Choice could mean change for manufacturers

By Sheldon A. Taft

Beginning Jan. 1, 2001, Ohio will change nearly a century of electric service regulation by the Public Utilities Commission of Ohio (PUCO).

Electric utility service will be divided into two pieces — electricity supplies will be deregulated, while the wire delivery of those supplies to consumers will continue to be regulated. The replacement of regulation by customer choice will create opportunities and risks for all Ohio consumers.

The question on the minds of many manufacturers is what impact deregulation will have on the price of electricity supplies. It is impossible to predict market prices, but many industries which have been deregulated — long distance telephone service, air travel, trucking, railroads — have found that deregulation has brought down prices.

Between now and Jan. 1, when competition begins, manufacturers and other consumers must prepare for competition. Consumers must determine how they use electricity and how that use can be made more efficient.

The purpose is to make their electricity load more attractive to competitive electricity suppliers and thereby reduce their costs. Discussions with competitive electricity suppliers will help educate consumers about the opportunities for improving the quality and reliability of their service and reducing their costs.

In the deregulated environment, manufacturers and other heavy users of electricity will be faced with choices affecting operations and costs. Consumers will be able to choose what kind of electric service they want and who their supplier will be.

For example, competitive electricity supplies will be sold in hourly increments, and on-peak energy (when everyone is buying) will cost much more than off-peak energy (when fewer people are buying). This will enable manufacturers to reduce costs by shifting their production to off-peak hours — especially during the peak demand summer months.

But because second or third shift workers are harder to attract, the cost and inconvenience of such scheduling changes may offset the savings on electricity costs.

Manufacturers may also consider interruptible electric service –which is less expensive than firm, continuous service and already available in some parts of the state. Interruptible service may occur when the market price of electricity rises above a predetermined level.

Manufacturers may be willing to interrupt their electricity supply, and therefore their production, if the higher price of electricity increases their costs of production above the value of their production. Whenever the market price for electricity goes above that price identified by the contract, service is automatically interrupted. Such interruptions may last several hours.

The contract may also permit a customer to continue service by “buying through” electricity supplies at the higher market price.

Manufacturers considering interruptible service must weigh the cost savings from avoiding high priced electricity against the costs of sending workers home or missing production and shipping deadlines. Maintaining inventory may offset some of these consequences.

Ohio’s deregulation law has created protections for customers who choose not to choose. Such customers include those who do not use much electricity or whose electricity costs represent a very small portion of their total production costs.

These customers may continue to receive the same kind of bundled electricity service they have in the past. This default service will be price-capped during a market development period (MDP) beginning Jan. 1 and lasting for up to five years.

At the end of the MDP, the electricity supply part of that electric service will become deregulated and subject to market forces. However, the customer’s wire delivery service provider must continue to make default supply service available to consumers at a market price.

Under Ohio’s electricity deregulation law, electric utilities have up to 10 years to make the transition to deregulated electricity supply markets. Each of Ohio’s eight investor-owned electric utilities has filed a transition plan, which must be approved by PUCO.

Consumers, potential competitors, the Ohio Office of Consumers Council and the PUCO staff have been working with utilities to resolve these complex transition plan cases. Cleveland Electric Illuminating Company, Toledo Edison Company and Ohio Edison Company were the first of Ohio’s electric utilities to settle their transition plan cases. While each case is different, the settlement indicates how competition will be implemented in Northern Ohio.

Under these settlements, electric utility service will be unbundled into electricity supplies, which will be deregulated, and the wire delivery of those supplies, which will continue to be regulated as a utility service. To encourage customers to shop, the utilities will offer a shopping credit, which customers may use to buy electricity supplies from competitive suppliers.

The shopping credit will equal the sum of an assumed market price for electricity plus a shopping incentive, which will equal a percentage of the assumed market price. For industrial customers, that incentive will start at 15 percent of the assumed market price and will total 3.016 cents per kWh for 2001, the first year of the market development period.

The assumed market price will increase with inflation and the shopping incentive will increase from year to year, so that in 2005 — the last year of the market development period — the shopping credit will total 4.304 cents per kWh for industrial consumers.

At the end of the MDP, customers will pay their electric utility only for the public utility wire delivery service they continue to receive. For some utilities, consumers will also have to pay transition costs. Cleveland Electric Illuminating customers will pay transition costs through 2008; Toledo Edison customers through June 30, 2007; and Ohio Edison consumers through 2006.

Consumers will also have to pay a supplier for electricity supplies. Those who choose not to choose may purchase default supplies from the utility provider of their wire delivery service.

Some industrial customers have special contracts for electric utility service, which provide for special services or rate discounts not available to consumers receiving service under a utility tariff.

Such industrial customers will have the option of continuing their contracts for the remainder of the term or taking a second look during 2001. Under their second look authority, contract customers may terminate their contracts and look for competitive suppliers or extend their contracts through the six- to eight-year period during which their utility may be recovering transition costs.

The electric transition plans also to provide for extensive consumer education, protections against cross subsidization between an electric utility’s deregulated electricity supply affiliate and its regulated wire delivery affiliate, and protections for employee workers who may be uprooted by the transition from regulated electricity supplies to deregulated markets.

PUCO has continuing responsibilities to ensure that the deregulation law is properly and fully implemented and that the pro-competition purposes of the legislature are fulfilled.

One opportunities created by Ohio’s electricity deregulation law is the aggregation of electricity consumers for creating larger blocks of electricity demand, thereby attracting more competitive bidders to supply that demand. Large manufacturers may decide to aggregate their facilities and even the facilities of their suppliers.

Municipalities and counties may aggregate their citizens, while trade associations and other groups sharing common interests may create affinity groups.