You wanted to know the rationale for PA 98-28, the legislation that restructured the electric market to permit retail competition. You also wanted to know how restructuring has fared in other states, particularly its effect on electric rates, and how other legislatures have dealt with the issue in recent years. OLR memo 2006-R-0048 addresses how PA 98-28 and subsequent restructuring legislation has affected rates in Connecticut.

SUMMARY

The most commonly cited rationale for PA 98-28 was that it would reduce electric rates, which were among the highest in the country, and thereby encourage economic development. A number of the act's proponents raised environmental arguments in support of it, such as providing additional funding for conservation and renewable energy programs. They also noted that the act would reduce the state's dependence on fossil and nuclear energy.

The experience of electric restructuring in other states is mixed. Nationally, there has been little development of competitive markets for residential customers, the vast majority of whom continue to be served by their local electric utilities in most states. However, there was a significant market for residential customers in Ohio until recently and

there has been steady growth in the residential market in Texas. A substantially more vigorous market has emerged for commercial and industrial customers than for residential customers in most restructured states, although not Connecticut.

The impact of restructuring on electric rates is unclear. A 2003 study by an advocacy group argued that electric utility customers in the Mid-Atlantic states paid about $ 3. 2 billion less for electricity in 2003 than they would have in the absence of restructuring. However, this study covered a period when many electric companies in these states were subject to caps on their rates. A national study conducted in 2005 by researchers at Carnegie Mellon University found that there was no evidence of a substantial reduction in electricity prices for industrial customers, who are the most likely to choose competitive suppliers.

Following California's early experience with restructuring, several states repealed or chose not to implement their restructuring laws. Other states have delayed the implementation of restructuring. Still other states have extended the period during which utilities are required to provide standard offer or similar types of service to customers who do not choose a competitive supplier. Earlier this year, Maryland legislators approved, over a gubernatorial veto, a plan to defer much of a 72% increase in residential rates for a utility emerging from a cap on its rates.

RATIONALE FOR PA 98-28

The legislators who favored the adoption of PA 98-28 gave a number of rationales for its passage. The most commonly cited reason was to reduce electric rates. When the legislation was being considered, Connecticut's electric rates were among the highest in the nation and a number of legislators argued that high rates were a barrier to economic development. In the House debate on the legislation, Representative Eberle, the then House chair of the Energy and Technology Committee, stated that it would provide significant savings to ratepayers through an initial four-year reduction of 10% from 1996 base rates and the opportunity to get additional savings from the development of a competitive market for generation services. Representative Ferrari, the then House ranking member of the committee, stated:

Without deregulation consumers will not get the 10% rate increase during the transition period. Without deregulation Connecticut electric rates will remain among the highest in the country. Without deregulation higher rates will encourage Connecticut industry to locate out-of-state or to generate their own electricity which will eventually lead to higher rates for our constituents.

(House of Representatives, April 15, 1998)

Senator Somma, the then Senate ranking member, stated that the 10% rate reduction would save customers approximately $ 300 million. Senator Peters, the then Senate chair of the committee, stated that the rate reduction would make it easier to do business in the state. She and Senator Somma also noted that the bill would give consumers a choice in their electric suppliers. Senator Somma anticipated that as new suppliers enter the market, they would drive rates down further. He and Sen. Peters also claimed that the act would encourage economic development by promoting construction of new generating plants, notably those using new technologies such as fuel cells. Representative Eberle stated that the provision in the bill that provided funding for renewable energy investments would support job and business growth and technological development.

Another rationale for the bill was its environmental provisions. Representative Stratton, then House chair of the Environment Committee, argued that the bill would encourage the use of renewable energy and promote the efficient use of all energy resources. She also commended a provision of the bill that would allow consumers, when choosing energy sources, to assess the environmental costs and benefits of the type of energy that they are utilizing. She noted that another provision was designed to ensure that restructuring would not result in further air pollution from increased production of energy from older power plants located in the Midwest and other regions upwind of Connecticut. Senator Daily, then Senate chair of the Environment Committee, made similar arguments and also noted the renewable portfolio standard, which requires electric companies to obtain part of their supply from renewable resources, would reduce the state's dependence on fossil, nuclear, and other types of polluting energy sources.

