During the past two decades, Americans have seen sweeping reform in the airline, telecommunications, and electric utility industries. The thought at the beginning was that mandating competition in these regulated industries would bring down prices for consumers and maintain or improve quality of service.

"Ironically," writes Consumers Union (publisher of Consumer Reports magazine) in a July 1998 report, "at the moment the Department of Energy finally came out with a plan for deregulation (in the utility industry), three of its sister agencies... admitted that consumers were being hurt by lack of competition and anti-competitive pricing practices." These agencies oversaw deregulation in the airlines, cable TV, and railroad industries.

In the same report, Consumers Union noted that, at the time, the top ten generators of electricity in the U.S. controlled 67 percent of the market. Since that time, American Electric Power (in Indiana, the former Indiana-Michigan Electric) has sought to merge with Central and Southwest Company (CSW); ComEd in New York is making a similar move to merge with Northeast Utilities which, if successful, would make it the largest utility in the country. Commonwealth Edison of Illinois has made a bid for PECO in Pennsylvania.

It appears the cry for competition in the utility industry may be nothing more than a maneuver for further consolidation and excess-profit making. In this sense, competition is a euphemism for oligopoly. That is, a few companies are able to set the price, in this case, of electricity.

As with many other efforts to spur "cost savings," the danger is that large customers, such as large industrial ratepayers, are able to play while residential and small commercial customers get to pay.

Consumers Union estimates that restructuring the electric industry will raise some costs for residential ratepayers. Price discrimination, marketing costs, price manipulation could wipe out any gains that residential costumers would gain. For instance, in California, Enron (a multinational firm that invests in gas and renewable power generation) ended up paying $300.00 per residential customer in marketing costs. Enron will not pursue additional residential customers in California.

Moreover, in a follow-up study, the Consumers Union studied price increases in the summer of 1998 which were caused by hot weather. The report concluded that price manipulation was occurring that was "innocent, if not benign...inept if not illegal." In some instances, utilities were withholding power from the grid to drive up prices. In other cases, they were declaring emergencies about an overload of the transmission grid and keeping additional supply out of their areas. Also, certain brokers sold power to themselves "to send the impression to others that the price (of electricity) is rising." Finally, utilities may favor affiliates with access to transmission lines blocking other suppliers. These kinds of market manipulations drive up prices.

Consumers Union concluded, "There is too much gaming and manipulation of markets to dismiss the problems..." Most importantly, Consumers Union made the point that "simple claims that the market will take care of itself is not an answer."

Other researchers are watching how utilities have attempted to shift a bulk of their costs to residential and small commercial customers. Periodically over the past 20 years, utilities have wanted to shift an inordinate amount of their costs to the distribution system. Under restructuring, electric utilities view assigning costs to the distribution system (the poles and wires) as a means to maintain a strangle hold on their current customers while reducing incentives for energy efficiency and cleaner sources of power generation. These "fixed charges" also give them a very stable income. Economist and consumer advocate William Marcus writes, "The most extreme cases... are in Nevada, where Nevada Power proposed residential customer charges in the range of $40 to $55 per month before any electricity is used, and Sierra Pacific...proposed charges of about $20 per month.

Of course, if successful in assigning costs of the distribution system -primarily to residential and small commercial customers, utilities can reduce the cost of power to large industrial and commercial customers.

In general terms, an article published in Public Utilities Fortnightly indicates residential rates are remaining flat or increasing in the country while industrial rates are dropping. This is particularly true in states where restructuring in the electric utility industry is at some stage of implementation. The authors suggest, "...this increase in rate differential has occurred despite flat or falling power consumption per customer."

There are indications that there are not enough consumer protections in place to ensure that a deregulated utility market can be fair and reduce electric costs for all customers. Even if such protections exist, can there actually be competition given the rate of consolidation in the electric industry?

As we have seen, there are many risks for residential and small commercial ratepayers in a restructured electric utility market. In most states, restructuring legislation has been written by either utility companies or industrial interests. These laws passed initially in high-cost states. The high-costs are inevitably associated with nuclear power. In order to maintain a competitive edge, the nuclear industry has been successful in bailing themselves out to the tune of $300 billion, by some estimates. These "stranded costs" (the unrecoverable costs of running nuclear power plants in a competitive market) are born mainly by residential and small commercial customers. Industrial customers, because of their size and influence, have been able to negotiate good prices for themselves, while electric utilities continue to use residential and small commercial customers as their cash cows.

These "reforms" have gone forward with little thought given to the impacts on electric rates over time for all customer classes or even if "competition" is a viable option for the electric utility industry. In Indiana, there is currently no public process to even determine whether restructuring would be beneficial to the state. There is no public forum to debate the issues. Policy makers are waiting for the utility industry to come up with something. The utility industry has not been forthcoming with regard to its own process or specific proposals.

There is only one state study that has given us an indication of how the price of electricity generation may play out over time. The State Utility Forecasting Group (SUFG) at Purdue University is charged with projecting the capacity needs of the state. Recently, SUFG’s report included impacts on prices in a regulated and deregulated market. It projected the costs of electricity generation over the long-run to be 5.02 cents and 5.0 cents per kilowatt-hour respectively. Although it projects generation costs initially to be lower in deregulated surrounding states, such as Ohio and Illinois, SUFG, assuming that Indiana does not deregulate, estimates that by 2003 those costs will be higher in those other states. If we deregulate, the study indicates a slight advantage for Indiana until about 2007 where generation prices become essentially the same throughout the region. The study does seem to beg the question of why deregulate at all. However, this study does not attempt to sort out if market power abuses will occur, what kind of consumer protections we will need, or if restructuring is beneficial to all customer classes.

Access to electricity is obviously essential to quality of life and economic vitality. It is simply irresponsible to move blindly forward expecting a plan for deregulating the electric utility industry in the 2001 session of the Indiana General Assembly without exploring some fundamental questions. Other states have.

The State of Colorado hired a consultant to perform a market power study. Because of the state’s low electric costs - similar to Indiana’s - and the fact that two utility companies control 70 percent of the market in the state now, Colorado has determined that restructuring is not worthwhile.

In Indiana, we should be taking this first step. What is the impact of restructuring the electric utility industry going to have on all ratepayers? Is restructuring worthwhile? If it is, what kinds of consumer protections and institutions are needed to curtail electric utility company abuses? The prevailing attitude in Indiana seems to be that the market will take care of these issues. We know this is not always the case.

• Contact your State Senator, State Representative, and Governor O’Bannon. Tell them to protect Indiana’s residential consumers and the environment when considering electric restructuring proposals. Tell them you are paying close attention to this issue through CAC.
• Arrange to have a CAC organizer address a group to which you belong.
• Write a letter to the editor of one or more Indiana newspapers.

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