Ratepayers face electric-bill jolt

Deregulation falls short on promises

The Boston Globe February 22, 2005

By Peter J. Howe, Globe Staff

More than 1.3 million Massachusetts households face a 3 percent to 13 percent increase in their electric bills beginning next week as the state moves into another phase of its seven-year-old utility deregulation policy.

For many small-business owners, who generally pay steeper rates than homeowners, the March 1 rate hikes could exceed 20 percent. The increases will hit 63 percent of residential customers and 55 percent of small-business customers.

In both cases, the residents and businesses paying the higher rates will be those who have had accounts with their current electric utility since before March 1998 and have not moved -- or if they have relocated they continued to be served by the same utility.

People and business owners can tell if their rates will increase by checking whether a recent utility bill reflects a "standard-offer" service, a state-controlled rate. Standard-offer rates are being phased out a week from today. Those customers will go to a more volatile, market-based rate plan that has been known as default service but is being renamed basic service. Basic rates will be readjusted in six months and could increase further depending on world energy prices.

By deregulating the industry, the state aims to give customers as robust a choice of power providers as they have for long-distance or wireless phone service. Most residents and small-business owners do not have a cheaper alternative to their utility.

"For small consumers, the policy is far from living up to the hype," said Frank Gorke, energy policy analyst for the Massachusetts Public Interest Research Group, which waged a lonely battle seven years ago against what it called a rate payer-funded bailout of companies such as NStar Electric and Massachusetts Electric Co. "There's no competition for small customers, which was one of the biggest things that was promised."

The lack of choice is just one of several examples of how electric restructuring hasn't matched political and industry leaders' 1997 promises.

Consumers and businesses were told they would save billions of dollars. Environmentalists would hail dramatic pollution reductions from new clean-burning natural gas power plants. "A major victory for Massachusetts taxpayers," promised then-governor Paul Cellucci.

The cornerstone of deregulation was getting utilities out of the power generation business. NStar, Mass. Electric, and others were required to sell their power plants and energy purchase contracts. Ratepayers had to cover any shortfall from what the utilities had originally paid.

Under deregulation, home and business customers continue to pay utilities a regulated rate for delivering electricity. They can shop among suppliers for generation of the power they use. Creating competitive electric supply was supposed to reap huge savings for all consumers.

But today, the only clear winners are big businesses and big utilities. Utilities argue that consumers pay somewhat less than they would have without the legislation. But rates have still soared by 40 percent at the state's two biggest utilities since 1998.

Environmentalists backed the law in hopes a competitive power market would shut out inefficient, highly polluting coal- and oil-fired generators. Instead, a surge in natural gas prices since 2001 means old coal plants remain cheaper and still belch smog day after day.

The state's top utility regulator, Department of Telecommunications and Energy chairman Paul G. Afonso, said electric deregulation so far is "a work in progress, but a good work in progress."

One problem is that the predicted flood of companies competing to sell household and small-business electricity never materialized because utilities' standard-offer rate was usually low enough that new competitors could not profitably offer a discount. Also, free-market advocates drastically overstated the likelihood that these new competitors could find a profit margin selling to thousands of residential customers.

As of December, just 2.7 percent of Massachusetts residential customers used a competitive electric supplier. Virtually all are members of the Cape Cod Light Compact, the only local power-buying cooperative formed to negotiate lower rates.

In contrast, 52 percent of the electricity used by large commercial and industrial customers was sold by competitive suppliers such as Constellation Energy Group, Dominion Resources Inc., Select Energy Services Inc., and TransCanada PipeLines Ltd.'s electric sales operation.

Power marketers love big businesses because billing and overhead costs are far lower. Just 2,200 big Bay State commercial customers buy as much electricity as 1.1 million residential customers.

Likewise, big businesses rave about deregulation. The 38 companies that buy electricity brokered by the Massachusetts High Technology Council have saved "north of $30 million" under the policy, said the council's, president Christopher R. Anderson.

When Bay State voters decided on deregulation in a 1998 referendum, huge advertising campaigns funded with $1 million-plus donations from Boston Edison and Mass. Electric promised more savings for consumers.

In one full-page Boston Globe ad the week before the vote, backers promised the law "cuts electric rates a minimum of 15 percent by September 1, 1999, and caps rates for at least 6 years."

What the ad left unmentioned -- unless readers followed a footnote to section 183 of the act -- was that the 15 percent cut and cap were subject to upward adjustments for inflation. Just two years later, utilities persuaded state regulators to rule that inflation means not just the consumer price index, but increases in the cost of fuel.

That left the guaranteed 15 percent rate reduction a mirage. Residential customers of NStar's Boston Edison unit, for example, have been hit with total rate increases of 44 percent since 1998, largely because of the run-up in world energy costs.

The state's utilities also fared unexpectedly well with the deregulation-mandated power plant sales. PG&E Corp. and Mirant Corp. bought plants at wildly inflated prices and later filed for bankruptcy. Mass. Electric got $490 million more than it counted on its books for plants it sold in 1998. Those sales indirectly benefited consumers. By cutting fixed costs the utility passes through, Mass. Electric's average residential customers save over $2 every month, the company says.

What its residential and small-business customers don't have, however, is any good alternative to paying Mass. Electric for power.

Peter J. Howe can be reached at howe@globe.com.