While skeptics may question the success so far of the move to retail electricity competition in some states, the State of Maine is enjoying several important achievements with its re-designed market.
Maine has a number of suppliers active in its retail market, and in the spring of 2002 reached migration rates of nearly 50% of total Maine load, virtually the highest load migration level to date in the United States. There are, therefore, important elements of Maine’s approach that other jurisdictions should consider as they plan their own moves toward competition.
The vast majority of Maine consumers who have switched to competitive retail supply options so far are in the medium and large commercial and industrial classes. Maine is, however, also beginning to see some niche market activity for small consumers in the green power sector. It is reasonable to project that, as the large customer market matures, competitive suppliers will begin to expand their focus and work harder to develop the residential and small commercial markets.
Importantly, these developments in the competitive market have been achieved without government intervention in prices. Maine has resisted the temptation seen in some other states in the US to set default prices administratively, either to ensure political support for restructuring (by setting them below market) or to speed development of the competitive market (by setting them above market). The Maine Public Utilities Commission has played an active role in developing and implementing Maine’s restructuring. The Commission holds that, while the type of intervention seen in other states may appear to yield short-term dividends, it comes at a cost, and in many states it has impaired development of the market more than it has aided it.
HIGH RATES LEAD TO COMPETITION
Maine began its move to electric competition in the mid 1990s, when the state’s high electricity rates, like those in the rest of New England and in many other states, prompted Maine regulators and legislators to consider other ways to structure the market. Maine’s high rates, largely the result of long-term contracts signed by utilities as part of a push to encourage development of renewable energy merchant generation plants, so concerned the Maine legislature that in 1997 it passed a law opening up Maine’s electricity supply to competition, beginning in 2000. The law shifted the risk of future generation-related investments from consumers to the private sector. Maine policy-makers expect that, over time, the switch to a competitive electric market should help to move Maine’s overall electricity rates closer to the national average.
Divestiture was a cornerstone of Maine’s move to competition. By requiring that incumbent utilities sell their generating assets, and by limiting the degree to which incumbents could participate in the newly competitive supply markets, Maine has avoided the problem seen in other states where incumbent utilities exercise extensive market power. In Maine, incumbent utilities are almost entirely only transmission and distribution utilities. They do not compete for electricity supply consumers, a fact that has helped establish good working relationships between Maine utilities and competitive retail providers, which in turn has helped make the transition to competitive markets go smoothly.
Another important feature of Maine’s market is the manner in which the standard offer (i.e. the default electricity supply service) price is set and supplier selected. Maine’s standard offer is available to all consumers who do not buy directly in the competitive market. The right (and obligation) to provide standard offer service is bid out by the Maine PUC periodically, with the lowest price bidder for each class of service in each service territory awarded the contract.
The product provided by the winning standard offer bidder is all-inclusive (e.g., all energy, capacity and ancillary services) and is sold at the bidder’s price. As such, it allows for ‘apples to apples’ comparison with prices for electricity supply available in the competitive market. Rates for transmission and distribution service, which continue to be regulated by the Maine PUC, are the same whether customers take the standard offer or obtain their supply bilaterally. The Commission does not intervene in price setting for electricity supply at all. Through this process, consumers reap the benefits of the competitive market, even though most smaller consumers have not yet directly entered the retail market. The creation of new stranded costs has also been avoided – an important benefit, since it was Maine’s high stranded costs that led the legislature to move to a competitive market in the first place.
Another factor that underpinned the success to date of retail competition in Maine has been the sound New England wholesale market, upon which Maine depends entirely for supply and price. The wholesale market was launched about a year before Maine’s move to a competitive retail market. By the time Maine’s new structure was put in place, the regional market was functioning smoothly, which helped ease the transition. While issues remain with the wholesale market, the Federal Energy Regulatory Commission (which has jurisdiction over wholesale issues) appears to be moving in a direction that will allow Maine to have continued confidence in wholesale prices.
EDUCATING THE CONSUMER IS VITAL
Consumer education played an important role in gaining acceptance for Maine’s restructuring. Prior to the cut-over date, the PUC spent over $1 million to ensure that the public was informed about the changes and opportunities created by the new system. Components of the education campaign included itemized billing (i.e. separating electricity supply from other components of the bill) and environmental disclosure labels.
Disclosure labels in particular may play an increasingly important role now that ‘green’ supply options have arrived in Maine. Maine’s environmental disclosure labels provide consumers with critical information about their electricity supply, including price, power sources, and air emissions information, both on their own and compared to New England average emissions. The labels, similar to nutrition labels found on many packaged foods, promote shopping by facilitating comparisons among suppliers.
Maine has also benefited from the construction, on a merchant basis, of significant additional generating capacity. While there may be no direct correlation between the emergence of these new sources and the design of Maine’s restructuring efforts, it seems clear that Maine’s policies removed barriers from their development and may have stimulated their construction.
RULES ARE ALWAYS UNDER REVIEW
Maine continues to fine-tune its rules. The PUC recently completed a report to the Maine legislature with recommendations for changes to standard offer service (see www.maine.gov/mpuc). While concluding that its standard offer has generally worked quite well, the Commission believes that it should be tailored to the level of competition seen in each market sector. For example, in the medium and large commercial and industrial sector, the extensive participation in the bilateral market suggests that competitive options are available to most consumers. For such consumers, the standard offer should no longer be just another supply option – it should instead be tailored as a last-resort service. Among the ways the Commission is considering changing the standard offer for large consumers is to re-set prices more frequently, perhaps quarterly, or to index prices so that at any point the large customer standard offer price more closely mirrors the one available in the market.
For smaller consumers, on the other hand, for whom significant retail competition (at least in the form of bilateral contracts) has not yet developed, the Commission believes the standard offer should remain widely available at a relatively steady price. It should be an option that continues to secure the benefits of the competitive market for these consumers until development of a more robust retail market. One change Maine is considering, however, is to make small consumer mailing lists available to suppliers. This move would help reduce a barrier to development of the small customer market – the high initial customer acquisition costs.
The Maine Commission is not overly concerned with the more limited development of its residential and small commercial markets. Development of competitive retail electricity markets may not be unlike development of long-distance competition after the break-up of AT&T in the mid-1980s. Some experts suggest that it took nearly 15 years for robust competition to develop in the long distance telephone market, and the PUC believes the development of competitive electricity markets may also be evolutionary, with providers first focusing on the ‘low-hanging’ fruit – that is, the larger consumers who can provide larger profits -and then focusing on smaller consumers.
The Maine Commission believes that other jurisdictions planning a move to competitive retail markets should consider relying on the market to set their default service prices, as Maine has done, and should require that incumbent utilities divest their generation assets, so they do not have an unfair advantage in the competition for customers. These moves, when combined with a strong consumer education programme, can go a long way to providing a sound foundation for the evolution of robust retail electricity markets.