep prices under control

By JON CHAVEZ
BLADE BUSINESS WRITER

Homeowners and businesses better brace themselves: The cost of electricity in northwest Ohio after next year is likely to rise, but whether it will be shocking is unclear.

It all depends on what happens between state regulators, Gov. Ted Strickland, state lawmakers, power companies, and others to keep electricity rates stable, to continue partial regulation, or to allow electricity providers to charge what they think consumers will pay.

The partial regulation now of FirstEnergy Corp., which owns Toledo Edison Co., ends after 2008. Rates have been frozen for more than 6 years, in return for permitting the Akron utility to collect fees from customers and to charge for certain services.

“Our choices are pretty stark,” said Mark Shanahan, executive director of the Ohio Air Quality Development Authority and the governor’s top energy adviser.

“We either let everybody go to open competitive markets or come up with a new phase of electric restructuring in Ohio.

“Anyone who has let everyone go to the open market, saw a significant increase in their rates. Maryland‘s rates went up 72 percent. The governor is very committed to working out a strategy for 2009 that avoids that kind of scenario.”

How deregulation of electricity unfolded in Ohio in last decade
1998: Interest groups, the state’s four major utilities, and legislators begin work on deregulation. [actually, it started in 1992 – then Rep. Ron Amstutz got the ball rolling]
1999: Legislation to deregulate the state’s electric industry is introduced and enacted, allowing residents to shop among electric providers for the cheapest rates starting in 2001. [several bills were introduced between 1992 and 1999]
2000: State regulators give FirstEnergy Corp. permission to charge customers $8.8 billion to pay for its debts on its nuclear power plants. [not quite right]
2001: Partial deregulation begins and is to be complete by 2005.
2002: Nearly 20 percent of FirstEnergy customers switch to a new suppliers, but savings generally are small, and soon, outside suppliers stop selling electricity in the state.
2003: FirstEnergy proposes to freeze rates again through 2008, in exchange for a fee to “stabilize” rates.
2005: The new rate plan for FirstEnergy begins and keeps rates frozen through 2008, with some excepted charges.
2007: Gov. Ted Strickland calls deregulation a failure and seeks a solution by year’s end.

The head of the state agency responsible for representing consumers, Ohio Consumers’ Counsel Janine Migden-Ostrander, said no matter what the course is taken, higher electric rates in 2009 seem unavoidable.

“Costs have gone up, inflation has gone up, fuel prices have gone up,” she said. “Prices are going up across the country. I expect they will go up here.”

How much is anyone’s guess. In the 16 states that have tried it, rates rose between 2002 and 2005 by nearly 16 percent, said Kenneth Rose, an independent energy consultant based in Columbus.

The past half-dozen years of moving toward no rate controls on power in Ohio produced a few electric competitors and lower power prices the first year, but that has long-since evaporated.

When deregulation was first proposed in 1999, it was full of promises.

Toledo Edison customers were to save up to 30 percent on their bills when it ended, predicted former Luther Heckman, former chairman of the Public Utilities Commission of Ohio. It didn’t happen, nor does it seem likely to in 2009.

Governor Strickland has declared deregulation a failure and insists that a new policy is needed. He has held multiple meetings with numerous parties, many holding diverse viewpoints.

“There has been a constant discussion among everybody,” said PUCO chairman Alan Schriber. “Somewhere, there’s a solution. We just have to find it.”

The increase in electricity prices could vary by region of the state, said Mr. Rose, the Columbus consultant. Because northern Ohio consistently has the highest rates, southern Ohio could have bigger increases, he said.

FirstEnergy won’t speculate on where rates are headed or changes that could preempt full deregulation.

“Our position is there’s a law in Ohio that says we go to market in 2009 and we have spent a considerable amount of time and resources to comply with that law,” said spokesman Ellen Raines.

The utility doesn’t expect a return to regulation. “The genie can’t be put back in the bottle,” she said.

