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		 Subject: Utilities, Electric: Deregulation: Who Pays for Deregulation?


 Who Pays for Deregulation? Pam Kufahl ? 09/30/2000 Utility Business 
Copyright 2000 by Intertec Publishing Corporation, a PRIMEDIA Company. All 
rights reserved. 

As the gas and telecom industries can demonstrate, deregulation does not 
always live up to its promise.

In San Diego these days, consumers are cursing the day they ever heard about 
electricity deregulation. As customers of San Diego Gas&Electric can attest, 
deregulation has yet to live up to its promise. 

Just after San Diego Gas&Electric President Edwin A. Guiles announced a $390 
million dividend for customers as a result of the company's successful 
transition to a competitive marketplace, the utility's customers were hit 
with their highest electric bills this year. Many of those bills were two to 
three times higher than the preceding month's bill.

The San Diego saga has left many consumers, utility industry leaders and 
policymakers around the country wondering about the future of efforts to shed 
decades of industry regulation. All are wondering whether deregulation can 
work - and whether benefits can broadly flow. They are watching intently as 
Californians sort their way through the shambles of the state's early 
deregulation efforts. Some industry insiders suggest these higher prices will 
spread to other deregulated states in the future.

Concerns about deregulation's effects on customers began even before this 
summer's events. Natural gas prices have been increasing since late 1997. The 
increases haven't been as noticeable on winter gas bills because winters 
throughout much of the country have been mild. However, drilling slowed 
starting in 1997, and natural gas reserves have dwindled to two-thirds of 
what they will need to be by Nov. 1. Utilities were purchasing gas during the 
summer to build up their reserves for winter. In addition, the high summer 
temperatures meant utilities ate into their existing reserves to generate 
more electricity.

Despite deregulation, residential gas customers may not be seeing as large of 
a decrease in their gas bills as commercial and industrial customers for a 
simple reason. Restructuring of the gas industry ended the cross subsidies 
that residential customers were receiving. While deregulation lowered their 
gas rates, the loss of these subsidies increased costs a bit. The result was 
that their savings were less than the savings of larger customers who never 
benefited from cross subsidies, according to Bruce B. Henning, director, 
energy practice at Energy and Environmental Analysis in Arlington, Va.

The telecom industry has been deregulated for several years. While 
residential rates have decreased in that industry, the highest volume users 
and business customers have benefited the most from deregulation.

The electric industry has followed suit so far. As the power industry is 
deregulated, utilities will have no choice but to serenade larger commercial 
and industrial customers, according to a February 2000 report by Dr. Eugene 
Coyle, independent economic counsel. The cost to go into a new area and 
market to new customers is so high while the return on residential customers 
is so low that the pursuit of residential customers just may not be worth it 
for non-incumbent utilities. This could mean that residential customers will 
be left out of the opportunities for electric deals that larger, power-hungry 
commercial and industrial customers are offered, according to the report, 
which was released by the American Public Power Association.

Besides targeting customers who use the most power, energy providers will 
market to those who have more disposable income, which translates into the 
ability to buy bundled offerings. Customers who don't fit into these areas 
will be ignored, Coyle says.

Kyle Datta, vice president and head of the utilities practice at consulting 
firm Booz Allen&Hamilton, doesn't agree completely with Coyle's predictions. 
"If you look at the customer base, there's certain commercial and industrial 
customers that are more profitable," Datta says. "They [utilities] will take 
actions to retain them. Those that are unprofitable they will keep, but they 
won't spend as much money marketing to them."

Besides, Datta says, it just makes good business sense to offer discounts or 
special services to retain the most profitable customers. However, utilities 
understand their social obligation to provide power and will not drop 
customers, he says.

Don't tell that to customers of DTE Energy Co., a deregulated energy 
marketing company that served residential and business customers in the 
Northeast. The company recently closed its DTE Edison America affiliates in 
New Jersey and Pennsylvania.

"We believe that we have learned enough to conclude that the competitive 
residential and small commercial mass market is not profitable in this early 
stage of development," Jean M. Redfield, president, DTE Edison America, said 
in a statement released by the company. "A fully deregulated market with 
large numbers of residential and small business customers 
participating...remains at least a couple of years away."

The company did not close its DTE Energy Marketing affiliate in the same 
states. That affiliate markets electricity and related energy services to 
industrial, commercial and institutional customers.

