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Electricity Prices in Transition |
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The push by some States to restructure electricity markets progressed rapidly throughout the late 1990s. Although the energy crisis in California during 2000 and 2001 slowed the momentum, 19 States and the District of Columbia currently have some form of restructuring in place. In addition, Washington State, which has not restructured its electricity market, allows its largest industrial customers to choose their suppliers. Many States put in place special regulations to protect customers during the transition. For most, this meant a specified period of guaranteed price stability in the form of rate cuts or rate freezes, after which the market was expected to be sufficiently competitive to reduce the need for price regulation. Low transitional rates in most cases were mandated by State utility commissions and offered by regulated utilities to customers who could not or did not choose a competitive supplier—a service often referred to as Standard Offer Service (SOS). Some States required utilities to offer a separate service, often called Provider of Last Resort (POLR) service, for customers who left, or were dropped by, their competitive suppliers. POLR service sometimes offered less price protection than SOS. The late 1990s saw a promising start to competition. The fuel prices paid by generators were low enough for competitive electricity suppliers to offer rates slightly lower than SOS prices. From 2000 on, however, rapidly increasing fuel prices caused many competitive suppliers to go out of business, because the price of wholesale electricity rose above the price at which they had contracted to sell it.
Since 2004 many State-mandated transition periods with fixed prices have been coming to a close, with competitive retail markets still not developed for large groups of customers. Most residential and small commercial customers have no offers from competitive suppliers, leading many State utility commissions to consider the possibility of extending regulated, cost-of-service rates for SOS customers. Most of those States are now trying to jump-start competitive markets by having electricity suppliers bid for the right to sell energy to SOS customers. Table 2 summarizes the changes that have been made to SOS pricing in key regions and States since the start of restructuring. It also shows the percentages of retail load currently being sold directly to consumers by competitive retailers. Most States initially required distribution utilities to offer SOS at a discount from regulated rates throughout the transition period, while a few States experimented with options that encouraged some competition. Texas and Massachusetts required utilities to offer both SOS and POLR service. The SOS provided rate stability and price reductions; the price of POLR service was determined by competitive bid. New York offered rate cuts for only 1 year and required most of its large SOS energy users to pay hourly market prices. In Maine, winners of competitive bids supplied SOS load—a method that was soon adopted by Pennsylvania for its largest utility. Both States still had mandated rate caps, however, so that in years when fuel prices were too high for load to be served at prices below capped rates, too few suppliers bid to provide SOS at competitive prices. Maine responded by raising rate caps, which has allowed the auction program for SOS to attract multiple bidders and competitive suppliers to attract more retail customers. In 2002, New Jersey held the first auction to supply Basic Generation Service (its name for SOS) for the last year of its designated transition period. The auction attracted sufficient bidders, and New Jersey has continued to hold an annual descending clock auction to supply SOS. In a descending clock auction the bidding starts high, and prices “tick down” when supply is greater than demand. The auction ends with the price at which the amount of supply equals demand. Other States have considered the descending clock auction as a means of providing SOS competitively to customers who do not have access or have not chosen retail competitive suppliers. Illinois, which adopted the method, recently held an auction for its 2007 SOS load. Other States have decided to jump-start competition as transition periods end, rather than extend rate caps. In the East, Maryland (starting in 2004), the District of Columbia and Massachusetts (since 2005), and Delaware and New Hampshire (since 2006) have required utilities to submit requests for proposals to serve load for SOS customers and have chosen the lowest bidding supplier. Pennsylvania has been negotiating with more utilities to offer SOS for competitive bid. Currently, the State has a proposed rulemaking out for comment that seeks to require each utility at the termination of its transition period to pass through the cost of competitively bid SOS. In Ohio, FirstEnergy has tried to hold an auction for the supply of its SOS obligation but has not attracted many bidders. In Texas, where SOS customers were automatically transferred to retail affiliates at the start of competition, utilities whose districts have at least 40 percent of their load supplied competitively can now offer SOS if it is bid out competitively. In addition to bidding out SOS, New York, Maryland, and New Jersey require large commercial and industrial customers to pay hourly market prices if they have not chosen a competitive supplier; subsequently, most large customers in the three States have chosen competitive suppliers that offer price hedges to decrease possible price volatility or, in the case of New York, have bought hedging products separate from energy supply. Each State has a slightly different requirement for the provision of SOS, but usually the competitive proposals are to supply load for periods of several months to 3 years, depending on the customer group or the amount of load in each customer group. The supply decrement or “tranche” is chosen on the basis of the lowest bid. Providing load in this manner is thought to allow prices to be determined competitively, but with much less volatility than would occur if energy were bought hourly on the open market. SOS loads for residential and small commercial customers usually are fixed for longer periods than are loads for customers who use larger amounts of electricity. In AEO2007, electricity prices are projected for 13 electricity supply regions. The weighted average of the prices constitutes the national electricity price projection. For competitive regions, price projections are based on marginal price calculations to simulate the pricing methods of hourly spot markets. It is assumed that a region will take 10 years after the implementation of competitive markets to become fully competitive, and so the amount of competitive load increases by 10 percent each year until 100 percent of electricity load is priced by marginal energy calculations. Until then, part of the load (as well as any other load from regulated States) is priced using cost-of-service calculations. Reliability costs and taxes are added to the weighted average of hourly marginal energy costs and are passed directly to the consumer. Transition price cuts and freezes have been factored into the AEO2007 cases, although most have been phased out as initial transition periods have come to an end. In regulated areas, unless a utility has an automatic fuel adjustment clause, customers do not immediately experience increases or decreases in generating costs, since utilities must wait until the next rate case in order to change rates. As a result, time lags between changes in electricity costs and changes in final prices to consumers are factored into the projections of regulated prices. In past AEOs it was assumed that prices in fully competitive regions would reflect spot market prices and would be passed on to consumers immediately. The end of price reductions and caps in many States, along with the increase in competitively bid SOS load, is expected to push competitive regions closer to that representation of competition; however, most customers in fully competitive regions will not experience price changes immediately in response to changes in market generation costs. In the interest of balancing the growth of competitive markets with price stability for customers, regulators in some States have mandated that SOS contracts be based on spot market prices but fixed for some period of time. Also, competitive supply often is offered at fixed prices for the contract period. Consequently, for AEO2007, lags have been built into the calculation of competitive energy prices to simulate the delay from the time suppliers experience cost changes to the time consumers experience price changes as a result of the length of fixed-price contracts for SOS and competitive retail service. Markets in deregulated regions are expected to become increasingly competitive over the long term, and it is assumed that the lag between the time when energy suppliers pay for energy on the spot market and the time when customer charges reflect those costs will be 6 months. For the short term, the lag is assumed to average 1 year in some regions.
Contact: Lori Aniti |