RESTRUCTURING IN OTHER STATES

Development of Competitive Markets

Approximately half of the states have restructured their electric industries to permit competition. In many cases, the legislation authorizing restructuring required that rates be reduced (as was the case in Connecticut) or capped.

Residential Customers. In most of the restructured states, a competitive market has not developed in the residential sector. As a rule, fewer than 5% of residential customers have chosen a competitive supplier, and continue to be served by their incumbent electric company. In Connecticut the proportion, as of late 2005, was 2. 1%.

A more extensive market for residential customers did develop in Ohio, primarily promoted by municipalities and other entities serving as aggregators. Aggregators group customers together to make them more attractive to competitive suppliers. At its peak in late 2005, a supplier chosen by the Northeast Ohio Public Energy Council (NEPCO) served nearly two-thirds of the residential customers in Cleveland Electric Illuminating Company's (CEI) territory in an opt-out aggregation program. Under this and other such programs, residents of participating municipalities are automatically switched to a competitive supplier chosen by the aggregator unless the resident affirmatively chooses not to be served by the supplier. Normally, the supplier charges a somewhat lower rate than the utility serving the area. However, the supplier chosen by NEPCO defaulted later in the year, and its customers returned to utility service. (Further information about aggregation in Ohio is available at http: //www. puco. ohio. gov/PUCO/Consumer/information. cfm?doc_id=102. ) As of March 2006, fewer than 9% of the residential customers in CEI's territory were being served by competitive suppliers; in the rest of the state the proportion was under 2%.

In contrast, the proportion of residential customers in Texas who have chosen competitive suppliers has grown steadily since the state opened its market to competition in 2002. The statewide proportion of residential customers served by suppliers was approximately 4% in July 2002, 10% in July 2003, and 16% in July 2004, according to the Texas Oublic Utilities Commission. As of June 2005 (latest available information) the proportion was 23. 9%. There are at least ten suppliers in each part of the state, including suppliers affiliated with utilities. The number of residential service offerings ranges from 12 to 21, depending on the part of the state. The number of suppliers and service offerings has increased since 2002.

Texas is unusual in that most of the state is not subject to Federal Energy Regulatory Commission (FERC) jurisdiction. This is because most of the transmission grid serving the state is not connected to the grids serving other states. As a result, the wholesale market in Texas is subject to state rather than FERC jurisdiction, which has affected the development of the retail electric market.

Commercial and Industrial Customers. As of late 2005, virtually no commercial and industrial customers in Connecticut had chosen a competitive supplier (less than 0. 2% of Connecticut Light & Power customers and no United Illuminating customers). In contrast, most restructured states have seen a more competitive market emerge for commercial and industrial customers. For example, in Massachusetts, aapproximately 16% of small business customers are served by competitive suppliers. For medium and large business customers, the proportions are 22% and 64%, respectively, according to the Massachusetts Department of Telecommunications and Energy. Moreover, the proportion of total electric consumption provided by competitive suppliers is substantially higher than these figures. In Texas, more than half of commercial and industrial customers have chosen a competitive supplier. In Maine and New York, more than half of industrial customers have chosen competitive suppliers.

Restructuring and Electric Rates

The rate impact of electric restructuring is unclear. A 2003 study by the Center for the Advancement of Energy Markets, which favors restructuring, estimated that customers in the PJM region (at that time Delaware, the District of Columbia, Maryland, New Jersey, and Pennsylvania) saved approximately $ 3. 2 billion in 2002 due to restructuring. The study is available at http: //www. caem. org/website/pdf/PJM. pdf. However, it is important to note that much of the region was subject to legislatively mandated rate reductions or rate caps at the time of the study.

A 2005 study by researchers at Carnegie Mellon University found that:

1. there is no evidence of substantial reductions in industrial electricity prices in restructured states;

2. states that initially saw high levels of interest on the part of customers and suppliers have seen this interest falter, and the markets for alternatives to utility service have substantially diminished, and;

3. restructuring has introduced several elements into the electric industry that act to raise costs, including uncompetitive markets for services needed to provide electricity to customers.

This study is available online at http: //web. mit. edu/ipc/sloan05/Electricity_Restructuring. pdf.

