Electricity Deregulation: What it is and What it Means to You?

By: Michael S. Payne, J.D., L.L.M.

Executive Vice President & Corporate Counsel

The deregulation of electricity presents an unprecedented opportunity for many consumers to save money. When a state deregulates its electricity market, the electricity supply component is separated from the transmission, distribution, servicing, and administration of electricity. This opens up a state market to competition for the sale of electricity.

Before deregulation monopolistic electricity utilities performed all of the basic functions: generation, transmission, distribution, servicing, and administration. Generation, the component being deregulated, is the actual production and sale of electricity at a power plant using coal, gas, oil, wind, water, or nuclear power. The expense of generating electricity is dependent upon fuel, operation, and plant maintenance costs. Transmission is the delivery of electricity from the generating power plant to the substations within a single utility’s network or to multiple systems involving several utilities. The owners of transmission facilities charge others for the use of their lines. Distribution, is the delivery of electricity from substation to consumer, and includes the servicing and administration functions of individual customer meter reading, billing, connection to the electric system, and repair of local electricity lines.

Deregulation of electricity began in the early 1990's with the passage of federal legislation including the Energy Policy Act (EPA). This act established federal guidelines mandating fair access to transmission networks and initiated a competitive market at the wholesale level, which included large industrial accounts and municipal users. This was followed by open access to the wire system delivering electricity to commercial and residential markets. This is referred to as deregulation at the retail level. Today, electricity deregulation is being implemented on a state-by-state basis for commercial, industrial, and residential customers.

As a result, consumers in a growing number of states can seek the best combination of price, reliability, and customer service. While cost is important, the choice of supplier is critical. Ultimately, a supplier’s ability to live up to its promises will prove only as good as its technology, resources, and ability to compete with other electricity management companies.

Utility companies that continue to provide all services must vie for position in a market that is increasingly competitive on a component level. A number of companies may only generate electric power effectively. Some utilities have sold their generating plants while others are buying plants in regions outside of their local operating areas. Still others may wish to concentrate on well-maintained and efficiently operated distribution systems.

Another issue of concern for consumers is “stranded costs”, one of the main reasons many states delay deregulation. These expenses represent the initial costs incurred by utilities in building their infrastructure of power generating plants, transmission lines, and distribution systems to support future customer service. Often, in order to recoup a portion of their investments, under deregulation utilities negotiate with state public utility commissions the ability to charge all customers in their service territory a prorated share of the stranded costs over a period of time. This surcharge, which may effectively negate any savings from competition, is reflected in the individual customer's bill, regardless of which company ultimately supplies the customer electricity.

Therefore, in order to make an informed favorable business decision in a deregulated electricity market, customers must understand and weigh many factors including the price of electricity, reliability of suppliers, associated fees such as stranded costs, customer service, and supplier experience. Consumers in deregulated states who do not choose an electricity supplier will “default” to their current local utility and pay a predetermined rate and may miss substantial savings opportunities.

To obtain a rate lower than the default rate available from utilities, customers not only need access to “real-time” information and access to favorable offers from qualified suppliers, they need to have a thorough understanding of their electricity account information, usage profile, and load characteristics. In order to identify and evaluate savings opportunities your association members can contact Affiliated Power Purchasers Int’l (APPI), an independent utility consulting firm. For more information on reducing electricity and other utility costs contact APPI at 800-520-6685 or info@appienergy.com.