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With state's Rate Stabilization Plans set to expire in December '08, governor pushes re-regulation proposal. Senate vote likely soon
By Dennis J. Willard Beacon Journal Columbus Bureau
Published on Sunday, Oct 21, 2007
COLUMBUS: Under normal circumstances, the lavish and airy South Hearing Room in the Ohio Senate Annex would be large enough to provide seating for government officials, special-interest denizens and the odd citizen who attend legislative hearings here.
But this autumn, when the Ohio Senate initiated proceedings on Gov. Ted Strickland's plan to re-regulate the $14 billion electric-utility industry in Ohio, the suits, briefcases and cell phones arrived and the empty seats disappeared.
The phalanx of representatives for utilities, large and small manufacturers, farmers, environmentalists, governmental agencies, chambers of commerce and even a group formulated to combat urban sprawl has forced the panel to pack up and move at times to the much larger Senate Finance Committee Room.
There, spectators have jammed the permanent bench seating, grabbed the temporary chairs and lined every inch of wall space. Upstairs, the mezzanine seating that allows onlookers to peer down upon the doings is packed as well.
It has been eight years since Ohio passed the so-called electric deregulation law that promised to provide consumer choice, lower rates and innovation by gradually weaning the Public Utilities Commission of Ohio from its traditional rate-setting role while allowing free-market forces to take hold and grow.
Today, even the lawmakers who worked on that bill admit the experiment failed, and the state is mired in issues whose solutions Please see FirstEnergy, A12
could, according to industry experts, watchdog groups and interested parties, define the energy landscape for a half-century.
On Dec. 31, 2008, the Rate Stabilization Plans put in place to freeze rates in 2005, when it became clear that an open market allowing consumers to shop for electricity did not exist are scheduled to expire.
Strickland has seized upon this timeline to not only address electric regulation, but also to establish a long-term energy plan he believes will spur economic development, stimulate a move to alternative and renewable energy sources and improve the state's ignominious reputation as one of the nation's largest contributors to greenhouse gases because of its dependence on coal-burning power plants.
Among the many ideas in the bill, the governor wants 12 percent of electricity to come from renewable energy sources and at least a like amount from modern, ''environmentally friendly'' nuclear and coal-burning power plants.
The plan also provides renewed authority to the PUCO, whose commissioner, Alan Schriber, has asked lawmakers to pass a bill this year to give the state 12 months to establish rules and implement changes.
Lawmakers notorious procrastinators appear to be working feverishly, holding 10 hearings so far, two or three each week, to listen to the labored testimony of dozens of experts, utility executives and others.
State Sen. Robert Schuler, R-Cincinnati, who chairs the Senate Energy and Public Utilities Committee, asked all interested parties to submit proposed amendments to the bill by Friday. A spokeswoman in his office said he received ''piles.''
An Ohio Senate vote does not seem too far off, although the proposal still would need to go through the Ohio House.
Before that can happen, however, lawmakers must find common ground on a problem that has pitted some of the state's most powerful groups against one another (utilities against manufacturers) and created unique political allies (manufacturers, labor unions and the Farm Bureau).
These legislative decisions could also have shorter-term political repercussions because there is little doubt this is the toughest issue Strickland has taken on in his first year in office.
Lawmakers must decide whether to return to a regulated electric utility industry, give the competitive market more time or adopt the governor's ''hybrid'' of regulation and free market.
At the same time, everyone from the utilities to the state's top consumer watchdog believes electric rates are going to rise. The question is: How high? How soon? And who is going to pay?
Strickland, who enjoys an approval rating of more than 60 percent, is aware the restraints on rates are scheduled to be eliminated as he enters his third year in office.
Skyrocketing rates
Janine Migden-Ostrander, the Ohio consumers' counsel, read slowly and deliberately through 24 pages as she testified to the Senate committee. An aide joked this was the abbreviated version of her true ideas and feelings. Maybe he was not joking.
Migden-Ostrander wants lawmakers to focus on keeping the rates as low as possible for the 4.5 million residential households her governmental office represents in Ohio.
Later, in an interview, she said it is not a question of whether electric rates are going to rise in Ohio, but how high.
''What's at stake is the possibility of paying very high rates for a very long time,'' Migden-Ostrander said.
She asked the lawmakers to be flexible, to establish a system that sets rates by choosing the lowest cost for consumers after comparing the market against a Strickland idea called the ''Electricity Security Plan,'' which critics maintain is a fancy phrase for renewed PUCO oversight.
Anthony Alexander, First-Energy chief executive and president, provided the senators with bad and even worse news.
