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Electric Power Industry Deregulation

.. with input and support from consumer advocates, small businesses and large employers, energy providers and experts, labor and environmental groups. The main objective of the new law was to allow Massachusetts consumers to choose their electricity supplier by breaking up the utility monopolies, and creating competition that will lead to lower rates in the future. Under the new law, local electric companies still own and maintain the wires that bring the electricity to homes and businesses, but consumers are now able to choose the company that provides the electricity they use. The distribution of electricity remains regulated to ensure reliable service to all consumers and to set distribution rates based on cost and performance, not at market prices.

However, competitive power suppliers whose prices for electricity are not regulated now provide the generation of electricity. In addition to breaking up the utility monopolies, the new law also provides electricity rate cuts to consumers while they choose which company to buy their electricity from. The rates are guaranteed to drop 15%, with 10% coming by March 1, 1998 and another 5% occurring by September 1, 1999, as the law provides a rate cap to lock these lower rates in for years to come. The law also provides the opportunity to eliminate sales tax on electricity transmission costs for non-industrial businesses, saving this sector an estimated $30 million a year. The law also created a 10% rate discount for farmers and others in the agricultural industry. Therefore, under the new system, your local electric company still delivers electricity to your home or business.

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However, you can purchase the electricity from the local company at the guaranteed minimum rate reduction, or you can choose to buy your electricity from another competing supplier if you decide that company offers better rates. In addition to lowering rates and allowing consumers to choose their power suppliers, the new law also provides many other provisions designed to protect the consumer. The law requires all competitive power suppliers to be registered with the state Department of Telecommunications and Energy, and also requires the suppliers to continue to provide reliable service. The law also prohibits suppliers from switching a customer to a different supplier without the customer’s consent. The law also creates rate reductions for low-income consumers, such as senior citizens on a fixed income.

As well as providing for these consumer protections, the law also entices economic growth within the state by lowering the cost of doing business through lower electric rates. This lower cost of doing business due to lower electric rates will encourage new employers, both large and small, to move into Massachusetts, as well as encouraging existing businesses to stay. In fact, in the short period of time the law has been in effect, it has spurred the forecasts of new job growth, and in the years ahead, is expected to create thousands of new jobs throughout Massachusetts. However, even though the law seems to have many more benefits than it does negatives, it has come under recent criticism. Many opponents of the law feel it is not doing its designed purpose, and consumer backlash was so great that Issue 4 asking whether or not the law should be repealed.

An organization called The Campaign for Fair Electric Rates, backed by failed congressional candidate John O’Connor and consumer advocate Ralph Nader, led the effort to repeal the law, calling it the biggest consumer rip-off in Massachusetts history. The big issue involved in the attempted repeal was lawmaker reneging on their promise to protect consumers by allowing utilities to recover 100% of their bad investments. Because deregulation will cause some utilities to lose money on investments in power plants or on contracts they made when they expected to keep selling power at a regulated price, the question becomes do they deserve compensation for these stranded costs, which may approach $200 billion nationally? For instance, utilities spent more than $5 billion building the Seabrook nuclear plant in New Hampshire, which produces 1,150 megawatts. In contrast, private developers have proposed more than 50 new plants, which combined would produce 30,000 megawatts, and the cost of these projects is estimated at slightly more than $15 billion. The utilities argue that public regulators approved those expenses and that the state can not back out on them now, stating that many plants have already begun to implement the new law, including selling most of their power plants. Repealing the law now, they argue, would create utter chaos.

Therefore, a provision was written into the law allowing for utilities to recover all of their stranded costs over a 10-year transition period. While proponents of the law were hoping for a 30% rate reduction, of which two-thirds would have come from consumers not having to pay for most of the utilities stranded investments, they will now have to settle for a guaranteed 15% rate cut, hopefully with more to come through competition. The question now on everyone’s mind is: has the law served its purpose and reduced electric rates? In a study done by Standard and Poor’s DRI entitled Economic and Environmental Analysis of the New Massachusetts Electricity Law, and released on September 2, 1998, it found that the new has triggered substantial economic and environmental benefits. According to the study, electric rates will decline by almost 28% by the year 2010 as a direct result of retail competition and industry restructuring. The DRI, a conservative report when compared to others, predicts that consumers will save $470 million in 1998 alone, and increases that estimate to at least $550 million per year in future years as a result of the new law. Also, the study predicts the Commonwealth to achieve higher economic output and employment growth triggered by the estimated $10 billion consumers and businesses will save on electricity costs.

By 2010, there will be over 60,000 more jobs, a $19.6 billion gain in consumers’ cumulative real discretionary income, and lower price inflation. All of this forecasting appears to put the law in a favorable light, but many want to know how it’s working now. According to the Massachusetts Electric Company, its 970,000 customers have saved a total of $67 million on their electricity bills in the first six months of the new electricity law. On September 1, savings for the company’s customers increased to more than 15%, or a total savings of $25 million per month, one full year ahead of the required rate cut. This was due to the company’s affiliates selling their power plants. Therefore, by examining the early results of the new law, along with projections such as the ones provided by Standard and Poor, one can determine that the deregulation of the electric industry has been long overdue.

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