Buckeye State’s deregulation process hits glass ceiling

By Kathleen Davis, Associate Editor

Ohio’s market has been open for approximately a year, and while there has been progress in the restructuring arena, that push forward seems to have reached a “plateau,” as the spokeswoman for FirstEnergy labeled the current situation. Other power companies seem to agree with that assessment.

“Restructuring in Ohio cannot be called a success at this point, but I wouldn’t throw it away either,” added Becky Merola, director of government affairs at NewPower, a certified alternate supplier in Ohio.

With restructuring, all things are possible

Ohio’s restructuring legislation, SB3 was signed into law by the governor in July 1999, making January 1, 2001 the opening date for retail choice.

The law required five percent residential rate reductions and a rate freeze for five years. The property tax utilities once paid was replaced with an excise tax on consumer bills, and the law required utilities to spend $30 million over the next six years on consumer education programs.

In October 1999, the Public Utilities Commission of Ohio (PUCO) issued an initial set of rules for the transition which included provisions for recovery of stranded costs, corporate unbundling, consumer education and employee protections. In

January 2000, FirstEnergy (Ohio Edison, The Illuminating Company, Toledo Edison) re-filed a transition plant with PUCO to conform with those new rules. Their plan included a requested recovery of $7 billion for transition and stranded costs, operational and technical support changes to allow for retail direct access by January 1 of the following year, plans to transfer control of transmission assets to the Alliance Regional Transmission Organization (Alliance RTO), and corporate separation of regulated and unregulated business.

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Dayton Power & Light (DP&L) also filed its transition plant with PUCO that month, including within its structure the required five percent residential rate reduction for generation, a cap on all prices through December 31, 2004 and recovery of $441 million in transition costs.

Cincinnati Gas & Electric followed all the usual rules of deregulation-unbundling and the like-as well as Ohio’s rules, including that five percent residential rate reduction. They asked for $927 million in transition and stranded costs, deciding to hook up with the Midwest Independent System Operator (MISO).

Monongahela Power requested $13 million in stranded cost recovery and American Electric Power (AEP), which represented Ohio Power and Columbus Southern Power, asked for $974 million.

FirstEnergy’s plan was okayed by PUCO in July, calling for recovery of transition costs through 2006 for Ohio Edison, mid-2007 for Toledo Edison and 2008 for The Illuminating Company. Distribution rates will be frozen through 2007.

DP&L’s transition plan was approved by PUCO in October, with generation rates capped until the end of 2003. Transmission and distribution rates will be capped through the end of 2006. Additionally, DP&L is slated to pay up to $1 million for a voluntary enrollment procedure if at lest 20 percent of its customers have not chosen another supplier by September 30, 2003.

AEP’s plan was also approved in October. More than $600 million in transition costs will be collected through 2007 for Ohio Power and through 2008 for Columbus Southern Power. Rates will be frozen through 2005, and AEP agreed to absorb $40 million of customer education, customer choice implementation and transition plan filing costs.

Allegheny Energy-parent of Monongahela Power-also saw their restructuring plan approved in October 2000. CG&E got a thumbs up as well. So far, everything was running smoothly, according to both power companies and regulatory agencies, and the Ohio market opened for business in January 2001.

The first month saw about 97,622 customers in FirstEnergy territories switch suppliers. At that time, standard offer rates ranged from 3.6 to 4.9 cents/kWh in the three FirstEnergy subsidiary areas.

Circle the aggregates

Aggregation is the second major part of Ohio’s deregulation process, which stems all the way back to June 1998 when PUCO approved Monongahela’s tariff for conjunctive electric service-the first tariff approved in Ohio that allowed groups of consumers to aggregate and negotiate the price they pay for power.

Theoretically, aggregation saves the retailer money by giving them a large group of base customers without having to wade through the expense of changing them over individually, and, therefore, those savings are supposed to be passed on to the consumer of that power. Ohio seems to be a big believer in the aggregation process, working it into the restructuring law and seeing some amount of progress-mostly across the northern half of the state-with municipalities. In fact, after residents in an Ohio city pass an aggregation referendum, the city can lump residents into the program unless the residents follow the exit process, leading some to label municipal aggregation a close kin to “slamming.”

In September 2001, PUCO adopted new rules for local government aggregation, focusing on pushing utilities to provide lists of customers in the local government’s jurisdiction, forming programs for customers to opt-out of the aggregation and the requirements for providing customers with written notices of inclusion.

However you look at it, by April it had a firm hold with nearly 140 cities having chosen to aggregate. Parma was the first city to pass the measure in March of 2000.

Clean, renewable energy supplier Green Mountain took full advantage of the aggregation subtext of Ohio’s deregulation to strike a deal with Northeast Ohio Public Energy Council (NOPEC) in the spring Ohio’s restructuring. NOPEC represents households across eight Ohio counties and encompasses about 400,000 customers.

“Deregulation is working very well in areas of the state where electric prices are high, which is the northeast part of Ohio,” stated Jim Gravelle, director of communications with Green Mountain Energy Company, in an interview with EL&P. “That’s where we have all of our customers who have decided to go with us under the NOPEC agreement.”

“The rest of the state has been very spotty and scattered because the prices are very low already,” he added. “It’s very hard to come in with a greener, cleaner electricity that comes at a premium price. Ohio residents just aren’t used to anything like that.”

