Oct 23 - Knight Ridder/Tribune Business News - Robert Manor Chicago Tribune

A decade ago, backers of deregulation of the electric utility industry believed that the average citizen would see lower bills as a result of increased competition to provide electricity.

Now it's clear that beginning in 2007, Illinois residential customers almost certainly will be jolted by much higher utility bills, perhaps as much as 35 percent.

How did we get to this point?

The idea of deregulating electric utilities in Illinois and around the nation was kicked around through much of the 1980s and 1990s.

Backers of utility deregulation envisioned a time when companies would compete to offer electrical service to residences, just as telephone companies do today, and that would bring prices down.

In the energy business, Enron Corp., then an icon of corporate success but later a symbol of wrongdoing, was pushing states to deregulate with the promise that prices would drop as competition increased. The company even sent the Enron Girls, a team of spokesmodels, on a tour of Illinois to win support for competition.

In 1997, Illinois responded by passing a deregulation bill that sounded like a blessing for consumers. Rates for residential customers, who had paid some of the highest utility bills in the nation, were frozen for a decade and cut by 20 percent. That alone would save them an estimated $3 billion.

And there was a belief that the savings would continue after 2007, when the rate freeze would end.

"The philosophical argument for this is that people are better off when they have a choice in supply for something rather than purchasing it from just one company," said former State Rep. Philip Novak (D-Bradley), who was the bill's chief sponsor in the Illinois House.

"Most people involved thought there would be residential competition," added Martin Cohen, the new chairman of the Illinois Commerce Commission, who formerly was leader of the Citizens Utility Board, a watchdog group.

But competition for residential service didn't develop as predicted. The reason? The prices paid for residential service were too low to spur utilities to compete for that business.

"There really wasn't a great demand for a competitive residential market," Novak said.

Cohen said that lack of competition is true not only in Illinois but also throughout the country.

"At the retail level, there is not much evidence that deregulation really leads to more efficient choices, or choices that have significant benefits for consumers," said Severin Borenstein, director of the University of California Energy Institute.

While lawmakers like Novak acknowledged that average citizens weren't clamoring for multiple sources of electricity in the hopes that rates would plummet, big business lobbied hard for deregulation.

"What drove this entire restructuring act was big business," Novak said. "They were the major force behind it."

Why? Because of the economy of scale.

Big electricity users are easier and more desirable to serve than individual homes. Power sellers also don't need to worry about non-payments as they do with residential customers.

A single bill to a major user of electricity might run to a million dollars a month, while it would take thousands of residential customers to reach that kind of usage. So large businesses sought a market that allowed them to negotiate with multiple providers to strike the best deals.

"Some years are great savings," said Craig Sieben, president of Sieben Energy Associates, which has negotiated $250 million worth of electricity deals for business clients. One of Sieben's customers saved 25 percent on electricity costs in 2004, he said.

But Sieben doesn't see the same thing happening with residential consumers. The costs of acquiring and serving individuals is too high, and electric rates too low to entice anyone to compete.

"I wonder whether, in the residential market, if it fundamentally makes any sense for a competitive offering," he said.

The deregulation bill also brought big changes in how the utilities operated, which also plays a role in rates for residential customers.

Commonwealth Edison, for example, got out of the electricity-generating business. It moved its nuclear fleet to an unregulated affiliate of corporate parent Exelon Corp. The company also sold its coal-fired plants and signed long-term contracts to buy electricity.

As a result, ComEd became a distributor of electricity rather than a generator and distributor. With its restructuring, the company could purchase electricity from generating companies controlled by its parent or on the open market.

ComEd and Ameren Corp., which serves southern Illinois, are proposing to buy power through an auction that would establish market rates for electricity. The utilities warn prices would be higher than consumers are used to, in part because energy costs are up, while rates in Illinois were held artificially low by the freeze.

So electric bills are expected to jump sharply in 2007 unless the state and utilities can find a way to ease the pain.

The idea of a big rate increase during an election year has run into fierce opposition from state officials.

Gov. Rod Blagojevich has threatened to fire any Illinois commerce commissioner who votes for the auction, arguing state law allows market-based electric rates only if there is competition to serve residential consumers.

"The proposal that is before the ICC is bad for consumers," said Blagojevich spokeswoman Abby Ottenhoff. "It is essentially asking the ICC to give up its right to approve and review electricity rates. As long as there is no competition in the residential market, that authority is critical."

Meanwhile, state Atty. Gen. Lisa Madigan sued to block the auction.

Not surprisingly, ComEd is looking for a compromise.

"We need a safety net for customers," said Anne Pramaggiore, vice president of regulatory and strategic services for ComEd. "We think it is important to try to ease the transition for customers."

She said the utility is considering capping utility rates increases through 2010 at a single digit, perhaps 8 percent, though Exelon could find itself subsidizing consumers if the auction yields prices higher than the cap.

ComEd says it could hold rates to no more than they were in 1995, when they were higher than now, through the end of this decade. Rates would go up but at a more moderate pace.

Pramaggiore said ComEd hasn't formally proposed the cap on rates but hopes to discuss the issue with regulators and consumer advocates.

"We also want the approach to allow competition to develop," she said.

Some benefits touted

David Kolata, CUB executive director, said Exelon is free to procure power any way it wants, just as long as it provides the best price available for consumers. He said it is vital that state regulators retain authority to review ComEd's purchases of electricity, whether it is through an auction or other means.

"Certainly, consumers are going to need rate protection for the foreseeable future," Kolata said.

Deregulation has produced some benefits for consumers, observers say.

Former ICC Chairman Philip O'Connor said the old method of regulation rewarded inefficiency. Utilities were virtually guaranteed a profit no matter how inept they were at business.

ComEd passed the cost of its inefficient nuclear plants on to consumers, while failing to invest in its transmission and distribution system. The result was high prices and frequent power outages.

"We had seen the results of traditional regulation," O'Connor said. "It didn't work."

Today, Exelon's fleet of nuclear plants are among the best run in the nation, while ComEd has spent billions of dollars upgrading infrastructure to improve reliability.

"It would be a wrong conclusion that [deregulation] somehow has not obtained its basic goals," O'Connor said.

And at least some people argue residential competition could arise once electric rates go up. According to the theory, the rate freeze in Illinois made power so cheap that there was no incentive for anyone to compete against ComEd.

"To get competition into a market, you have to let prices rise and float," said state Sen. Steve Rauschenberger (R-Elgin), who has closely followed utility issues.

"Over time, you cannot protect people from the real price of a product."