Governor and Electric and State Government and Energy & Environment and Utilities and Government & Economic Development

Pence cracks door to electricity deregulation

February 15, 2014

The Pence administration is discussing whether to include electric-utility deregulation in a new state energy policy, making Indiana one of the few states since California’s electricity crisis to consider opening its market to competition.

Policymakers caution that, at this point, deregulation—also known as “retail choice” and restructuring—is only a topic of discussion. Even that is remarkable in a state where utilities operate as regulated monopolies and where, consumer groups say, lawmakers and regulators go out of their way to bolster utility-company profits.

Deregulation takes many forms, depending on the state, but it essentially means consumers are allowed to choose their energy supplier while the utilities continue providing the lines that deliver the electricity. Investor-owned utilities like Duke Energy and Indianapolis Power & Light would be forced to compete with the open market on the energy-related portion of consumers’ electric bills.

Deregulation was a hot topic in the 1990s, but California’s experience in 2000 and 2001 with widespread blackouts caused by energy traders gaming the system put the trend on ice. Indiana is taking up the idea again because the state is losing its low-cost edge.

A decade ago, Indiana was one of the cheapest states for industrial users—a status that helped keep and attract big factories—but it now stands in the middle of the pack. Indiana electricity is more expensive than in Illinois, an economic-development arch-rival that deregulated in the late 1990s.

Electric rates for all types of consumers will rise an average 32 percent over the next decade, according to the State Utility Forecasting Group, a state-funded research panel based at Purdue University.

“The willingness to have even the level of conversation we’ve had so far … really speaks to the understanding of how serious of an issue it is that our industrial electricity rates are going up,” said Dan Schmidt, Gov. Mike Pence’s energy policy director.

Deregulation won’t happen unless the General Assembly passes new laws, but Pence could kick-start the effort if it’s included in his energy plan, which is due out this summer.

The Office of Energy Development has been meeting with stakeholders on deregulation and other topics and will continue to do so through the spring.

Policymakers are hearing from the likes of Tate & Lyle, a multinational agribusiness that has two corn-refining plants in Lafayette. The company is considering a big investment in its north plant, but the cost of electricity is a major factor, said Chris Olsen, vice president of community and government affairs.

The company’s annual electric bill in Lafayette is in the tens of millions, and the cost of electricity for an expansion would be $2 million more than in other locations, he said.

“As we look at projects, in virtually every economic-development factor except electricity prices, Indiana is outstanding,” Olsen said.

Prices vary across states

Comparing Indiana’s rates to those of neighboring states doesn’t offer much perspective. Average prices in Illinois are lower across the board, but that’s also the case in regulated Kentucky, according to the U.S. Energy Information Administration’s monthly statistics.

Michigan’s prices are even higher than Indiana’s, prompting a similar discussion in that state about deregulation.

Prices will vary across states depending on their sources of energy and cost of infrastructure, but the rate of change has been slower than inflation in all 13 deregulated states and Washington, D.C., said Phil O’Connor, a former chairman of the Illinois Commerce Commission and pro-restructuring consultant. Electricity prices have outpaced inflation in all of the 30 traditionally regulated states, he said.

O’Connor noted that Indiana’s industrial electric rates have risen, even while demand is flat, a trend that counters price behavior in the open market.

Industrial customers in Indiana paid an average 6.59 cents per kilowatt hour through the first 11 months of 2013, while their counterparts in Illinois paid 5.75 cents per kilowatt hour, a nearly 15-percent difference.

At 6.59 cents, Indiana’s average industrial electric rate is 27th-lowest in the nation, up from sixth-lowest in 2003.

“There’s no way to regain that price advantage with traditional regulation,” O’Connor said.

Manufacturers want reform

The Indiana Industrial Energy Consumers, which represents 25 of the state’s largest manufacturing companies, is not set on retail choice but wants some type of regulatory reform, said Jennifer Terry, a Lewis Kappes attorney who spearheads the issue for the group.

In Indiana, utilities are allowed to request rate increases to cover all kinds of costs, from fuel to transmission and distribution lines, without opening their books to regulators to justify the total rate, Terry noted. The rate requests are known as “trackers” because they track with utilities’ expenses.

The industrial group would like to see “tracker” requests trigger a full rate review by the Indiana Utility Regulatory Commission, or for the state to force periodic rate reviews, Terry said.

But those reforms would also require new legislation.

“The way trackers have proliferated in Indiana is like ink spilling out of a bottle,” Terry said. “Proponents of restructuring are saying it’d be easier to start over with a blank sheet of paper.”

The grass-roots consumer group Citizens Action Coalition agrees with the industrials on the need for regulatory reform, but Executive Director Kerwin Olson doubts the Legislature will repeal any of the tracker statutes.

energy table“Utilities have a stranglehold on the Statehouse,” Olson said.

Citizens Action Coalition doesn’t necessarily oppose deregulation. In fact, Olson said it might be a way to increase the use of wind and solar, but he doubts that restructuring in general would benefit residents and small business as much as it would industrial users.

Energy suppliers would fight for a big factory’s business, but other types of customers don’t have that much clout in the marketplace, Olson said.

One solution, found in Illinois, is aggregate purchasing, where municipalities and chambers of commerce are allowed to buy energy on behalf of their residents or members.

Olson is skeptical that would fly in Indiana.

“The word ‘aggregate’ to the Indiana utilities is evil,” he said. “Whenever they hear aggregation, they put up a wall.”

Passing on capital costs

Industrial customers also help absorb the cost of huge capital projects, like Duke Energy’s $3.5 billion Edwardsport coal gasification plant.

In the regulated system, utilities pass those costs to consumers through rate increases. Even after states switch to the open market, utilities are fully compensated for recent capital investments, usually through a fee that’s tacked onto bills regardless of consumers’ choice of energy supplier.

“As you peel off those large users, what’s going to happen to those costs?” Olson asked. “Is everyone going to pick up their share of what the industrials used to pay?”

In an interesting twist, Indiana’s investor-owned utilities are also expressing concern about what the open market would do to the little guy.

Big customers might gain a rate advantage, “but they would do that at the cost and at the risk of increases being imposed on small manufacturers, on the commercial sector, and certainly on the residential ratepayer,” said Ed Simcox, president of the Indiana Energy Association, which represents IPL and Duke Energy, among others.

The energy association blames rising prices on federal pollution-control mandates, which have fallen especially hard on Indiana because nearly 80 percent of the state’s electricity is generated by coal.

Simcox argued that Indiana’s rates are still reasonable, and because electricity prices are rising nationwide, there’s no reason to rush for the open market.

“For the time being, there’s a lot of pressure on states that are mostly coal-fired, but that will abate,” he said. “We think that, over time, Indiana will look good in the comparative analysis with other states.”

Legislators are aware of the rising rates, but they’re not declaring any emergencies. A standing study committee, the Regulatory Flexibility Committee, took testimony on deregulation last summer.

It didn’t change Sen. Jim Merritt’s mind.

“I don’t believe that is something that should be in Indiana’s future,” said the Indianapolis Republican who is chairman of the Senate Utilities Committee.

Merritt’s counterpart in the House, Rep. Eric Koch, R-Bedford, said he thought it was important for the study committee to be informed on the topic, since it’s come up in Michigan.

Koch said he hasn’t made any decisions. “There are so much costs, so much money involved, so many possible unintended consequences, we just need to be very careful,” he said.•

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