In 1997, the Massachusetts Legislature enacted a comprehensive electric restructuring law with the intention of creating a competitive electric-supply market that would lower consumer electric rates and still provide for a reliable source of energy.
For electricity customers, the law has been an undeniable success. In 1998, customers realized an immediate 10% price reduction and in 1999, a further reduction of 5%, totaling a 15% reduction, which is retained today and which adjusted for inflation.
Regrettably, the good news for Massachusetts' consumers has been overshadowed in recent months by record increases in market prices for oil and natural gas, as well as by concerns resulting from extensive media coverage of deregulation in California. Despite those concerns, the facts show that on critical elements of restructuring, Massachusetts and California are considerably different.
First and foremost, the Massachusetts Legislature provided for mechanisms within the electric restructuring law to guarantee rate reductions while providing flexibility within that rate structure to allow for inflationary cost-of-energy adjustments. In doing so, the Legislature maintained the economic viability of distribution companies by allowing them to recoup the actual costs of energy.
According to California's law, electric rates are capped. The result has been that California's utilities are forced to buy power in the open market and yet cannot sell the product for the price at which it was purchased. In Massachusetts, legislators and regulators have recognized the pitfalls to that approach and have made prudent cost-of-energy adjustments. The law has allowed Massachusetts utilities to adjust rates to reflect the record-setting increases in the costs of oil and natural gas used to produce electricity. While it increased electric bills, it also sent proper price signals and maintained the economic stability of the Massachusetts energy market.
Another difference in the deregulation process of the electric industry between the two states is that California utilities cannot enter into long-term bilateral contracts to hedge against soaring energy prices during peak power demand. In fact, utilities are forced to buy all of their power on the spot market and that has subjected the entire energy portfolio of California's distribution companies to the whim of the market.
In Massachusetts, however, distribution companies are free to hedge against market impulses by entering into long-term supply contracts. That provision alone has contributed to savings for our customers and has provided a modicum of protection against potential gaming of the market.
All told, customers in Massachusetts have saved more than US$1.5 billion in energy costs since 1997. Those savings are the result of careful legislative deliberation. Through their work in 1997, the Legislature and governor displayed an appreciation for sound economic principles that have benefited the consumers of Massachusetts. At NSTAR, for example, electric customers have saved more than US$500 million as a result of price reductions since 1997.
In Massachusetts, the Legislature and others who helped craft the deregulation legislation did not entirely premise customer savings on lower energy costs. Instead, the Massachusetts Restructuring Act sought to encourage efficiency by utilities and to promote the development of more generating capacity as ways to improve competition and thereby lower consumer costs.
At NSTAR, effective cost controls have led to actual price reductions for customers. For our customers, even beyond the original 15% price reduction, effective cost cutting has had the consequence of improving NSTAR's credit rating, meaning that NSTAR customers pay interest costs that are 20% lower than California utilities with weak credit ratings.
By cutting costs and improving efficiency, NSTAR is able to make significant capital investments in its electric and gas distribution system. In fact, the capital investments made to ensure safe and reliable distribution of energy since the 1997 restructuring act are approaching US$500 million.
A final major distinction between Massachusetts and California lies in the area of siting and constructing new generation. We are all aware of California's difficult environmental and siting restrictions and the lack of new generation that is a significant contributor to its energy difficulties.
In Massachusetts, restructuring has encouraged new generating capacity. In 2000, more than 1500 MW of new capacity was added to the New England regional electricity supply. An additional 8300 MW is expected to be in operation by the end of 2002. The new natural gas fueled capacity further ensures a reliable, cleaner and cheaper supply in Massachusetts and throughout New England.
We still have a lot to do before we can call deregulation a complete success. The record-high oil and gas prices have not only increased energy bills but also have been an obstacle in developing a competitive energy market.
Deregulation in Massachusetts continues to move in the right direction and the energy industry is well prepared to meet expanding consumer needs. The regional energy supply is growing rapidly and will continue to reliably serve the energy, environmental and economic demands of the six-state New England area.
Thomas J. May is chairman and CEO of NSTAR, the parent company of Boston Edison, Commonwealth Electric, Cambridge Electric, Commonwealth Gas and unregulated subsidiaries in telecommunications and district energy. He previously served as president and CEO of BEC Energy and its subsidiary Boston Edison Co., which he successfully guided through electric-utility industry deregulation. May has the Bachelor's degree in business administration from Stonehill College, the Master's degree in finance from Bentley College, and he is a graduate of the Harvard Business School's Advanced Management Program.