Innovative Approaches To Deregulation in Maine
By UtiliPoint International, Inc.
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One jurisdiction that gets little national attention is Maine, which has been open to competition since March 2000.
At one point last spring, the migration rates from the incumbent to competitive suppliers reached roughly 46 per cent of the total electricity load there. Medium and large industrial consumers have made up the preponderance of those that shop around, mainly because they are the ones that can save the most money. The switching rates have since declined to about 37 per cent of the total load as the so- called standard offer price has fallen. That “default” price is for consumers who do not buy from competitive suppliers.
Maine stands apart from other states, largely because of the way it has developed its standard offer. Unlike some jurisdictions where the default price is set administratively, Maine puts that business out for bid by aggregating ratepayers regionally to make the group attractive to potential providers. The supplier with the best price in both the residential and small business market as well as the large industrial one will get the business of those consumers not looking to shop. Alternative suppliers are encouraged to try and top that offer through any number of measures that include longer term contracts, uncommon services and of course, better prices.
“In Maine, consumers pay market-based rates whether they buy directly from suppliers or take the standard offer service,” says Tom Welch, chairman of the Maine Public Utility Commission. Between 10 and 15 active suppliers serve the market there, now.
Uncommon Features
The commission just completed a report to the state legislature that says the standard offer ought to be a “last resort,” or contingency service, for medium to large industrials, with the aim being to get them all to migrate to competitive suppliers. To accomplish this, it might shorten the contract period for such pricing to expose customers to more price volatility. At the same time, the residential market has yet to develop, not just in Maine but also nationally. The commission is therefore recommending that the default service remain in effect past the 2005 deadline that was previously set.
The state also required its incumbent utilities to divest of their generation assets. In essence, they have functioned largely as the carriers of electrons that have no vested interest in which suppliers use their services. Meanwhile, those transmission and distribution companies are given incentives to reduce their costs and improve their efficiency standards. In other words, if companies can cut cost, they can keep most of the extra profit. But if they cannot, they probably won't be able to pass that cost along to consumers.
Bangor Hydro-Electric, for example, agreed to reduce its distribution rates by between two to 2.75 per cent over about 10 years. In return, the commission allowed the company to earn a rate of return between five to 17 per cent, which would be shared in part with ratepayers.
In an analysis released last week, Standard & Poor's says that regulators in other states could adopt similar strategies, particularly ones where the state aggregates ratepayers and puts the standard offer out for bid. “But while the state's approach to this problem thus far seems effective, it may not be the best approach for all deregulated states.”
During the 1990s, Maine battled with high electricity costs. In 1999, those prices reached an apex, with residential customers paying 13.02 cents per kilowatt hour (kWh)—substantially more than the 8.16 cents per kWh national average. Industrial consumers, meanwhile, paid an average of 6.42 cents per kWh, which was also higher than the national average of 4.43 cents per kWh.
High prices were a major reason why the state legislature passed laws to deregulate electricity in 1997. The bidding process for the standard offer appears to have worked as rates have dropped, enabling residential customers across the state to currently pay between 4.95 to 5.69 cents per kWh for generation services. Those numbers have gotten more attractive over time as an increasing number of bidders have stepped to the fore.
Refined Process
About 90 per cent of the state's 500,000 households have opted to do nothing and buy their power through the standard offer. Those choosing to go with competitive suppliers are often ones who want a “green” option and are willing to pay higher prices to do so.
The slow pace of change at the residential and small business level is troubling to some. In an interview with the Bangor Daily News, Anthony Buxton, an attorney for the Industrial Energy Consumers Group, says that those default rates are too low and discourage competition. Companies have expenses, such as billing and marketing, that they must factor into their rates, while the firms that provide the standard offer service don't have those expenses, he told the paper.
“As long as we in the state continue to breast feed (consumers), we cannot expect a marketplace to form,” Buxton said in the interview.
Chairman Welch says that he is not surprised by the lack of interest by alternative providers at the residential level, noting that the acquisition costs for smaller consumers are higher while the margins are thinner. Competitive suppliers are therefore focused on the larger, more lucrative, markets. That's not to say that residential users are not seeing the benefits of competition, he says. The vibrant wholesale market is driving prices down—a force that has affected retail markets.
In preparing its report to state legislators, the commission said that about three-fourths of residential and small business customers who were polled noted that they would rather pay the lowest price than to have more suppliers from which to choose. Customers don't want regulators to artificially inflate the standard offer to encourage more suppliers to participate, the report says.
While the commission doesn't suggest making changes to the standard offer process for small users, it did say that it is possible to stimulate retail competition by requiring the former incumbents to provide customer mailing lists and other marketing information to competitive suppliers to allow them to establish effective marketing campaigns. Welch says that deregulation in Maine is a work in progress and that regulators are always searching for methods to improve wholesale markets, as well as ways to refine its standard offer service.
“Beyond that, we will try to share our experience as broadly as possible, since we think that we will be better in the long run if all our neighboring markets are robust and healthy," he says. “We believe that there are at least some elements of Maine's approach that may be worth emulating elsewhere.”
