August 19, 2002
ELECTRIC DEREGULATION IN ILLINOIS AND OREGON
By: Kevin E. McCarthy, Principal Analyst
You asked how electric deregulation laws in Illinois and Oregon address choice and default service for customers who do not choose a competitive supplier.
Like Connecticut, Illinois and Oregon have adopted legislation partially deregulating the electric industry to allow customers to choose their electric suppliers. Illinois' law, adopted in 1997, applies to all customers. Oregon's law, adopted in 1999, differs from those of the other states that have adopted deregulation in that it allows only non-residential customers to choose a supplier. At the same time, the incumbent utilities must offer residential and small non-residential customers a choice of supply options that are regulated by the Public Utility Commission (PUC). Both states allow non-residential customers to buy power from their utilities at rates that vary with price changes in the wholesale market.
Both states have amended their legislation. Illinois accelerated the opening of the non-residential market to competition. On the other hand, Oregon, which was significantly affected by developments in California, delayed the introduction of choice for both residential and non-residential customers.
In both states, utilities must provide default service for eligible customers who do not choose a supplier. In both states, the provision of default service is subject to traditional rate regulation, which ties a utility's rates to its costs (including a rate of return on its capital investments).
The development of competition in both states has been mixed. In Illinois no suppliers are currently serving residential customers. A relatively small proportion (4.5%) of small non-residential customers have chosen a supplier or are buying power from their utility under the variable rate option. A much larger proportion (30%) of large non-residential customers, representing 42% of the load (total energy consumed) of this class, have taken one of these options. In Oregon, approximately 2.5% of residential and small non-residential customers have chosen non-traditional supply options. No non-residential customers have chosen suppliers to date, although some have chosen the variable rate option.
Illinois passed its deregulation law in 1997. It began phasing in choice for commercial and industrial customers starting in October 1999, and allowed all customers to choose their supplier by May 1, 2002. It provided for rate cuts for residential customers of Commonwealth Edison and Illinois Power (the state's largest utilities) effective August 1998. Most customers received a 15% rate reduction by August 1998, and another 5% reduction in May 2002. Rates for all customer classes (as adjusted by the reductions) were frozen, originally through 2004.
Utilities must provide default service to residential and small commercial customers. They must offer this service at market-based prices, which can be either rates set through the traditional rate setting process or the utility's cost of obtaining power at wholesale through a competitive bidding or other arms-length acquisition process. A residential or small commercial customer who chooses a supplier can return to default service upon paying a reasonable administrative fee. But, the utility can require that the customer stay on default service for the next 24 months.
Utilities must offer a power purchase option to their non-residential customers. Under this option, the utility essentially serves as the purchasing agent for the customer. It is entitled to charge the market value of the power it has purchased, plus a fee to compensate it for any administrative costs it incurs in arranging to supply the service. The utility may require that the customer purchase such power under this option for at least one year and may require that the customer provide up to 30 days notice for a purchase of one year's duration, and 90 days notice for a purchase of more than one year's duration. A customer exercising this option can sell or assign its interests in the power it has bought to a supplier or other party. Utilities must inform their small commercial customers of this option at least twice a year through bill inserts or similar means.
Utilities were required to offer real-time rates for their non-residential customers starting in 1998 and their residential customers starting in 2000. For non-residential customers, retail rates vary hour-to-hour based on wholesale market rates. For residential customers, the rates vary on a periodic basis during the day (e.g., separate rates for days and nights). According to Illinois Commerce Commission staff, very few customers have taken advantage of this option because it provides little cost advantage.
In 1998 the law was amended to accelerate the transition to customer choice. Under the amended legislation (220 Ill. Code Sec. 5) the first one-third of commercial and industrial consumers with the greatest load were able choose a supplier by October 1, 1999, the second third by June 1, 2000, and the final third by October 1, 2000. Residential customers received a 5% rate reduction by October 1, 2001, seven months earlier than scheduled under the original legislation. The rate cap for utilities was extended through 2006. In addition, Commonwealth Edison was required to allocate $250 million to environmental initiatives and an energy efficiency fund.