However, sometimes, deregulation doesn't even pay for large commercial and 
industrial customers. In California, some energy retailers have withdrawn 
from the market, while others have been shedding customers. Commonwealth 
Energy of Tustin and AES New Energy of Los Angeles, two new entrants into the 
California market, recently had to drop more than 18,000 customers - 
primarily commercial and industrial customers in the state. The two companies 
have said that the rules of deregulation in California have made it too 
difficult for them to compete. Commonwealth Energy had amassed 95,000 
customers in the area and notified the 18,000 that it could no longer sell 
them electricity. AES New Energy, which serves mainly large businesses, 
notified more than half of its 220 customers of the same thing. In 
California, 15.9 percent of industrial customers and 7.2 percent of large 
businesses have chosen new suppliers. Only 2 percent of residential customers 
in the state have switched.

However, residential customers still find it more difficult to benefit from 
deregulation. In most markets, new entrants can't make much money on 
residential loads under the current rules unless they sell a bundle of 
products - power, gas, telecom, financial service offerings - to make their 
marketing investment worthwhile.

"They must sell a large number of products to residential customers because 
electricity is a low-margin product," Datta says. "You have to offer a 
discount and by the time you offer a discount, then the spread between the 
actual price and the wholesale price is too great. So, you have to find 
higher-margin products" such as telecom.

Pennsylvania's Condition Pennsylvanians are closely watching the situation in 
California. The state deregulated in 1999. About 10 percent or 500,000 
customers in Pennsylvania are being served by alternative providers - and 
400,000 of those are residential customers. The state has imposed rate caps 
to help ensure that residential customers can't be harmed by volatile prices. 
Some of the caps extend through 2010.

"It is important that we have the rate caps," says Sonny Popowsky, consumer 
advocate of Pennsylvania. In addition, all incumbent utilities in 
Pennsylvania agreed to rate reductions of 3 percent to 8 percent for about 
one to two years.

"To me, one of the most important issues was to make sure you didn't see a 
cost shifting to residential customers," Popowsky says. "We took steps to 
prevent that. Whether it works remains to be seen."

Is "Going Public" the Answer? Some consumer groups are calling for a slow 
down or repeal of deregulation in California, warning that higher rates will 
occur in other deregulated states in the future. Harvey Rosenfield, president 
of the Foundation for Taxpayer and Consumer Rights, says that deregulation 
just creates an unregulated monopoly. He calls deregulation "the most 
monumental mistake ever committed by public officials."

"We're all going to pay for the greed of this industry unless we go back to 
public control over our utility system," Rosenfield said in a statement 
released by the organization. Calls for public control echo Coyle's February 
report. Coyle argues that with a cost structure like that of the electric 
industry, there has to be public control either through regulation or public 
ownership.

"The picture isn't good unless there's some type of public intervention," 
says Coyle.

But another answer may lie in aggregation. An American Public Power 
Association report, "Promoting Competitive Electricity Markets Through 
Community Purchasing: the Role of Municipal Aggregation," says that 
residential and small business consumers must be equipped with the kind of 
bargaining power that large consumers have in order to reap equal benefits 
from deregulated electricity markets. Municipal aggregation programs can 
provide these small consumers with enough market weight to capture the 
economic benefits they are missing. Some residential groups are giving this 
option a try. Public housing authorities in many cities are putting together 
consortiums to bid for energy for its members. In March, 21 towns and two 
counties, representing 185,000 electricity customers, came together as the 
aggregated group Cape Light Compact and chose a mutual power supplier.

Online services, such as LowerMyBills.com may also provide answers to 
residential customers. Sites like this one help customers to find the least 
expensive provider of services including electricity, gas, telecom, cable TV 
and insurance.

While consumer groups may complain about high rates and some industry 
insiders may project a darker future for residential customers, other experts 
saythe current situation is just a matter of a newly deregulated industry 
experiencing growing pains.

"Over the long term, competition is an effective way of disciplining prices," 
says Henning. "In the long term, economists look at restructuring as a way to 
keep rates down."

Competition should live up to its promise of lower rates for everyone, but 
residential customers may have to resign themselves to the fact that 
larger-volume users will see greater savings from deregulation than they 
will. It's only good business sense on the part of the service providers. 
Folder Name: Utilities, Electric: Deregulation Relevance Score on Scale of 
100: 98______________________________________________________________________ 
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