Why Deregulation Failed--And What Comes Next

The government’s deregulation of five major industries—airlines, telecommunications, cable television, banking and electricity—has harmed customers far more than helped them, according to a study released by Consumers Union. “The promises of deregulation have not been kept,” said James Guest, president of the nonprofit consumer organization, which originally supported airline deregulation as a way to lower prices. Instead of promoting vigorous competition, deregulation legislation has been written in ways that leave consumers at the mercy of “a Wild West marketplace,” he said.

Guest said the study, published in the July issue of Consumer Reports magazine, concludes that deregulation has caused a sharp deterioration in service and dramatic increases in hidden fees and loopholes.

The basic reason deregulation of electricity has not lived up to claims of its sponsors is that it has not really been tried yet. In spite of widespread use of the term, deregulation does not exist, even in the states that have passed laws to implement consumer choice. What does exist is a form of government mandated restructuring of investor-owned utilities, leaving the federal, municipal and rural electrics unaffected. American humorist Will Rogers said, “When Congress makes a law it is a joke, and when they make a joke, it is a law.” If you want the full story, please read on. Then, you be the judge.

Federal policies lack coherence

You may recall that the Energy Policy Act of 1992 responded to demands by large electricity users to create national competition among electric generators so that prices, which varied considerably from state to state, might seek a lower market equilibrium. This goal was met by separating power generation from high-voltage transmission and local power distribution, and creating a new category of wholesale generators exempted from the Public Utility Holding Company Act of 1936. Regulation of interstate transmission lines was left with the Federal Energy Regulatory Commission (FERC) and regulation of intrastate power distribution was left up to the states. Thus, only power generation was actually deregulated. The investor-owned system that formerly consisted of integrated power generation, transmission and distribution monopolies was replaced with a fragmented three-part system. Its sponsors convinced state legislators it would ensure lower prices, and stimulate better service and new consumer applications, like deregulation of the airlines and telecom industries had provided. About half the states with electric prices above the national average embarked on so-called deregulation schemes during the 1990s, while the states with lower than average prices did nothing, and Congress just watched.

A deregulated wholesale electric market stimulated nonutility investors to build new power plants and incumbent utilities to merge with neighbors and reorganize into holding companies with a wide variety of subsidiaries offering new consumer services, including engineering energy-efficient retrofits, managing load profiles and providing telecommunications, in addition to basic power generation. Some utilities actually sold off their generating plants, as ordered to by some states, and chose to concentrate on the state-regulated “wires business” of delivering power supplied by others. Those who chose power generation as their core business soon were faced with volatile prices and an oversupply of competing power plants under construction that depressed earnings. They also faced vocal locals in choosing the generating fuel, whether oil, gas, coal, nuclear or renewables and in siting new plants. They retaliated by forging a new marketplace for trading futures in electric delivery. That led to the debacle of Enron, which went bankrupt trying desperately to produce the appearance of earnings from unethical, if not illegal, transactions apparently sanctioned by its auditor, Arthur Anderson. Other energy traders now are in similar hot water.

While the political motives may have been driven by lower prices and improved services, the unintended consequences that usually accompany major policy changes have conspired to create unhappiness and discontent all around. Among the adversarial combatants are energy producers pitted against environmentalists, stockholders pitted against consumers, and state public utility commission regulators pitted against the federal watchdogs at FERC. In addition, the present concern for international terrorism and the U.S. dependence on oil from Saudi Arabia, Iran and Iraq have prompted the White House to seek a new energy policy that split the House and Senate along lines of producers versus environmentalists respectively so that electricity is foundering among the divergent views without any clear direction coming from Washington. During the energy policy debate shown on C-Span, one senator observed, “We are not legislating what is best for America, but> what merely is passable.” Another noted, there are two things Americans should not watch being made: sausage and federal laws. Some Capitol Hill insiders doubt there will be an energy bill from this Congress because too many senators hate the House version and too many representatives hate the Senate version.

State deregulation plans are floundering

States that did adopt a plan for consumer choice in selection of a power provider were successfully lobbied by incumbent utilities who cried for protection from outside suppliers until they could be adequately compensated for potential losses of “stranded costs” for plants and equipment incurred in good faith as monopolies. These costs were added to the distribution costs for several years, and so raised the burden on consumers who might switch to another supplier and forced those new suppliers to offer prices of power low enough to offset the added delivery costs to retail customers. In addition, incumbent utilities often reduced power prices to levels so low it was difficult, if not impossible, for alternative suppliers to compete, so that legislators could deliver savings as promised to consumers. These default price reductions made the consumers happy, but any free market pressure for rising prices was effectively stifled, practically sealing out any new competitors. The public just is not politically ready for rising prices that send signals to conserve when supplies are tight. Even the slightest trend upward sends the politicians running for a fix. No politician or regulator wants to be blamed for rising prices in a free market.

