Lets Get On With Competition

Let`s Get On With Competition

Michael Peevey

Why are so many utilities intent on slowing or derailing the progress of electricity deregulation in their service territory?

With few exceptions, utility pronouncements in favor of competition are a sham. In every state so far where competition has begun, utilities have tried (with varying degrees of success) to slow or halt the onset of customer choice. They have made life difficult for competing energy service providers by erecting procedural barricades, advertising the benefits of sticking with the local utility incumbent and implying beneficial linkages between the utility and its unregulated affiliates. In the name of “consumer protection” utilities have barraged customers with misleading information suggesting that doing business with non-utility energy service providers will be (a) difficult and confusing, (b) financially risky and (c) less reliable than the local utility. This is all utter hogwash.

Who loses as these antics escalate? Customers do. Utility foot-dragging reduces the benefits available to customers created by a fully competitive environment, and in many cases creates the false impression that deregulation doesn`t work.

In fact, competition is developing healthily in every state that has truly opened its markets. For example, in the first six months after the California market opened for competition, more than 10 percent of the electric load served by investor owned utilities (IOUs) switched to competitive energy providers. (Customers of public power utilities in California won`t enjoy the benefits of competition until much later.) Among the large industrial users, 25 percent of the load has already switched. This pace of change is much faster than occurred with the opening of the long distance telephone market to competition through Judge Greene`s Modified Consent Decree. It took at least 18 months before MCI, Sprint and others garnered 10 percent of AT&T`s monopoly market share (based on call minutes)–three times as long as it took for energy service providers to win that much market share in California.

Why, then, are so many pundits pointing to California as a “failed experiment”? To be sure, if you look at the number of customers who have switched, things look pretty bleak. Given that the California Legislature financed a 10 percent rate cut for residential customers, there`s little opportunity for competitive energy companies to create significant additional savings for customers. But counting the number of customers who have switched is no more meaningful than counting the number of times Mark McGwire swung and missed during the 1997 baseball season. The important statistic is that he smashed a record 70 home runs.

Competitive energy providers are hitting home runs, too. Customer savings today are not huge, but they`re still better than the status quo. Once we get past the transitional era of stranded debt recovery, things will really become interesting. A study of the effects of deregulation of other “network” industries documents that 10 years after deregulation commenced, real-dollar prices fell 25 percent to 50 percent in the airline, trucking, railroad, long distance telecommunications and natural gas industries. We can expect comparable savings in electricity once we have full deregulation and no more stranded debt recovery.

Perhaps even more importantly, deregulation spurs innovation and creativity. Newly launched energy service providers–staffed by people who haven`t spent all their lives working within a one-size-fits-all tariff system–seem to find more ways to meet customer needs than people born and bred in the utility industry. For example, the combination of “smart meters,” computer systems and telecommunications technology now gives our customers the ability to inspect and analyze their energy use and cost facility-by-facility and in real time, rather than a month after the fact. The technology to do this has been available for years, but never found its way to market in the hands of regulated utilities. Why not? Put simply, there`s a real disincentive to innovate when regulators are looking over your shoulder. If a new idea fails, shareholders eat the cost. If it succeeds, customers get all the benefits. Deregulation changes the equation, creating win-win situations for innovative companies and their customers.

More innovation lies ahead in a deregulated environment. For example, consider distributed generation. Most utilities have been loath to embrace this emerging technology, because it competes against their central station power plants, and even–fully implemented–against their distribution system. Yet the economics of distributed generation are overwhelmingly positive for customers. With the monopoly of utility-owned central station power plants now wiped out by deregulation, I expect distributed generation technologies to win a significant share of the market in the next decade.

Faced with the incoming tide of deregulation, what should utility executives do? Learn to swim. Quit thinking of deregulation as a problem to be fought and a timetable to be delayed. Retool your organization to focus on the needs of customers. Reach outside the utility industry for new thinking about what might be done with and for customers in a truly unfettered competitive environment. Stop trying to beat your competitors in the regulatory arena, and start trying to beat them in the marketplace. If you`re good, you`ll succeed. If you don`t…well, that`s what competition is all about.

Michael Peevey is President and Chief Executive Officer of New Energy Ventures, Inc., the nation`s largest energy service provider. Before co-founding New Energy Ventures in 1995, Mr. Peevey was the president and director of Edison International and Southern California Edison Co. from 1990 to 1993; he was with Edison seven years prior to becoming president. Mr. Peevey will be a keynote speaker at DistribuTECH `99.

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