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The real story behind electricity deregulation

November 20, 2005|By Steve L. Klick

As director of rates for Allegheny Energy (AYE), I had front-line responsibility for negotiating the electricity deregulation plan with various stakeholders, including Eastalco. I offer the following on the aftershocks of that plan.

First, many seem to have taken for granted and perhaps selectively forgotten AYE's low rates, both within the state and regionally. For example, the electric rates I now pay in New Jersey are 100 percent higher than AYE's.

The upside of electric deregulation/competition (lower rates) for all AYE customers was limited from the get-go. Put another way, in hindsight, the short-term expectations were too high.

Secondly, the benefits of a competitive marketplace cannot be measured over just a few years. It took Thomas Edison over 6,000 failed attempts before getting his carbonized fiber right. Edison also kept the big picture in mind, inventing a whole light system rather than just a single bulb, separating him from the crowd. The lesson - innovation takes time and patience, attributes our society sometimes no longer values.

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Additionally, the imposition of artificially low capped rates was/is a weapon of mass destruction to the electricity competitive market. This politically correct must-have element of the deregulation plan resulted in "regulated competition," an oxymoron bigger than Michael Moore.

Finally, I take umbrage at CQI Consultants' statement that AYE was "able to structure their PSC-approved rates to charge large users less and spread the burden of those reduced rates across the larger network of their residential customers."

Here's the real deal from the horse's mouth - ratemaking is both an art and a science - with a vast array of factors part of the equation including the local economy and the relative change in rates to other customers.

But the foundation and primary element is the science part - rates are based on the cost of providing service to that customer.

To suggest that Eastalco's rates were by design less (subsidized) in an effort to shift costs to residential customers seems either intellectually dishonest or self-serving.

Eastalco takes service at transmission-level voltage, thus it has none of the high cost and high maintenance of distribution transformers and poles. It also requires the same very high amount of power 24 hours a day, 365 days a year (100 percent load factor) - creating less peak demand and avoiding the need for exponentially expensive peak power. As a full-service electric customer, the cost of providing service to Eastalco was significally less than other customers, and so were their rates.

In conclusion, what was needed for electricity deregulation to succeed was a gloves-off, (no rate caps) 15 round fight. What we got was a three-round sparring match with headgear to protect customers from the risks of the marketplace. I think Tom Edison would have liked the Rocky version much better.

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