The NewStandard ceased publishing on April 27, 2007.

Home-heating Hardships

Watchdogs Blame Industry, Not Weather, for High Energy Costs

Part Two in a Series

by Catherine Komp

While some mainstream energy analysts blame the 2005 hurricane season and rising demand, progressive consumer advocates trace high prices to energy deregulation, which for the past several years has been dramatically altering the utilities industry.

 

Feb. 1, 2006 – Across the country this winter, Americans are struggling to understand the story behind their higher heating bills. Murky calculations coupled with the complexities of natural gas and electric systems make it hard to decipher a typical energy bill, and even harder to understand what each charge really means.

While some mainstream energy analysts blame the 2005 hurricane season and rising demand, progressive consumer advocates trace high prices to energy deregulation, which for the past several years has been dramatically altering the utilities industry.

"Owners of unregulated power plants… are able to exploit their position as owning a very limited resource," said Tyson Slocum, director of the energy program at the consumer advocate Public Citizen.

Rejecting the government and corporate mantra that this year’s high energy costs resulted from hurricane-related supply disruptions, Slocum said that systemic issues and lack of transparency are largely to blame.

Historically, states have stiffly regulated electricity prices, in turn granting power companies the security of regional monopolies. The system was designed to ensure relatively affordable and reliable services for customers. But over the last decade, deregulation – which proponents argued would encourage competition and lower prices – has forced dozens of state public utility or service commissions to give up regulatory influence over privately owned utilities.

About 59 percent of households use natural gas and 31 percent use electricity to heat their homes.

Stepping into that void, a number of public-advocacy groups have formed to protect consumers from big power companies. Bob Finklestein, executive director of The Utility Reform Network (TURN), said his California-based organization saved ratepayers hundreds of millions of dollars over the last few years defeating companies that try to win what he called inflated or poorly justified rate hikes.

Californians argued for deregulation because their rates were among the highest in the nation, said Finklestein. "Here we are ten years later, and the only thing we’ve achieved is that our rates are even higher."

Types of Heat

The two most common home-heating methods in the US are natural gas and electricity.

According to the federal government’s Energy Information Administration (EIA), about 59 percent of households use natural gas and 31 percent use electricity to heat their homes.

Currently, about 70 percent of electricity is generated using fossil fuels like coal, natural gas, and petroleum. Another 20 percent comes from nuclear plants. Renewable sources, like hydroelectric and wind power, account for just under 10 percent of electricity generation.

Natural gas, the simpler of the two main heat sources, is delivered to consumers through a massive system pipelines. Consumers pay local or regional distribution companies, which often exist without competition, for both the gas itself and the cost of distribution.

Last year’s hurricane season cannot account for natural-gas rate hikes reported by the EIA since the winter of 2002-2003.

In recent months, government officials and some energy analysts have cited Hurricanes Katrina and Rita as a major reason for natural-gas price spikes. According to the Federal Energy Regulatory Commission (FERC), the storms decreased the nation’s annual natural gas production by 3 percent, after which prices spiked by 65 percent.

But last year’s hurricane season cannot account for natural-gas rate hikes reported by the EIA since the winter of 2002-2003. The EIA blames volatility in the natural-gas market during these years on decreased production, colder than average winters, rising crude-oil prices, and fluctuating energy-import and -export markets.

Unlike residential natural-gas prices, which are not tied to daily market fluctuations, electricity prices can rise and fall sharply depending on both seasonal and daily changes in usage. While natural-gas prices pose the most hardship for families during the winter months, higher electricity costs strain budgets year-round and peak in both the winter and summer months.

As a result of deregulation, electricity prices are now tied to the cost of the last fuel source used to generate the electricity, as opposed to the previous price formula pegged to total fuel and operative costs. Though older plants powered by fossil or nuclear fuel cover average daily electricity needs, when usage bounds, new plants – fueled by natural gas – are used to meet demand. With natural-gas prices at currently high levels, this means that electricity prices shoot up during periods of intense demand.

While federal utilities, nonprofit municipal power entities, and member-owned rural cooperatives serve about one quarter of US households, –the majority are beholden to profit-driven, investor-controlled utilities for their electricity. Privately owned utility companies profit by selling power they generate themselves, or by purchasing electricity on the market and distributing it through "the grid," a nation-wide system of metal towers, substations and power lines.

All Power to the Highest Bidder

Slocum is also concerned that RTOs and ISOs are abusing the grid, which was not designed to accommodate delivery of power over hundreds of miles of transmission lines.

