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What Energy Deregulation Means For Chicago And Illinois

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Deregulation of the electricity market in Illinois is simple as a concept. But even that simple concept took lawmakers and others by surprise as the economic repercussions began to assert themselves.

The simple idea behind any deregulation is the tried and true belief that having many competitors in a marketplace will bring prices down for customers. If there is only one person selling oranges, he or she can demand high prices. But if two different companies compete for business selling oranges, then they will drop prices in order to attract customers.

The orange industry does not need to be deregulated, because there has always been healthy competition among grocery stores. But with electricity, it came to pass in most of the United States that the expense and undertaking of distributing electricity – building transmission stations, stringing wire throughout the states and cities, then maintaining all those poles and wires – created a situation where just a few companies had control of the so-called electricity grid (the distribution infrastructure) and the supply.

Not in every case, but in many cases, the utility companies that owned the grid also owned the electricity generating companies, which meant that healthy competition began to die off.

Competition among electricity supply companies partly died off because of regulations that allowed a few companies to control a vastly important and increasingly less competitive market. Deregulation, in turn, was the effort to drop regulations that slowed or thwarted competition.

When states deregulate their electricity markets, new electric supply companies move in to compete with each other. In theory, this lowers prices.

The utility companies – the distribution companies – meanwhile, have not been forced to sell their infrastructure of wires, poles and transmission stations. For many reasons, including the point that utility companies own those wires, poles and the transmission stations, the distributing utilities have been left intact. In practice, deregulation is about the supply of electricity, not the distribution.

When the Illinois government voted to deregulate electricity in the state, the Commonwealth Edison utility company or ComEd, retained its holdings as a distributor, and it remains the largest electricity distributor in the state with their business centered around the northern portion of Illinois, including Chicago and the greater Chicago area. Ameren Illinois, meanwhile, continues to cover distribution in the southern portion of the state.

In Illinois, deregulation was phased in. First, commercial and industrial customers were given a one-year phase-in period, allowing them to choose their own electricity suppliers. Meanwhile, the state imposed a no-generation rule on Ameren and ComEd, which meant utilities could no longer own companies that generated or produced electricity.

At the same time, for a ten-year grace period, 1997 to 2007, residential customers had to stay with their established electricity company and wait their turn to choose any supplier who offered electricity in their neighborhood. While waiting for 10 years to have a deregulated market reach residential customers, the state’s government cut customer electric rates by 20 percent for residential customers and froze that rate in place for the 10-year waiting period.

By 2007, when the residential market was deregulated, there were 55.000 commercial and industrial companies signed up with alternative retail electricity suppliers, known as ARES. While very few residential customers signed up with an ARES, the electric rates, frozen at an artificially low point for a decade, suddenly shot up. With increased competition for residential customers, in other words, prices did not drop, they soared, climbing an average of 50 percent.

Recall that prices had been artificially frozen at a point 20 percent lower than they had been before the phase-in decade began. So prices had predictable reasons to rise to some extent. But few expected prices to rise as quickly or as high as they did.

Prices rising 50 percent within a short period of time for the price of a movie ticket would be one thing, but it is widely recognized that electricity is part of the social contract between residential customers and the state. Since it is considered a necessity, having prices rise that fast forced the state to intervene once again.

The state, at this point, took a band-aide approach. In 2007, they authorized $1 billion to go straight to residential customers to relief them of the burden of high electricity bills. In the meantime, that gave companies a chance to move in to the residential market in significant numbers.

By 2009, competition among suppliers for residential customers was still weak. In the northern portion of the state, where ComEd controls distribution, there were only eight alternative retail electricity supply companies serving residential customers. By 2011, however, there were 52 ARES companies for Illinois customers to choose from, including 13 suppliers for residential customers and 30 for commercial customers in the ComEd covered territories and eight suppliers for residential customers and 16 for commercial customers in the Ameren territories. And at this point, the government is leaving well enough alone.

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