When Jonathan Swann took a job in the corporate finance department at The Limited Inc., in 1995, he was happy to escape the turmoil at Dayton Power & Light, which was struggling with the pending deregulation of the electric industry. The Limited, a $9.7 billion (in revenues) clothing retailer based in Columbus, Ohio, was about as far from an electric utility as Swann could get.
But two years after Swann signed up at The Limited, the CFO there at the time read a newspaper article claiming that the deregulation of the electricity industry could reduce the cost of power by as much as 25 percent. The Limited’s 5,500 shops were then running up an annual electric bill of around $130 million. Eager to capitalize on the potential savings from deregulation, management set up a new energy services department. Not surprisingly, Swann, who worked his way up from accountant to manager of a service territory during his six years at Dayton Power & Light, was picked to head up that department.
Almost immediately, however, The Limited’s energy czar came to a rather painful realization: Deregulation of the electricity industry was not going to generate sizable cost savings for The Limited. “Probably 5 to 7 percent [savings] will come from competition,” Swann says. “We see much larger [savings] than that in some states and much less than that in other states.” While management still aims to reduce the clothing retailer’s annual electric bill by around 18 percent, Swann says much of the savings will come from better energy-management techniques. Those techniques, along with some savings from deregulation, have already shaved $6.5 million from The Limited’s electricity costs in just two years.
Shocking but True
Swann’s disillusionment with deregulation is not uncommon. The fact is, the merits of a deregulated power industry have been vastly oversold. Congress passed the first real harbinger of utility competition, the Electricity Policy Act, in 1992. Four years later, the Federal Energy Regulatory Commission opened up long-distance transmission grids to competing wholesale power providers. Since then, it’s been up to state legislators to bring meaningful competition to the local distribution level.
That, in turn, has led to a wildly fragmented power market. Industry observers note that deregulation is at a reasonably advanced stage in a handful of states — notably California, the first to completely open its market to all customer classes; and Pennsylvania, which has arguably done the best job of fostering competition. New York, Massachusetts, New Jersey, and Rhode Island have also done a passable job of opening up more options for customers. But most southern and midwestern states are moving at a lethargic pace. Says John A. Anderson, executive director of the Electricity Consumers Resource Council (Elcon), a corporate coalition that accounts for 6 percent of all the electricity consumed in the United States: “Nowhere in the States do we have anything approaching true competition.”
The numbers don’t lie. Retail electricity rates in the United States range from 2 cents to 15 cents per kilowatt hour. “No commodity has a price variability [like that] in a competitive market,” Anderson notes. “But nobody argues that this is a competitive market. It is Balkanized along state laws that end up protecting the monopoly utilities.”