There have been substantial rate increases in a number of restructured states, particularly those emerging from rate caps. As described in OLR memo 2001-R-0086, in 1999 and 2000 California experienced an energy crisis. Electric rates doubled in the San Diego area between summer 1999 and summer 2000 when the local utility emerged from its rate cap at the same time as wholesale prices skyrocketed. Another utility, Pacific Gas and Electric, which was still subject to the cap, declared bankruptcy in 2001. There were also repeated shortages in electrical supply. In June 2000, the San Francisco area suffered a blackout that caused an economic loss of approximately $ 100 million.

Several other restructured states emerging from rate caps have also seen substantial rate increases. In New Jersey, rates went up by 19% in 2003 when caps were lifted. In Illinois, the Citizens' Utility Board, the state ratepayer advocate's office, asserts that customers will see rate increases of 40% to 60% when rate caps are removed in 2007. As discussed below, residential customers of Baltimore Gas and Electric faced increases of 72% earlier this year before the legislature acted to defer much of the increase.

On the other hand, Texas is often pointed to as a state where restructuring has succeeded. According to the Texas Public Utilities Commission, the state has continued to see new suppliers enter the market. In many cases, these suppliers are offering substantial discounts to the regulated “price to beat” that the incumbent utilities are required to offer until January 1, 2007. As of the end of 2004, the discount offered by competitive suppliers to residential customers was approximately 10%. The state has also seen the addition of new generating plants, which have displaced older, less efficient units, while still contributing to projected reserve margins far in excess of the traditional 15% standard. The commission's 2005 report to the Texas legislature is available at http: //www. puc. state. tx. us/electric/reports/scope/2005/2005scope_elec. pdf.

Although competition has been more successful in Texas than in many other states, Texas customers have experienced major price increases in recent years. The statewide average monthly bill for a utility residential customer using 1,000 kilowatt-hours increased from $ 79. 93 in January 2002, to $ 85. 38 in 2003, $ 99. 95 in 2004, and $ 110. 59 in 2005. By May 2005, the average rate had increased to over $ 125, although the rates charged by competitive suppliers were somewhat lower. The rate increases were primarily due to increases in the cost of natural gas, which is widely used to generate power.

Legislative Responses

In 2001, Nevada became the first state to repeal its restructuring legislation. Subsequently, in 2002, the state allowed very large customers (those with a demand of one megawatt or more) to choose a competitive supplier with the permission of the state Public Utilities Commission. New Mexico repealed its restructuring legislation in 2003. Oklahoma delayed implementation of restructuring in 2001 and no further restructuring activity has taken place. Similarly, West Virginia never implemented its restructuring law.

In 2001, the Montana Public Service Commission delayed the full implementation of restructuring to 2004. In 2002 the legislature extended this date to 2007. In 2003, the state's largest utility (NorthWestern Energy) filed for bankruptcy after making extensive investments in the telecommunications industry. Legislation adopted in 2003, extended the restructuring transition period to 2027 and required that NorthWestern Energy continue as the electricity supplier for small customers in central and western Montana. However, mid-size and large businesses are allowed to shop the market for electricity. In November 2004, NorthWestern Energy emerged from bankruptcy protection.

This year, in light of the limited development of competition in Rhode Island, the legislature extended the end of standard offer service from 2009 until 2020. The legislation also required utilities to file annual procurement plans with the Public Utilities Commission that include energy efficiency, cogeneration, and renewable energy as well as conventional energy sources.

Earlier this year, the Maryland Public Services Commission initially approved a 72% increase in residential rates for Baltimore Gas and Electric (BG&E) when it came out of its rate cap. Subsequently, the legislature passed, over the governor's veto, an act that limits the increase to 15% until May 31, 2007. Thereafter, customers can chose to pay rates at the full market rate or defer part of the increase until full market rates start January 1, 2008. The act also (1) authorizes BG&E to

issue up to $ 600 million in bonds to cover its costs of procuring power on the wholesale market, which customers paying interest on the deferred amount; and (2) removes all of the members of Public Service Commission, which had approved the rate increase. The state's other two major utilities are under similar “rate stabilization” plans which had been negotiated with the state.

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