FirstEnergy’s financial health has improved greatly during the past seven years. It had $1.25 billion in profit on revenues of $11.5 billion last year, up from a profit of $599 million on revenues of $7 billion in 2000.

When deregulation began Jan. 1, 2001, homeowners and renters received a state-mandated 5 percent rate cut on electricity, and had rates frozen through 2005.

A later plan between the PUCO and Ohio‘s utilities keep rates frozen again through 2008. Customers in northern Ohio, though, paid a fee in both instances either to pay off FirstEnergy’s debts or to keep rates “stable.”

The utility has a pending request to boost the rate it charges to distribute electricity, beginning in 2009. That fee is regulated, but the utility is expected to have the fee approved, as its expenses, including fuel costs, have risen since its last distribution increase in 1995.

The tough part for state leaders and the utilities is to devise a method that provides deregulation of electricity but avoid what happened in Maryland or Illinois, the latter in which customer rates rose 300 percent in one utility’s territory.

Mr. Schriber, who helped shepherd the current rate plans in place, declined to commit to a particular strategy.

But there are ideas he disfavors.

“The utilities make it sound like the [wholesale power)]auctions, a market solution, is the best world for them. I personally do not believe that everybody benefits from a market solution, including the utilities, and I think Wall Street has told them that,” Mr. Schriber said.

FirstEnergy twice tried auctions to determine if there were cheaper providers able to sell electricity to its customers, but an auction in 2004 failed to find a provider less expensive than its rates, and an auction in 2006 was canceled when no bidders registered.

Mr. Schriber said the state of Virginia is reinstating regulation, giving a windfall to entice the utilities. That wouldn’t work in Ohio, he said.

Illinois legislated a rate freeze, which only prolongs a bad situation, he added.

Another plan to keep rates stable, likely with a fee attached for customer, is not a bad idea, providing there are restrictions, he said.

Ms. Migden-Ostrander, who has disagreed with the current rate plan, said a new approach needs flexibility.

“If wholesale rates go down, we should be allowed to go to auctions,” she said. “The plan should include the promotion of maximum energy efficiency, renewable energy, and seek the cheapest solution for ratepayers.”

A new plan should not have the allowed extra charges of the current plan, enabling the utility to charge for certain higher costs yet not provide customers a break when cost savings are instituted by the utility, she said.

Any plan has to take into account future environmental concerns that will increase costs and affect rates, said Robert Burns, a researcher at the National Regulatory Research Institute in Columbus.

“Ozone, nitrous oxide, mercury regulations are all there and we’re anticipating sooner or later we’ll have CO2 regulations,” he said. “All of those will affect the coal plants and will cause their costs to go up.”

His advice to consumers: invest now in energy efficient appliances and cut your own electric consumption because rates will go up.

Mr. Rose, the consultant and an economist, said electricity is too complicated to have a robust retail market. Still, he added, it’s not too late for Ohio to fix its restructuring problems.

Ohio utilities own their power plants, which is a good thing, he said. If those power plants were sold, a federal agency would control their power and a local utility would be forced to buy electricity on the wholesale market, which had wildly fluctuating prices, he said.

Ohio needs to get a plan in place soon so that Ohio utilities aren’t tempted to sell their power plants, Mr. Rose said.

Mr. Schriber, whose commission has faced criticism that it has been too generous to electric companies, said solutions should shift more risk to the utilities. He is not sure, though, how to do that.

FirstEnergy prepared for full deregulation in 2009, and if that is to change, spokesman Ms. Raines said the firm wants to participate in discussions in advance.

A solution is critical to reviving Ohio‘s economy, said Mr. Shanahan, the governor’s adviser. Companies looking to expand or to locate in Ohio need to know what their electric costs may be, and the lack of knowledge is steering them away, he said.

“I’m not sure there is a statewide solution,” he said. The needs of each utility in Ohio vary and a plan good for one company may hurt or hinder another, he said.

Contact Jon Chavez at: jchavez@theblade.com or 419-724-6128.Article published June 17, 2007