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Deregulation praised, panned after first year

High costs trip up new competitors 07/30/00


Ron Spinner is happy to pay an extra $15 to $20 a month on his electric bills this summer.

He's paying more because he switched to, a Vermont-based energy company trying to lure customers to switch electric suppliers because its power produces less pollution than its competitors.

''At least I don't feel guilty about running the air conditioner," said the 33-year-old marketer from Summit.

But Spinner doesn't have much company. It's been a slow haul for in New Jersey since it began marketing its so-called green power here earlier this year. So far, it has attracted only a fraction of the 20,000 customers it signed up in neighboring Pennsylvania when the electricity market was deregulated there, said John Holtz, a regional manager for the company.

To many critics, the inability of companies such as to gain a foothold in the Garden State shows that energy deregulation is a failure.

The state broke up its electric utilities a year ago Tuesday. The result? Fewer than 100,000 of the more than 3 million electricity customers in the state have chosen a new provider. That's far from the lofty predictions of those who pushed deregulation as a way to help consumers lower their bills.

''Let's just say a lot of problems are showing up," said William Potter, a Princeton lawyer specializing in energy issues. "This deregulation bill was premised on the assumption that there would be a surplus of power that would drive energy costs down. In fact, supplies are tighter and costs have gone up."

Among the unintended consequences of deregulation:

Higher wholesale energy prices have quashed competition, with only a few suppliers bothering to offer residential customers price savings.

Some commercial and industrial customers have not gotten the lasting savings they expected. Many were bounced back to their original supplier this summer when the utility they chose could no longer meet the season's peak demand.

More worrisome, the breakup of electric monopolies has stirred concern among experts around the nation about the reliability of the system itself.

New Jersey narrowly averted blackouts earlier this year when a number of power plants were taken out of service for routine maintenance. Many other areas around the nation have experienced their own power shortages as suppliers struggle to deliver power in times of extreme heat.

In New Jersey, the potential for problems has been eased so far this summer by mild weather.

''We're having rolling blackouts because of competition," said David Schanzer, a utility analyst with Janney Montgomery Scott. "We've had contract defaults on delivery. All I can say is we're very blessed to have the kind of July we're having."

Municipalities also are disappointed. They had hoped to form buying pools in order to get residents a break on price, but their efforts have been frustrated by tough bureaucratic rules.

The higher cost of electricity in the wholesale market has made it virtually impossible for new energy suppliers to beat the prices being offered to residential customers by the incumbent utilities, which were established by state regulators.

The old monopoly utilities, meanwhile, can't pass the higher cost of buying energy on to customers because of a cap on rates. But even those rules are muddled.

Conectiv and GPU Energy can go before the state Board of Public Utilities after a four-year transition period to try and recover those costs from consumers. That could lead to a spike in rates, some experts said.

PSE&G, the state's largest utility, with 2 million customers, traded the right to seek redress for being allowed to transfer control of its power plants to an affiliate.

''The program has a flaw which has temporarily killed it," said Bill Kinneary, a senior vice president at KeySpan Services, a Brooklyn based supplier which signed up about 5,000 residential customers in the first few months, but stopped when the prices of energy soared in May. "We can't find the pricing that will make this work."

The same scenario has occurred with the other two most active suppliers in the residential market -- AES Power Direct and Energy America, which signed up 25,000 and 30,000 customers before the spike in energy prices. Now, both are on the sidelines for the time being.

''I would call it a limited success," said Michael Drago, business development manager for Power Direct, which began offering customers a 10 percent discount on bills, but pared it down to 4 percent before it stopped marketing.

A similar spike in natural gas prices has led suppliers in that field to stop marketing, too, said Ed Graham, president of South Jersey Energy, the unregulated subsidiary of South Jersey Industries, which signed up 10,000 customers in the first couple months of this year before the rise in the fuel.

Despite the bumps in the road, Herbert Tate, president of the BPU and one of those who helped the Whitman administration steer the deregulation bill through the Legislature, is satisfied.

''I'm fine with the way the market is developing," he said. Every day, more and more customers are switching suppliers, and once the volatility in the wholesale market settles down, more suppliers will enter the marketplace, he said.

There are some signs of a decline in electric prices, in part because of a summer that has seen few days with temperatures above 90 degrees, experts said.

''The forward prices are dropping down as we speak," said Steve Gabel, the head of an energy consulting firm Gabel Associates in Highland Park. "There's a good possibility that pricing will stabilize as new generation plants come on line."

Tom Michelman, managing editor of Retail Energy Foresight, agreed.

''In the long term, prices will go down," he said. "It might get a little bit worse, but it is eventually going to get better."

Al Koeppe, president and chief operating officer for PSE&G, said the reason more suppliers have not entered the marketplace in New Jersey is because of the pricing uncertainty and because they have not yet figured out how to meld other services with electricity.

''The marketplace grows when you begin to bundle services," he said.

Others aren't as optimistic.

''It's a failure on all accounts," said Joel Shain, a lawyer who unsuccessfully sought to form an energy buying pool for Monroe Township but was stymied when the state ruled that GPU Energy did not have to hand over its customer list to local officials.

''What we have in New Jersey is deregulation without competition," he said.

Potter, too, thinks the old monopoly utilities, particularly PSE&G, have been big winners under deregulation.

''They're in a position to run distribution monopolies and to parlay their control of the rights of way into other businesses like telecommunications," he said.

Given the tremendous dislocation occurring within the industry, Schanzer, the utility analyst, said he often wonders why states have rushed to deregulate the field.

''Who benefits from it?" he asked. "The legislators and congressmen who want to make a name for themselves, but in the end, I'm not sure they're going to get much credit."

-- Martin Thompson (, July 30, 2000


In short, Energy (electrical) deregulation always was/is/will be a terrible idea. Not for cost issues, but because of the threat to a dependable power system. I am a conservative "freemarket" guy down the line -- BUT -- THE most important component of ANY industrial country's infrastructure must not be left subject to decisions made in the name of profit or "share holder value". This is almost as stupid an idea as if they were to deregulate the military. In my mind this is clearly an issue **nearly** equal to the idea behind "providing for the common defense". The DOE is screaming that the nations power system is in grave danger all because of energy companies are competitors, rather than cooperative organizations. It is damn shame this insane idea ever got past the talk stage -- and -- and the country will suffer. JB

-- Jackson Brown (, July 31, 2000.

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