With a 5-0 vote to approve an auction of power at the wholesale level, the Illinois Commerce Commission (ICC) recently moved the state a giant step closer to creating a competitive market for electricity.
The ICC, which regulates the state’s utility industry, gave its approval for the auction in late January in the face of fierce resistance from key Illinois officials, including Gov. Rod Blagojevich (D) and Attorney General Lisa Madigan (D), who contend the plan will lead to substantially higher electricity prices. Proponents of deregulation agree prices will rise, but they say the plan, which has been years in the making, will ultimately provide customers with a reliable source of power to meet growing residential and commercial needs.
End of Price Controls
As part of a plan to restructure its power industry, Illinois cut electricity prices 20 percent in 1997 and imposed a 10-year freeze on rates, which is set to end in 2007. In anticipation of the expiration of the freeze, the ICC will allow utilities to purchase electricity at a state-run auction–actually, a reverse auction–the first of which is scheduled for September.
In a reverse auction, also known as a descending bid auction, a buyer entertains bids from several potential sellers who have been informed of the buyer’s needs. The sellers compete with one another through progressively lower bids until the buyer selects the lowest-priced seller whose bid meets its needs.
In the Illinois reverse auction, wholesale energy suppliers will bid to sell power to Commonwealth Edison (ComEd), which distributes electricity to northern Illinois, and Ameren Corp., which delivers power to southern Illinois. The idea behind the reverse auction is that a competitive wholesale bidding scheme will help control the inevitable price increases once the freeze expires. Thereafter, rates would vary from year to year.
New Jersey is the only state to use reverse auctions in the wholesale electricity market. Its first auction was in 2003, and electricity prices in the state have risen only moderately since then. A February 2005 report by the New Jersey Utility Board noted rates had increased by 2.5 to 8.3 percent, while natural gas and oil prices in the region were up 25 percent and 30 percent, respectively.
Command and Control Economics
Blagojevich remains unconvinced. “The ICC will no longer regulate the price of electricity supply, and consumers will foot the bill, no matter how high,” he told the Chicago Tribune for a January 24 article. “This policy is both unwise and unfair.”
In a January 24 news release, Madigan asserted customers “will end up paying an extra $1 billion per year for the same electric service they have today.” Madigan plans to appeal the ICC’s decision in court.
“Apparently, many electricity customers in Illinois are concerned they will no longer benefit from below-market prices for electricity that were imposed nine years ago as part of the restructuring agreement adopted by the legislature,” countered Jim Johnston, a retired Amoco economist who is now a senior fellow at The Heartland Institute. “While there are howls of protest by buyers of electricity, there is no indication these electricity customers are willing to charge below-market prices for what they sell to customers or employers,” Johnston noted.
Market Success
Johnston explained that short of an extension of government-mandated price controls, it is inevitable that the price of electricity will rise in the near future. The key is to put in place a mechanism through which the market can deliver the lowest fuel prices to Illinois consumers.
The New Jersey experience “suggests a similar [modest] price increase might occur in Illinois given that a similar auction is planned for 2007,” said Johnston. Moreover, consumer “price increases for the first three years will be limited voluntarily by ComEd and its corporate parent Exelon.”
Bowing to political pressure to keep rates where they are, the state could nevertheless decide to extend the freeze. ComEd and Ameren, however, would still need to procure power somehow, and do so at a time when energy prices are continuing to rise. Analysts fear the result could send Illinois down the same path trodden by California a few short years ago, with rolling brownouts and blackouts wreaking havoc across the state.
California-Style Blackouts?
Concerned something like this could happen in Illinois, credit agencies are watching developments in the state closely. They fear the state might jettison the proposed market-based approach in favor of an extension of the freeze or some other form of price controls. Moody’s has already placed ComEd on its “watch” list, and Standard & Poor’s has downgraded ComEd’s debt, citing the “heightened adversarial environment in Illinois.”
Bonner R. Cohen ([email protected]) is a senior fellow at the National Center for Public Policy Research in Washington, D.C.
For more information …
For more information on the Illinois electricity auction, see
“Rising Electricity Prices: No Surprise, No Problem,” http://www.heartland.org/Article.cfm?artId=18521;
“ICC: Approve ComEd Auction; Demand Lowest Price Possible,” http://www.heartland.org/Article.cfm?artId=18391;
“ICC Did the Right Thing on Electricity Auction,” http://www.heartland.org/Article.cfm?artId=18390.
Bonner R. Cohen is a senior fellow with the National Center for Public Policy Research, a position he has held since 2002.