He has been telling anyone who will listen that electric rates will increase when the rate stabilization plans expire next year, but he warned the senators that a return to regulation will mean even higher rates.
''You've all heard the stories about price increases in Maryland and Illinois that followed about 10 years of price freezes. What you haven't heard about are the increases in the regulated states since 1997. The 45 percent increase in Florida or 53 percent increase in Washington or 57 percent increase in Wisconsin,'' Alexander testified.
A coalition of large manufacturers and farmers under the banner Ohio Coalition for Affordable Power appeared before the committee to talk about the desperate need to act this year.
David Ciarlone, a manager who oversees the $625 million Alcoa spends on natural gas and electricity in North America, said his company was forced to close a smelter in Maryland after a regulatory process, similar to Ohio's current rate stabilization plan, expired and wholesale prices skyrocketed.
Ciarlone argued that electric rates rose faster in deregulated states, about 36 percent, compared to regulated states, about 21 percent, between 2002 and 2006.
The Ohio Farm Bureau and Ohio AFL-CIO stressed the same idea to lawmakers: Unregulated states without some form of stabilization plans have witnessed skyrocketing rate increases.
Samuel Randazzo, a lobbyist for the Industrial Energy Users-Ohio, which represents small and large manufacturers, worked on the deregulation bill in 1999.
''The objective was to create a market that would do a better job than regulation,'' Randazzo said.
Alexander has mounted a counterattack.
He points out that the manufacturers wanted deregulation in 1999 and now want the PUCO to again regulate the utilities.
He argues that a competitive market already exists in Ohio, and manufacturers have the ability to negotiate special contracts that afford substantial savings.
At a speech delivered in Akron on Sept. 19 before the Manufacturers' Education Council, Alexander said manufacturers are wrongly blaming electric rates for lost jobs.
He said smaller manufacturers, who often pay twice the rate for electricity, added 51,000 jobs while large industrial users like the Hoover Co. in North Canton shut down and moved to Texas and Mexico.
''Certainly, the price of electricity wasn't a factor behind this decision because Hoover benefited from some of the lowest electric rates in the country, let alone the state. The new owner simply found it more advantageous to make vacuum cleaners in Texas and Mexico even though Texas has some of the highest electric rates in the United States,'' Alexander said.
Alexander wants his company to go to a bidding process over a 36-month period to stabilize energy prices.
Strickland's hybrid plan
Last week, the Ohio Electric Utility Institute, an umbrella lobbying organization, outlined a series of amendments it would like to see adopted.
The group's unity on the amendments, however, doesn't mean Ohio utilities are aligned on every aspect of Strickland's plan.
Some utilities in the state are in the construction mode, meaning they are building or have plans to construct power plants. It may be in their best interests to succumb to PUCO regulation to ensure a guaranteed rate of return and permission to pass along the building costs so they won't be vulnerable to free-market forces.
Alexander acknowledged this idea during his testimony.
''In regulated environments, the process for setting rates is fairly straightforward,'' he said. ''Utilities build costly new power plants or add environmental controls, and then prices are set to reflect the substantially higher costs of services created by these new investments. As a result, rates typically jump up significantly as utilities enter cycles of new construction.''
Put another way, utilities in unregulated, competitive markets find it difficult, if not almost impossible, to build because those expenditures are wrapped into their rates, thus putting them at a competitive disadvantage with electric marketers that are not passing along construction costs.
Raising capital to build in a competitive market is not an easy sell to investors.
Migden-Ostrander saidFirstEnergy is the reason the state should have a hybrid system.
The utility may choose to sell electricity to East Coast customers if a newly empowered PUCO decides to reduce the Northeast Ohio company's rates, she said.
While manufacturers and the utilities point to one another as the problem, Migden-Ostrander said deregulation in 1999 in Ohio failed because lawmakers, lobbied intensely by special-interest groups, made decisions that ensured a competitive market would not develop.
The legislation froze rates through 2005, but the deregulation bill allowed utilities to recover stranded costs, primarily money invested in prior construction projects.
And when the stranded costs went to the PUCO, utilities were allowed to recover $11 billion, or 100 percent, of their claims without any proceedings to examine the validity.
Consumers could not switch electric companies without adding a surcharge for stranded costs to their bills, Migden-Ostrander said, and competition never took hold.
''They killed the market before it ever began,'' she said.
Dennis J. Willard can be reached at 614-224-1613 or dwillard@thebeaconjournal.com.
COLUMBUS: Under normal circumstances, the lavish and airy South Hearing Room in the Ohio Senate Annex would be large enough to provide seating for government officials, special-interest denizens and the odd citizen who attend legislative hearings here.
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