Public-advocacy groups warn the fallout from deregulation will affect peoples’ pocketbooks for many years to come. The consequences intensified during the 1990s and exploded by the end of the decade with the California energy crisis of 2001. The corporate scandal that ensued revealed that Enron and other big power companies intentionally shut down electricity output in order to artificially drive up prices, gouging consumers out of billions of dollars.

Several groups point the finger at government regulators for colluding with industry. In a pending lawsuit filed in July 2004, Public Citizen, accuses the FERC of playing a pivotal role in the California energy crisis. Joined as plaintiffs by the Colorado Office of Consumer Counsel, the Rhode Island and New Mexico attorneys general, and the National Consumer Law Center, their complaint alleges the FERC illegally deregulated electric rates under its jurisdiction and permitted wholesale electricity sellers to set prices without public notice or federal approval.

Plaintiffs have petitioned the court to "overturn FERC’s market-rate scheme, fix just and reasonable electric rates for the future, and consider what refunds should be paid to parties as a result of rates charged unlawfully."

Watchdog groups also accuse regional utility authorities of driving up costs. During the deregulation process, the FERC established regional transmission operators (RTOs) and independent systems operators (ISOs) at the urging of the utility industry. These groups plan and operate the transmission grid, largely without government oversight.

Computer software or "smart" meters could be developed that monitor prices and turn off appliances when prices reach a certain level.

Slocum of Public Citizen said these entities create new inefficiencies at consumers’ expense. "Now, under deregulation, your local power plant may not be selling to you; your local power plant is going to be selling to where it will get the highest return," he said. "So they're going to move [electricity] greater distances, and that takes far more coordination on the part of these Independent System Operators, which greatly adds to the costs. And all those new administrative costs are passed on to end customers."

According to Public Power Council, an organization representing consumer-owned utilities in the Pacific Northwest, the annual operating cost of RTOs and ISOs in 2003 was about $1 billion, up from just under $227 million in 1998.

Slocum is also concerned that RTOs and ISOs are abusing the grid, which was not designed to accommodate delivery of power over hundreds of miles of transmission lines.

Rejecting the argument of deregulation proponents that the power grid is inefficient because it is "antiquated," Slocum told The NewStandard. "Well, it's not antiquated if we remained with the system under which it was designed, which was working perfectly well," he said.

Regulatory-commission officials did not grant interviews for this article.

Energy Bill, PUHCA and Mergers

Public Citizen and other consumer advocacy groups also predict the controversial energy bill, signed into law last August, will dramatically affect corporate control over electricity and natural-gas markets, rendering them even less competitive. The Federal Energy Policy Act of 2005 repealed the 70-year-old Public Utility Holding Company Act (PUHCA), created to protect consumers from power-company mergers and price gouging.

Though PUHCA’s dismantlement is still in the early stages, four major mergers have already been announced. In 2005, the FERC approved a merger between Exelon and Public Service Enterprise Group to create the largest gas and electricity utility in the country, which will have assets of nearly $80 billion. Also joining are Duke Energy and Cinergy, MidAmerican Energy and PacifiCorp, and Constellation Energy Group and Florida Power & Light Company.

The Call to Reregulate

Catherine Wolfram, a business professor and researcher at the UC-Berkley Energy Institute suggests that more transparency in pricing could help residents conserve and lower their bills.

"Right now, no one sees when the price is high, so utilities know people won't turn down their air conditioners," Wolfram said. "So they just drive the price up, because no one is going to react to it."

One option, said Wolfram, is to let people see how prices fluctuate throughout the day. Computer software or "smart" meters could be developed that monitor prices and turn off appliances when prices reach a certain level. "Electricity companies have resisted" that solution, Wolfram said. "It's kind of a billing nightmare for them... and, yeah, they make more money [with the current system]."

TURN's Finklestein said that in today's competitive and minimally regulated energy market, profit motives dictate production and supply. But when it comes to services that are essential to every household, said Finklestein, regulation is critical.

"People who are advocates of letting the market control the outcome of these issues are always talking like it’s just another commodity like peas [or] soybeans," he said. "[Heat and electricity] will never be just another commodity. It is something that people have to have in order to be effective participants in today's society. I don't think there's any way of overstating its importance."

 

Send to Friends Respond to Editors or Reporter

The NewStandard ceased publishing on April 27, 2007.


This Feature Article originally appeared in the February 1, 2006 edition of The NewStandard.
Catherine Komp is a contributing journalist.

Recent contributions by Catherine Komp:
more