With reduced prices guaranteed for several years in most “deregulated” states, it is little wonder that very few consumers have been induced to switch suppliers or know why stockholders of investor-owned utilities have been disappointed in their financial performance. While incumbent utilities that sold their generating plants had to buy power on the volatile wholesale market, even wholesale prices often were capped by state laws to protect consumers from fluctuations until a competitive marketplace could be established. This insanity reached its zenith in California when wholesale prices skyrocketed due to regional supply-demand imbalance in 2001, and incumbent utilities were driven toward bankruptcy by capped resale prices. The state had to step in as buyer of last resort, and now California taxpayers are saddled with the $12 billion bond issue to pay for long-term power contracts purchased by the state at prices far above capped rates. Market prices have returned to normal levels, and now California wants FERC to void those long-term contracts while it continues to control the wholesale market.

Transmission bottlenecks challenge FERC

The transmission system was never designed as a national highway for power transfers, although it does include points of interconnection between regions to mitigate against catastrophic blackouts. It is more like the old state highways with a tollgate at each state line. Imagine being a trucking operator under those conditions. That is the problem facing independent generators trying to move their power to consumers. Location of a power plant can have a crucial impact on the cost and availability of transmission to “wheel” the power to its customers. The problem facing FERC is that incentives for maintaining and expanding the transmission grid no longer exist so it is rapidly deteriorating and causing bottlenecks in power delivery at numerous points. Without a national transmission grid there can be no national market for wholesale electric power. As if this comedy of errors were not complete, the loose cannon in deregulation is a mandate by FERC to require turnover of transmission lines by their utility owners to a few Regional Transmission Organizations (RTO). It is hoped this move would avoid the unequal tariffs charged to generators to move power across state lines.

It is one thing to have an excess of power generation capacity under construction, and quite another to create a national transmission grid for delivering the power that would be both economical and also adhere to Kirchhoff’s laws of AC power distribution in parallel circuits. Remember them? Electricity cannot be stored for future distribution as oil and gas can, but the regulators seem to overlook that fact. Consider the complexity of a transmission system with thousands of generators and several hundred million different loads. Factor in the absence of input of qualified systems engineers in FERC rulemaking, and you have a really interesting situation brewing.

FERC has approved the merger of the Midwest Independent System Operator with the Southwest Power Pool, creating the first and likely largest RTO in the country. It will operate throughout 21 states. FERC now is working on issuing standardized tariff rates for RTO systems. When completed, transmission-service customers in one region (A) will pay some of the costs in a neighboring region (B) when generation from B benefits users in A. However, state utility commission leaders want more influence in this regulatory process. Meantime, delivery of power through the many choke points raises serious concerns about overall reliability during load peaks, especially for users that require power quality of 99.9999. Solutions include owner-financed on-site power plants, and distributed generation closer to the point of use being stimulated by the DOE. (See EC issue of May 2002) There must be an opportunity here someplace for electrical contractors.

Future risks and challenges

Given the above conditions, it takes only a little imagination to see more risks and uncertainty ahead for producers, environmentalists, consumers and investors. This country cannot function long at all without a growing economical and reliable supply of electricity.

Pull the main circuit breaker on your building one morning and check your losses by the end of the day, not to mention the psychological malaise that will be created by little or nothing to do. If this prospect does not stimulate you to pay more attention to the changing energy policies under consideration in your area, perhaps you are reading this on some otherwise uninhabited island, such as the one in the movie, “Castaway,” starring Tom Hanks. Perhaps you should see it to preview a life without electricity. In the meantime, you can find a summary of attempts at “deregulation” in your state at this government Web site, where even they call it “restructuring,” not deregulation:

http://www.eia.doe.gov/cneaf/electricity/chg_str/tab5rev.html EC

TAGLIAFERRE is proprietor of C-E-C Group. He may be contacted at 703.321.9268 and e-mail lewtag@aol.com.


About the Author

Lewis Tagliaferre

Freelance Writer
Lewis Tagliaferre is proprietor of C-E-C Group. He may be reached at 703.321.9268 or lewtag@aol.com .

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