Consumer Electric Choice

By: Jeff Grabmeier

Published on March 26, 1998


CONSUMERS WILL BENEFIT WHEN THEY CHOOSE THEIR ELECTRIC COMPANY

COLUMBUS, Ohio -- Within the next few years, many consumers across the country will have the opportunity to choose their electric utility just like they choose their long-distance phone service.

And, for most people, that will mean lower prices in the short- and long-term, according to an expert at Ohio State University who follows the industry.

“Consumers should be generally happy with the restructuring of the electric industry,” said Kenneth Costello, associate director for electric and gas research at the National Regulatory Research Institute.

“It’s not going to be an overnight miracle, but I believe most people will see lower electric bills soon after deregulation takes effect.”

The restructuring of the electric industry to allow for competition is happening on a state-by-state basis, Costello said. Some states, particularly California, are almost ready to introduce competition for consumers. Other states have only begun discussing restructuring. But eventually all states will participate, Costello predicted.

“It’s not a question of whether states will allow competition -- it’s only a question of when,” he said.

The first states to allow competition will be those where electric rates are generally highest, like California, New York, and the New England states. Areas where electricity is relatively cheap, like the Southeast and Northwest, will follow later.

The consumer savings from competition will also vary from state to state, with those living in areas with high electric rates seeing the biggest savings.

But Costello believes everyone will benefit. “The political reality is that states will not allow restructuring unless there are guaranteed benefits for the average consumer. The politicians will require that.”

Even those customers who choose to stay with their local utility will see lower rates because competition is going to force every company to become more efficient.

“I use the example of long-distance telephone service -- even those who stayed with AT&T are getting better rates today because of the competition in the industry,” he said.

The only likely short-term losers may be those rural residents whose electric bills are currently subsidized by urban customers. Although it is often more expensive to deliver electricity to rural areas than it is to cities, rural rates are sometimes lower than they would be under free competition because of subsidies from urban customers. That price break for rural residents may end with restructuring.

“Some rural residents may see their rates go up for a short time, but I would argue that as utilities become more efficient even these customers will see lower rates,” Costello said.

Under a competitive system, the local utilities will continue to “deliver” electricity to consumers’ homes and businesses. However, customers will be able to choose from whom they buy the electricity. That means consumers will have to become educated about their various options in an open, competitive market.

“If restructuring is going to benefit consumers, than consumers are going to have to understand what’s going on,” Costello said. “They have to know their responsibilities and their risks. That’s not going to happen overnight.”

State regulators will play a vital role in assuring that consumers know the new rules concerning their rights and responsibilities, he said.

Although Costello sees restructuring as good for consumers, he says there are some risks.

“There are potential problems, particularly in making sure there’s true competition,” he said. “Local utilities will have a lot of incentive to try to keep competing companies out of their area. It’s important that regulators make sure there is a level playing field for all companies.”

Costello recently co-authored a report looking at many of the issues of competition in the electric industry. The report, called Prospects For Retail Competition in the Electric Power Industry: The Case of Kansas was written with Kenneth Rose, senior economist, and John Hoag, graduate research associate, both at the NRRI. The report was funded by the U.S. Department of Energy.

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Contact: Kenneth Costello, (614) 292-2831; Costello.1@osu.edu Written by Jeff Grabmeier, (614) 292-8557; Grabmeier.1@osu.edu



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