Here’s why electricity deregulation is bad for Virginia’s economy

You can’t drive very far without noticing the current price of gasoline. Most people know to the penny what the price was the last time they filled up.

But when it comes to electricity, few of us know what we’re paying per kilowatt hour unless we check our own bills. What other utilities’ prices are is a mystery to most of us.

The average price in Virginia is about 9 cents per kilowatt hour, the power it takes to light a 100-watt bulb for an hour.

And while gas prices are dependent in large part on highly volatile prices of crude oil, the variation between states rarely exceeds 20 percent. But electricity rates can vary three-fold, even though most electricity is generated by coal and nuclear, which is much less volatile in price.

Some of the variation can be blamed on the type of generation fuel, but government deregulation has also had a big impact on price.

For the last century, electricity was produced by local monopolies that owned the generation, transmission and distribution systems. Customers had only one choice of whom to buy from.

In exchange for this, government heavily regulated the industry. They allowed utilities to recover the cost of supplying the electricity and a guaranteed but reasonable profit. Our mostly secure and reasonably priced electricity supply was the envy of the world.

In the last decade, government and industry has embarked on a deregulation experiment based on the notion that if customers had a choice of providers, prices would decline. But for various reasons that should have been evident from the beginning, competition never materialized and in deregulated states prices have increased much more than in regulated states.   

Unfortunately, legislatures get the ear of the giant utilities. Ratepayers have mostly been sold out.

In pre-deregulation days, utilities generated their own power, delivered it over their own wires, and sold the product to the end consumer. The Supreme Court didn’t allow direct regulation of wholesale power, but did allow regulation of retail price. State lawmakers apparently didn’t understand that when they allowed utilities to break up this “vertical integration,” ceding their ability to control the primary cost of electricity.

Historically, electricity was made close to the market it would serve. Deregulation meant that power marketers could simply sell to the highest bidder, even if they were a thousand miles away.

All this attracted my interest recently when Allegheny Power proposed to sell their distribution operations to Rappahannock Electric Cooperative and Shenandoah Electric Cooperative for $340 million. (I first wondered where a nonprofit gets $340 million.) That deal will probably be finalized later this year pending approval from the State Corporation Commission.

I have long been an Allegheny customer and have mostly been happy with its service and price. I was concerned because I had heard that REC was more expensive.

That used to be the case when Allegheny’s generation was subject to regulation, but REC had to buy its power on the unregulated open market. In 2000, Allegheny divided its generation and distribution sectors into two companies. Since then, they have been having to buy on the open market (sometimes from Allegheny’s generation unit), so the rates have become closer.

Former Allegheny customers prices are not expected to rise more than 6 percent (barring fuel surcharges) through June 2011. After that, all bets are off.

Maybe the deal will be a good thing for Allegheny ratepayers. But I’d prefer to see Allegheny return to the way it used to be — owning both generation and distribution ... and having it regulated by the SCC. Unregulated generation is where the money is. Selling that unit means Virginia will never have control over this essential service.

A reasonably priced supply of electricity is essential to our economy. One would think that such a vital link would get more attention among policymakers and the media. Maybe it’s too complicated or the pain isn’t great enough.

Just wait.

Legge’s column runs every other Thursday on the editorial page.