WASHINGTON — A year ago, only four states had taken concrete steps to deregulate their electric utilities and introduce competition.
Now, 14 states have taken strong action, including two in the past month, and electric power analysts are watching closely to see what happens when California opens its market Jan. 1, the first big test of deregulation.
In spite of the jump-on-the-bandwagon effect spreading through state legislatures and utility commissions, plastics industry observers are not quite sure what the impact will be on site selection for their power-intensive operations.
In some cases, electric costs can make the difference.
Grafco Industries LP said Iowa's cheap electricity rates were a ``real heavyweight'' in the company's announcement in November to put its new Midwestern plant in the Mississippi River city of Bettendorf, Iowa. The state's rates were 40 percent cheaper than neighboring Illinois, said Tim Frank, president of the Hanover, Md.-based injection blow molder.
Neither state had deregulated its markets when the company made the choice this fall, although the Illinois Legislature has since passed deregulation legislation.
So will deregulation allow companies to pocket the same kind of savings that geography brought to Grafco?
Not likely, at least in the short term.
Some electric industry officials predict companies could see 10-15 percent rate cuts in deregulated states, which are mainly the current high-cost locations.
In the longer-term, after five years, the costs in some of those high-cost spots, such as California, could drop by one-third when utilities write off their stranded costs, which are inefficient power plants that will be unprofitable in the face of competition.
At least for the next few years, though, deregulation is unlikely to play a significant role in where most processors put plants, said Dennis Donovan, senior managing director of Wadley Donovan Group, a site selection firm in Morristown, N.J.
``It's not going to be a deal maker or deal breaker,'' he said. ``I don't believe we will see any significant cost reductions in any state until 2003 at the earliest because you need to pay off stranded costs.''
A Department of Energy study in August predicted that allowing utilities to recover many of their stranded costs would erase much of the 8-15 percent savings that competition is expected to bring. But not recovering stranded costs will bankrupt some utilities and reduce the value of utility assets by at least $70 billion, the study predicted.
``In most places, customers will see some rate decreases, although, frankly, they will not in a lot of cases be of the dimensions that some are claiming,'' said James Owen, a spokesman for the Edison Electric Institute in Washington, a trade association representing investor-owned utilities.
Deregulation is likely to lower prices in high-cost states but probably will not reduce rates much in already low-cost states, said John Cook, manager of national sales for plastics and industrial markets at Houston Lighting & Power, an electric utility in Houston.
The DOE study predicted that competition actually could raise rates in some regions, such as the Pacific Northwest, with low-cost hydroelectric power, and in the upper Midwest, with low-cost coal-fired power plants.
``From an economic development standpoint, there will be an equalizing effect,'' Cook said.
Now, electric costs average 4.6 percent of the manufacturing costs for plastics processors, according to figures from the Society of the Plastics Industry Inc., making a 10 percent rate cut worth about half a percent to the bottom line. For some processors, that's not enough to overrule the big factors of needing to be very close to customers and railroads and having a solid labor supply.
``Our decision has always been primarily because of the customer's location,'' said Andre LeBlanc, the chief operating officer of SPM Inc., the plastics unit of Yorktown Heights, N.Y.-based Dynacast International Inc., which recently has been expanding rapidly. Wanting to be within three hours of customers, for example, is why the company chose to build a new plant in North Carolina, he said.
While deregulation is not a factor for site selection now, it is likely to be very important in five years, said Clint Hoch, president of Corplan Inc., a site selection firm in West Orange, N.J.
``It is a shift and change that is still under way,'' he said.
Mel White, president and chief executive officer of blow molder CNC Containers Corp. in Tumwater, Wash., said electric utility deregulation is beginning to play a role in plant location, although it is ``not as big as you might think.''
Deregulation has played a role in some of CNC's new plants, allowing the company to sign shorter contracts with existing utilities and getting favorable exit clauses if competition does come, White said.
Impending deregulation now gives companies more leverage to negotiate, he said. ``It certainly wasn't even a consideration two years ago. It wasn't happening then,'' he added.
But the costs of shipping the company's bottles will continue to make proximity to customers the key factor, even though the company pays widely varying electric rates, from about 2.5 cents per kilowatt-hour in Washington state to 5 cents in Arizona to 7 cents in Southern California.
Generally, states have been passing laws that are ``more favorable than unfavorable'' to consumers of electricity, said Marc Yacker, director of government and public affairs for the Electricity Consumers Resource Council, a Washington lobbying group for large industrial users of electricity.
Some big states have gone against that trend, however, he said.
Illinois's new legislation, if signed by Republican Gov. Jim Edgar, would be a disaster because it limits how customers can buy power from outside the state, according to Yacker. The bill, however, does limit utilities' stranded costs recovery, a positive for industrial users, some officials said.
A spokeswoman for Commonwealth Edison, Illinois' largest utility, said the company has not taken a position on the legislation. But, she said, the law would allow the utility to recover only 50 percent of its stranded costs and mandate residential rate reductions that are a ``significant financial burden.''
Yacker noted that California's effort also is not perfect, because it allows utilities to recover 100 percent of their stranded costs. Nonetheless, the plan has the support of a carefully crafted coalition of utilities and business and residential users in the state.
About 30 plastics processors in California that are members of SPI will get rate cuts of 5-15 percent after Jan. 1 in a deal with electricity broker New Energy Ventures Inc., said NEV spokesman Lew Phelps.
Rates in California will drop to at least 30 percent of today's rates in 2002, when most of the stranded costs are paid off, he said.
About one-third of the stranded costs in California come from alternative energy sources like windmills and geothermal generators that regulators told California utilities to buy power from, he said. The energy crunches in the 1970s pushed alternative sources, but now they provide power at as much as 15 cents per kwh, well above the market rate, Phelps said.
Massachusetts also passed legislation in November that EEI's Owen said is fair and gives utilities a chance to recover 100 percent of their stranded costs if they sell certain plants.
In the nation's capital, deregulation legislation got bogged down in 1997 and may face many of the same problems in 1997, Owen said.
There is no consensus around some of the thorny issues of whether the federal government should mandate deregulation, tax policy for public and investor-owned utilities and whether the law should include environmental provisions encouraging companies to find cleaner power sources, he said.