Deregulation Backlash

03/21/2007 | By Lew Tagliaferre

Assuming that educated consumers make the best customers, this column attempts to make sense from all the noise to spare its readers from the hours it takes to search and analyze current events. Granted that various observers will draw differing conclusions from identical data, but there are some clusters of energy information that point to events worth reporting. Such is the present flurry of news pointing to a backlash forming over electric utility deregulation.

I assume you are busy, so I will cut to the chase. It seems that a clash between forces representing energy consumers and forces representing energy investors is under way. What this means for energy buyers varies among the states, so the situation is not so far removed from conditions that stimulated the policy toward electric-utility deregulation in the first place.

Permit a short history lesson: Following the OPEC oil embargo of 1976, Congress passed the Public Utility Regulatory Policy Act of 1978. Its goal was to stimulate independent investors to build power plants and, thus, provide a competitive supply of new power for utility companies in areas of high costs. Although it stimulated new investment in generators fueled mostly by gas and built by independent power producers, national-corporation energy buyers were not satisfied with widely fluctuating conditions among the states, so they successfully lobbied for the Energy Policy Act of 1992. That policy permitted states to require vertically integrated utility monopolies to divest their generating plants and opened the door for more competition among suppliers at the wholesale level. Plant siting was controlled by the states, interstate transmission lines were controlled by the Federal Energy Regulatory Commission (FERC), and new retail suppliers were invited to compete with the regulated utilities. More than half the states took a wait-and-see attitude; others jumped into competition with little awareness of the unintended consequences.

Utilities mounted several different strategies in response to investor concerns. Some set up holding companies and sold off their generating plants. Others set up subsidiaries to invest in supply generation. Still others successfully obtained state protection by lobbying for floors and caps on prices to protect their interest in stranded assets, thus deferring competition while politically supporting it. Unfortunately, the law also removed incentives for building and owning transmission lines by attempting to convert them into a form of common carrier of power from any and all suppliers. So, the infrastructure needed to connect suppliers and users was permitted to degrade and atrophy. Some states, notably California, saw price spikes and shortages from market games, so FERC attempted to aggregate regions into voluntary-control entities set up to assure level playing fields among competitors. Its attempts worked marginally well in some regions, but failed to prevent blackouts due to shortages and spikes in consumer costs when supply contracts were given to the highest bidder.

The present Bush administration came into office with a different vision for energy policy, and that situation led to the Energy Policy Act of 2005. The latter was primarily to fix the debacle in transmission lines and stimulate development and commercial use of alternative renewable generation, plus encourage conservation measures to reduce growth of demand while also encouraging growth of petroleum-based suppliers.

As rate controls on electric utilities finally played out, consumers in some states (including Maryland) saw spikes in rates that shocked them into an angry reaction. The governor responded by tightening controls. It became evident that true open markets in the few regions that actually worked were accompanied by price and supply instability, unlike the good old days when both were regulated by state public-utility commissions. Additionally, fears about global warming due to fossil-fuel combustion rang up intense debates and opposition to expansion of electric-power infrastructure – even when based upon renewable technologies.

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