It was supposed to be the next Gold Rush. Just a year ago, investors and consultants predicted that deregulation of the $210 billion U.S. retail electricity market would usher in rip-roaring competition. Expecting hordes of newcomers into their business, utilities threw themselves into a merger frenzy.
But deregulation is proving to be anything but an overnight sensation. Competition is barely trickling into the business of supplying electric power. And there are lots of reasons why. State regulators are setting rates and imposing "transition" fees that make all consumers--even those who switch to new suppliers--pay for the "stranded costs" of obsolete power plants. The sheer complexity of crafting new power-distribution and pricing systems is also causing delays.
SECOND LOOKS. Then there are the limits written into the deregulation laws: California's doesn't immediately cover the roughly 30% of consumers served by municipal power operations. Illinois' law requires utility customers who opt to switch providers to pay an exit fee through 2006. Little wonder consumers aren't rushing to change electric companies.
The biggest problems have cropped up in the state that was to be deregulation's star, California. The $23 billion market was supposed to open to competition on Jan. 1, but that has been delayed so programmers can fix a system to set daily prices for electricity marketers. Now, California is putting off a market opening until March, citing poor performance of a crucial power pricing system.
No biggie, though; few consumers seem charged up by the idea of deregulation. California's investor-owned utilities say transfer requests are well behind expectations. As of Dec. 22, Pacific Gas & Electric Co. had received 10,000 applications for switching. Southern California Edison Co. has lost just 1% of its 4.2 million customers. Says R. Thomas Beach, vice-president of utility consultants Crossborder Energy Inc.: "The requests have been less than overwhelming."
It's not just California, either. Across the nation, power companies and regulators say true competition is years away. Because most states are granting utilities' requests to recover costs of obsolete plants from all consumers, "the markets won't open up and be as competitive as people would like to see," says Stephen W. Bergstrom, president of power marketer Electric Clearinghouse. "I think customers will see this as a facade."
Would-be competitors are also taking another look. Hagler Bailly Inc., a consulting firm, estimates that the available retail electric market in the top 10 states amounts to just $1.5 billion a year. That helped persuade Oregon electric giant PacifiCorp to back away from plans to hop the border and sell throughout California. "We just didn't see enough opportunity to justify the expense," says Manager of Regulatory Policy Carole Rockney.
Not everyone is retreating. New Energy Ventures, a startup power marketer led by former Southern California Edison President Michael R. Pevey, has signed up 1,500 business customers in California. Enron Corp., which invested $100 million in 1997 to establish a retail energy marketing business, says it had 13,000 California residential customers as of Dec. 19. Still, Enron no longer plans to automatically enter pilot programs, as it has been doing.
Still, there are some bright spots. Pennsylvania had 900,000 customers apply for 250,000 spots in a pilot program that began on Nov. 1. "We're not getting all the savings [we would] if we went to full competition," concedes Pennsylvania Public Utility Commissioner John Hanger. "But it is possible to get some of the potential savings." Who knows? Maybe a few more nuggets like that can incite a gold rush.