The development of the market has been mixed. Currently, no suppliers are serving residential customers in the state. Of non-residential customers with a peak demand under one megawatt (MW), 4.5% have chosen a supplier or taken the purchase power option. These customers represent about 18% of the load from this class. For larger commercial and industrial customers, market development has been substantially greater. Currently, about 30% of these customers have chosen a supplier or the purchase power option, representing about 42% of the load for this class.
Oregon originally passed its deregulation legislation (1999 Or. Laws ch. 865) in 1999. The legislation differs from that passed in Connecticut and other states in that it only allows non-residential customers to choose their supplier. It allows residential customers to choose several types of service provided by their incumbent utility and regulated by the PUC. These customers can choose services in which (1) prices fluctuate with changes in the wholesale energy market or (2) prices reflect significant new renewable resources. The legislation required the PUC to regulate these options to ensure that the rates under each option reflect the utilities' costs and risks. If a customer does not choose one of these options, he continues to be charged fixed rates that reflect the utility's costs of service. The PUC must report to the legislature by January 1, 2003 on whether it believes residential customers should be allowed to choose their supplier.
Under the original legislation, non-residential customers were allowed to choose their supplier and residential customers were allowed to choose a utility supply option by October 1, 2001. The legislation required the utilities to offer a cost of service option to small commercial customers, and allowed the PUC to order the utilities to provide this option to large non-residential customers. It allowed the PUC to prohibit or limit small commercial customers who had chosen a supplier from returning to the cost-of-service rate.
The law contains several other provisions, including (1) the establishment of a 3% public benefits surcharge on electric bills to fund energy conservation and low-income programs and (2) a requirement that utilities unbundled their costs of providing generation, transmission, distribution, and other services.
The law does not apply to public power entities, which serve about 25% of the state's residents, unless they choose to enter the competitive market. Nor does it apply to small private utilities that serve fewer than 25,000 customers.
The law was amended by HB 3633 in 2001 to delay, until March 1, 2002, the start of competition for commercial and industrial customers and the utility supply options for residential customers. It also delayed the surcharge and unbundling provisions until this date.
The amendment required utilities to provide a cost-of-service option for all customers, rather than just the ones covered by the original legislation. It allowed the PUC to waive this requirement for large commercial and industrial customers after July 1, 2003 if it found that a competitive market existed for them. Specifically, the PUC would have to find, after public hearing and a comment period, that large customers could:
1. buy adequate and reliable supplies of electricity at prices that are just and reasonable and not unduly volatile, and
2. obtain multiple offers of electricity supply within a reasonable period of time.
PUC regulations required that rates for default service must be based on the costs of serving the relevant customer class. For residential and small non-residential customers, the rates for each option must reflect its costs.
The PUC has developed the following options for residential and small non-residential customers in addition to traditional service with rates based on the utility's cost of service: time of use, seasonal (for PacifiCorp customers only), 100% renewable, fixed amount renewable (e.g. 50 kilowatt-hours per month), and fish habitat protection. The PUC developed these options and chose to offer them to small non-residential customers following consultations with an advisory group. The group, which was established by the original legislation, included environmental, municipal, business, and senior citizen groups, as well as the state's two major utilities.
There are currently six suppliers certified and six aggregators registered to serve non-residential customers, with another four supplier applications pending. As August 1, 2002, no customer has chosen a supplier. However, customers representing 9% of the load served by Portland General Electric, the state's largest utility, have chosen to take variable rate service from it. Under this option, the customer's rates vary over time, reflecting changes in the wholesale market. This option was developed by the utilities and approved by the PUC independently of the legislation. Under this option, the customer can choose to have its rates change on a monthly or quarterly basis. The customer cannot return to traditional service for a period of 12 months. Although the state's other large utility (PacifiCorp) also offers this option, very few of its customers have chosen it. Further information on the choices made by Oregon consumers is available on the PUC's Website, http://www.puc.state.or.us/erestruc/statrpt/2002/0802rpt.pdf.