As published in the July 1, 2007 Toledo Business Journal
Trent Smith
Toledo Edison, regional president
Open market pricing for electric utilities in 2009… Ready or not?
Toledo Business Journal recently interviewed Trent Smith, Toledo Edison regional president, about deregulation of the electric utility industry in Ohio. Here are his thoughts.
Toledo Business Journal: From a customer’s perspective, can you explain what deregulation of Ohio’s electric utilities really means?
Trent Smith: Under full deregulation of the electricity generation market in 2009, Toledo Edison and other electric companies will become electricity delivery companies. We will still maintain and operate the wires, the poles, and the transformers that deliver the electricity to our customers, and the price for delivery will still be regulated. But the sale of the electricity itself will be offered through the open market by competing providers, and the price will be completely market driven – just as natural gas is today.
There are significant differences between a regulated electric utility industry and a deregulated one. Under the regulated model, the utilities document and disclose all their costs – generation, transmission and distribution – to the regulators; work with them to resolve such issues as recovery of costs, return on investment, and reliability standards; and derive electric rates from that process.
By contrast, deregulation goes from that model to an open market for generation, a fully competitive scenario where the price of electricity is based on such market influences as supply and demand. The electric utility functions of generation, transmission, and distribution are separated into distinct entities, with transmission and distribution (the latter being the service offered by Toledo Edison) remaining regulated and only generation pricing becoming deregulated.
In Ohio, deregulation has been under development since 2001 and was originally scheduled to be completed in 2006. That [date] has been postponed to January 2009 when the electricity – the generation portion of the customer’s bill – will be market-based. The industry and regulators have used the time from 2001 to January 2009 as a transition period to allow the generation market to develop, putting mechanisms in place to protect the customers from sudden rate hikes or rate fluctuation impacts.
TBJ: With deregulation a year and a half away and given what some states have experienced in terms of electric rates following deregulation, how will deregulation impact customers in Ohio and in our part of the state?
TS: The good news for Toledo Edison customers is that the Toledo Edison portion of the bill – for delivery of electricity – will be reduced beginning in 2009. FirstEnergy and Toledo Edison notified the commission last month that we are preparing a rate case that would go into effect in 2009 and would basically set the delivery prices beginning then.
Also, on January 1, 2009, customers will choose who they purchase their electricity from. The biggest potential change in cost will be with open-market generation – nobody can really predict what might happen with those prices.
TBJ: What have you seen in other states in terms of this deregulation scenario and what happened after the scenario, price-wise?
TS: It’s pretty well documented that in many states that have gone through this [process], customers have seen price increases – some very significant. What is different in Ohio is we have incorporated a transition period to allow all stakeholders, including customers, to understand deregulation and have an opportunity to prepare for it. In some of the other states, the transition from below-market pricing to market-based pricing happened quickly, and that drove significant price increases.
TBJ: How can customers – residential, commercial, and industrial – prepare for buying electricity in the new marketplace?
TS: In general, all customers should try to become more knowledgeable about how they use energy. For large industrial and commercial customers, it would be very important to understand what time of the day they use their energy, [understand] when they hit their peak demand, and to develop an historical database over a period of time showing energy use patterns. We have customer support representatives that work with larger customers to help them understand and manage their energy usage.
For residential customers, this kind of preparation may be on a smaller scale, but the principle is the same. FirstEnergy’s website offers customers a number of tools to help them work through this process, including an “energy calculator” that enables them to learn how much electricity certain appliances use and how to better manage energy use.
TBJ: Some cities are looking at creating their own municipal electric utility as a way of avoiding the potential negative impact of deregulation. Can you share your insight on this situation?
TS: Cities wanting to start their own municipal electric system in a deregulated, competitive environment are faced with several difficult and complicated questions. For example, in what areas will they be able to compete to achieve savings for their customers: the generation side or the distribution side?
Under the deregulation rules currently in place, customers in Ohio already have the right to choose their electricity supplier from the open market. Customer choice of supplier is part of what deregulation offers, so you don’t need to start a municipal electric system to do that.
In a competitive scenario, if a city decides distribution will be its best option for savings, it’ll be competing with companies like Toledo Edison. Keep in mind that distribution rates for Toledo Edison will be going down and we intend to compete for all customers. Additionally, municipal systems will also have to compete in the area of reliability. On that front, Toledo Edison has, in recent years, spent tens of millions of dollars improving reliability, which is very important to our customers. We have invested in state-of-the-art technologies that help us minimize outages, reduce the outage times, track weather patterns, and analyze data to head off problems before they start. This [investment] makes our reliability among the best in Ohio.
Another area to consider is the competition for talent. Workforce demographics for a lot of businesses, including ours, show that many employees are reaching retirement age. As a municipal system attempts to enter this business, it would also be competing for talent with existing utilities, generators, electric cooperatives, and marketers.
TBJ: Can you discuss the outlook for electricity prices in northwest Ohio for industrial, commercial, and residential customers following deregulation in comparison to other areas in the Midwest? What do you see as the impact of stranded costs from Davis-Besse and other past investments in terms of our region’s electricity costs versus others?
TS: The stranded cost portion of a customer’s bill refers to the historical costs for building and making improvements to power plants – including Davis-Besse – and transmission and distribution systems necessary to meet customer demand. Recovery of these costs was guaranteed through the regulatory process. That recovery will be completed at the end of 2008 and those stranded costs will be eliminated from customers’ bills.
TBJ: Do people realize that?
TS: Probably not everyone. But, again, this is good news for customers. The elimination of the stranded costs from the distribution bill is significant because it will lower our distribution costs, making Toledo Edison one of the lower cost distribution companies in the state.
Keep in mind, however, there are a number of moving parts in the deregulation process. Distribution costs are just one component. How deregulation measures up, overall, from a rate perspective depends on generation prices. If they remain stable, we’re going to compare favorably to other deregulated states, like Illinois, Pennsylvania, and Michigan.
TBJ: What about the supply of electricity – nationally and locally – over the next few years? Do you see possible service interruptions?
TS: Over the next couple of years, we don’t foresee any supply problems. As the demand for electricity – generally between 2% and 4% per year – continues to build, demand will increase, supply will become short, prices will react, and more people will enter the market. It’s Economics 101.
In the near term – as far as reliability and the system goes – we don’t anticipate problems. FirstEnergy, from a generating perspective, has improved efficiencies at our current generating stations to get more generation from the existing units rather than by building new generators.
TBJ: Is there anything else you would like to discuss?
TS: From a fair price perspective, Toledo Edison’s base rates have been frozen since 1996 and will remain frozen until January 2009. There aren’t many cases in the energy world – or the marketplace in general – where base prices haven’t changed in over 10 years. This is part of the deregulation transition – commitments that Toledo Edison made to keep the environment stable for customers, while improving our reliability, hiring new talent, and supporting our community.
Now, as 2009 approaches, our industry, our company, and our customers face some significant changes. But, I would say that in our business and in this world, change is inescapable. The more important thing, whether you are the service provider or the customer, is to be ready for change.
Even in a world of change, however, some things stay constant. We remain committed to providing safe, reliable service to our customers at a competitive price. As in the past, we will pursue that vision with continuous improvement initiatives, investment in technologies, and development of the skills and experience of our employees. Toledo Edison has been serving the city and the region for more than a century. We’re here for the long haul.