Regulation by Any Other Name

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Most consumers of electricity in Virginia are unaware that their electric market is deregulated and therefore have the option to purchase power competitively.  However, in many ways, the market is “deregulated” in name only.  

Since 2007, a hybrid version of electric choice has been in place that, despite its assumed intent, severely cripples the principles of a market economy.  Under this system, with the exception of some 100% renewable clauses, retail choice is only allowed for large commercial and industrial customers who use 5 MW and above (along with aggregated loads that meet the 5 MW threshold – subject to SCC approval).  More troubling is a problematic “five year minimum stay” clause embedded in the legislative bill which states that,

“If a customer purchases electric energy from licensed suppliers it shall not thereafter be entitled to purchase electric energy from their incumbent electric utility without giving five years advance written notice of such intention to such utility.”

Therefore you must buy power from a supplier for a minimum of five years and provide a five-year notice before returning to your incumbent utility’s standard rates.  This clause makes it nearly impossible for consumers to “work the commodities market”, which is the intent of any commodities market.  It can also create an endless loop for the consumer.  The five year term will in actuality turn into a five year plus term unless you give your five year notice to return on day one of your supplier purchase agreement. This in turn would force the consumer to negotiate another supplier agreement on day two.  But who would do that?  Wouldn’t you need some time before determining if the current market prices fit your strategic/operational market needs and wouldn’t you need time to “feel out” your relationship with the supplier (what company can decide on day one if they like their vendor)?  Imagine if one had this stipulation placed upon the selection of cable television providers. Who among us can foresee five years into the future?  It gives the appearance that the intent of this clause is to prevent consumers from entering this “competitive” market or, at a minimum, make it very difficult (if so, it has succeeded).

When informed that Virginia’s electric market is deregulated, a common refrain from consumers is “what has changed and why are consumers now hearing of this?”  The short answer is that market prices can now compete with power company rates.  Although major competitive suppliers, registered to sell power in Virginia, attribute lack of competition to the obstacles mentioned above, they also say that energy market conditions are now conducive to a competitive market in Virginia.  

In 2007, before the U.S. energy revolution had time to fully impact market prices, Virginia’s regulated power company rates were competitive with market prices.  Fast forward to 2017 and the dynamics have changed, thereby causing a divergence between market prices and regulated power company rates and in turn creating a more competitive market.  The cause of this divergence is due to plunging fuel prices which have resulted in electric market prices experiencing consistent declines. Simultaneously, regulated power company rates have not declined at the same pace as market prices.  This is primarily due to record-breaking spending by regulated power companies despite the fact that they are experiencing flat or declining demand (capital spending for the largest regulated power companies in the U.S. hit an estimated record-breaking $117 billion in 2016).  

According to the U.S. Energy Information Administration (EIA), the flattening of electricity sales (electricity sales have declined 5 out of the past 8 years) reflects declining sales in the industrial sector and little or no growth in sales to the residential and commercial building sectors, despite growth in building construction. In addition, declining growth rates are the result of increasing efficiency of electricity-using equipment, a slowing rate of economic growth, and the changing composition of the economy, which has significantly reduced the number of electricity-intensive manufacturing facilities in the U.S.  

The divergence between market prices and regulated power company prices has recently encouraged consumers in some states to push for full deregulation.  For example, in November 2016, 72% of Nevada voters cast their ballots in favor of the “Energy Choice Initiative” which will open their electric market to competition.  Also of note, electricity prices in states with competitive choice have outperformed monopoly states in every sector (see chart).

The legislative discrepancy described in this article is crippling to a free market and detrimental to the full development of customer choice in Virginia. With market conditions competitive, it’s time to make changes to the current law.  At a minimum, the five year minimum stay/notice requirement should be eliminated.  Virginia has two very good power companies that consumers should be proud of.  They often tout their low power rates (and they should).  Consequently, they should not be – and I suspect they are not – afraid of competition.   So, let’s allow the free market to work in the competitive manner in which we all naturally assumed was the purpose when the legislature passed this bill in 2007.

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About Leonard Pulley

Leonard Pulley is President and CEO of EA Power Solutions, an Energy Consulting and Power Aggregation Firm.

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