“But no one is giving up,” he stated. “We are constantly looking for aggregations.”

Status quo

The Ohio Consumers’ Counsel 90-day update on restructuring labeled Green Mountain’s deal with NOPEC a notable development, stating that it was the “largest single community aggregation in the nation.” However, the Counsel’s 90-day glance at the rest of the market wasn’t quite so positive. They noted that while there were plenty of certified suppliers, few were actively marketing to residential consumers. Thirty-six suppliers-excluding governmental aggregators-had been certified by PUCO at that time. Only two had offers on the table and were soliciting new customers, according to the report.

They also reported generally limited savings at that time, a range from a few cents per month to as much as $100 per year. NOPEC customers were expected to save $10 to $12 million over five years, or about a dollar or two a month per customer.

Despite all the drawbacks, the author of the report, Robert S. Tongren, praised the Ohio market for its slow and steady pace.

Crediting legislators with taking a “wiser, longer-term view,” Tongren stated that “the market development period [through 2005] allows residential consumers to take their time to learn how to shop for and buy electricity in a competitive market without the pressure to make a decision too soon.”

At the time of the report, approximately 152,000 residential customers in First-Energy territories had switched, with 500 AEP, Cinergy and DP&L customers bringing up the rear.

In the fall of 2001, the Ohio Consumers’ Counsel released a second progress report on Ohio’s deregulation process. Author

Tongren took another look at the positives and negatives of Ohio’s process, noting that summer supplies were adequate to meet demand and that consumers continued to be protected from rate hikes. However, those supplier choices had not expanded much.

“Eight months into Ohio’s transition to a competitive electric marketplace, the jury is still out on how long consumers in all parts of Ohio will have to wait to see the kind of supplier competition envisioned by state policy makers with they restructured Ohio’s electric industry,” Tongren wrote. “Currently, just two alternative suppliers are actively marketing to residential consumers. In some parts of the state, consumers still have no alternative suppliers from which to choose.”

Tongren pointed to aggregation as the best opportunity for most consumers, noting that atop Green Mountain’s deal with NOPEC, six of the eight communities in the Northwest Ohio Aggregation Coalition had accepted an offer from WPS Energy Services. Plus, the City of Toledo, the largest member of NOAC, signed a contract with FirstEnergy Solutions.

Ohio’s consumer education organization, Ohio Electric Choice, also sees aggregation as one of the most positive prospects in Ohio’s plan. According to spokeswoman Nancy Manecke, Ohio nearly hit 350,000 residential consumers benefiting from the retail market-almost entirely through aggregation. Manecke went on to note that during November’s general election 24 Ohio communities passed aggregation issues, joining the nearly 140 communities who passed similar measures in 2000.

Right here, right now

As with almost every restructured market at this time, Ohio is not all positive. Shell Energy Services LLC, an affiliate of Shell Oil Company, announced that it was exiting the Ohio retail electricity market in September. It also stepped away from the Texas Electric Choice program.

Shell Energy had to find new service for its 30,000 Ohio power customers and stated that the decision was a result of a slowed deregulation pace. The company stated that Shell Energy would be unable to reach “adequate size nationwide to be profitable in electricity in a reasonable length of time.”

Alan Raymond, president and CEO of Shell Energy stated at the time of the announcement that “volatile energy prices and an uncertain economic environment over the past few months have caused legislators, regulators, generators and marketers to reconsider their deregulation situations and strategies.”

Ellen Raines, spokeswoman for First-Energy believes it’s really too early to call the race for Ohio’s market.

“We’ve got about 2 million customers in Ohio, and we’ve had about half a million customers switch suppliers since competition began in January,” she stated.

Raines pointed out that a number of the markets early switches resulted from FirstEnergy’s agreement to provide a limited amount of generation, 1120 MW, at below market prices to suppliers-as a way to “jump start the market.” Along with the number of people switched through aggregation, Raines believes there has been significant activity for a burgeoning market. However, it looks like that race may have reached a slow jag.

“Right now our subsidiary is the only supplier that has an offer in our service area, so things have settled down quite a bit. Things have quieted since the early months,” she stated, noting that no one is really offering the customer a stellar deal to entice switching.

“Those [government aggregation] groups aren’t offering huge savings. One of them is offering 1 percent off your price to compare, or one percent off one third of your bill,” she told EL&P in an interview. “So, it’s not a lot of money.”

Gravelle added, “People are less inclined to switch since their electricity is already so cheap. The legislature targeted a 20 percent rate for consumer switches this year, and it looks like it’s going to be about 12 percent. Perhaps they should be thinking about what else could be done to encourage people to take a closer look at alternative suppliers.”

Whether that plateau in Ohio’s market changes is open to speculation, according to Raines, depends on the actions of wholesale prices in the region. If those wholesale prices become favorable to suppliers-allowing them to both offer savings and make a profit-Ohio could start to push forward once again.

“After the market development period, the state goes to market-based rates. At that point, I believe that competition will be able to flourish,” NewPower’s Merola said, emphasizing that the wholesale market doesn’t need to be “fixed,” that it is not a problem. The move to market-based rates is truly the solution, according to Merola, and FirstEnergy’s Raines agreed.

“The market will decide,” Raines stated simply.

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