The Johns Hopkins Gazette: January 5, 1998

Jan. 5, 1998
VOL. 27, NO. 16


At What Price Deregulated Electricity?

Forecast: JHU experts weigh pros and cons of a free market in utilities

Phil Sneiderman
News and Information

Johns Hopkins Gazette Online Edition

Electric customers almost everywhere in the United States will soon pick their power company, just as they now choose their long-distance phone service provider. Federal and state officials have begun lifting the regulations that have allowed most electric utilities to maintain monopoly control over their service areas.

While consumers will face difficult questions about how deregulation and the resulting competition among electric companies will affect their power bills, utility researchers are trying to predict the wider impact of this change. Will all customers enjoy lower rates or just the ones who can buy in bulk? Will customers in remote areas and those with poor credit be left out in the cold? Will these market changes lead to more pollution or less?

John J. Boland and Benjamin F. Hobbs, both professors of geography and environmental engineering, have been studying the economic and environmental impact of electric utility deregulation. Boland, who is a consultant to the World Bank and has served as an expert witness before state public utility commissions, is concerned that electric customers and utility regulators may have unrealistic expectations about how well this new system will work. Hobbs is more optimistic. A Federal Energy Regulatory Commission consultant, who also conducts research on utility planning issues for the National Science Foundation, Hobbs believes that consumers and the environment will benefit.

The professors recently sat down with The Gazette to offer some opinions and predictions on this complex issue.

Gazette: First, please review the origin of this push toward deregulated electricity.

Hobbs: Until recently, people thought it was absurd that somebody would build a power plant without having a guaranteed monopoly market. But things have changed drastically. In 1978, the Public Utility Regulatory Policies Act forced utilities to buy power from small firms that used renewable energy, like wind or solar power, and cogenerators. That opened the door a crack, and through that crack came a lot more new power plants than people expected.

In the 1980s, we had the deregulation of airlines, telecommunications and then natural gas, sometimes with mixed results and sometimes with dramatic decreases in costs. Then people started looking at electricity, the last regulated industry, and asked, "Why not?"

In 1992, Congress directed the Federal Energy Regulatory Commission to open up the wholesale market for electricity, but not the retail market; the push for retail competition is coming at the state level. Industrial customers have been paying high rates for electricity. They see a political opportunity here to get out from under those excessive costs. They're really pushing hard, and they're winning.

Boland: They see an opportunity to use the size of their firm to cut a national deal, where one supplier will agree to provide energy to, say, all Ford Motor Co. facilities. Wal-Mart already has its national supplier lined up, and you can be sure it was at a very favorable price. But there are a lot of customers out there with zero market power, who can't cut a deal with anybody. How the hierarchy of prices is going to work out is an interesting matter of speculation.

Gazette: So will the deregulation of electricity be good for consumers?

Boland: It depends on which consumers. It will be better for industrial and commercial customers and for some large residential customers, who have the ability to shop for a better deal and to buy bulk energy from a low-cost provider. It will be worse for the customers left behind, those who are not attractive to these companies.

You can expect energy suppliers other than the traditional utilities to "cherry pick," to sell to the customers they can supply the easiest and at the lowest cost. You can expect them to ignore customers who don't look like a good deal: customers in remote areas, those with bad credit. They'll have no obligation to serve them, so they won't. Rates for these "problematic" customers will go up.

Hobbs: We'd like to think the rate differences will just reflect the cost of service, but that might be naive.

Gazette: Most energy companies will still have to sign up plenty of residential customers to generate profits. Do you expect a big marketing push?

Boland: Yes, complete with telephone calls during dinner from people trying to sign you up as an electric customer. And there will be quite a gradient of prices. Wal-Mart may be able to buy power for 2 cents per kilowatt hour; an office building may pay 3 cents; a large residential customer, 5 cents; and some poor suckers left behind will be buying it for 8 cents.

Hobbs: During pilot deregulation programs in New England, we've seen things like utilities offering free Ben and Jerry's ice cream to new customers. One interesting trend is "green power," where a utility will emphasize that it sells power from "clean" sources. Some people are willing to pay a premium for power that causes less pollution, just as some people will pay a premium for paper towels made from recycled paper.

Gazette: Might deregulation lead to less pollution?

Boland: There are three ways you can get environmental compliance. One is "command and control." You set a regulation. If you catch somebody violating it, you punish him. Another way is economic incentives. You construct systems where the company has a reason to do things a certain way through some kind of a tax or transferable permits. A third way, which is often neglected when people talk about this, is voluntary compliance. There's a lot more voluntary compliance in environmental control than is usually recognized.

Certainly, when you move toward deregulation, voluntary compliance is going to work less well. But you can expect economic incentives to work better. So that's the trade-off.

Hobbs: If we create systems that provide economic incentives for cleaning up, you may get even more environmental cleanup. The sulfur dioxide allowance system works well. Each year, a utility gets permits to emit so many tons per year. If the utility reduces its pollution and emits less than its allowance, it can sell its extra permits and get some revenue. But if it's very expensive for a utility to clean up its operations, it can just go out and buy more permits from someone else. Right now, it's just a cost, like anything else.

With restructuring, there's an even stronger incentive to try to minimize that cost. Similar systems will be set up for nitrogen oxides, which are the major precursor to the ozone problems that we suffer each summer in the eastern United States. If you have those economic incentives in place, I don't think there's going to be a problem with deregulation.

There are other reasons I'm optimistic. After deregulation, you'll have more incentive to run your plant efficiently. An efficient plant is generally less polluting. You'll also have incentives to retire your older, dirtier plants because they are less efficient. And the newer power-generation technologies are much cleaner. Replacing plants will result in emissions going down. Even though more electricity will be produced in a deregulated system because prices will be lower, I think that after the next five years we'll see a much cleaner industry.

Gazette: How do you think government leaders should move into the uncharted waters of deregulation? Should they be cautious, or aggressive?

Boland: Deregulation is potentially good. But we're making a transition between a regulated monopoly and a mixture of regulated and competitive interlocking marketplaces. That's complicated. We don't have a history of doing it. There are two ways to proceed. One is to just blunder in, make massive mistakes and then try to patch them up later. Another is to worry about all of these things first, then try to do a good job right from the beginning.

Hobbs: In the old regulatory way of doing things, everything had to be studied to death before you could do anything. The studies took forever and were often wrong anyway. So I'm a believer in experimentation: Let's try it and see. California's willing to step ahead boldly. Let's see what happens there. Let's learn from their mistakes. However, we can't throw out all the rules. If you're talking about human safety and system reliability issues, you don't want to go into this blind.