Bottom Line Energy Issues - How Electric Deregulation is Working - Or Not

Feb. 14, 2002
By Lewis TagliaferreRecall that the Energy Policy Act of 1992 split off power generation from transmission and distribution. It created the category of Exempt Wholesale Generators, i.e. exempt from federal regulation under the 1935 Public Utilities Holding Company Act. Transmission was left regulated by the Federal Energy Regulatory Commission (FERC) and distribution was left regulated by the states. This move stimulated formation of several hundred “merchant generator”companies organized to generate power for the new wholesale market and other retail merchants organized to buy at wholesale and sell at retail. Some of them are new entrepreneurs and others are split off from established regulated utilities that set up new holding companies not classified as utilities. They are represented by the Electric Power Supply Association ( and the Power Marketers Association ( respectively. About half the states with above national average regulated prices have enacted legislation designed to encourage competition by enabling consumers to choose a power supplier. Most of those plans have yet to show substantial results because they were phased in over a number of years to permit incumbent utilities to recover costs for power plants that would be underbid by new competitors. In addition, consumers were induced not to switch suppliers by rewarding them with lower rates if they stayed put, so-called default pricing. Only the largest users, like gambling casinos in Nevada, that could negotiate significant lower rates have done much switching in deregulated states. For those who can decipher them, deregulation offers large users pricing options including time of use, renewable sources, and cost of service options. Retail competition has yet to hit its stride among residential users because state legislators are afraid to let retail prices float up and down with supply and demand. The worst case scenario occurred in California where wholesale prices soared up to 10 times normal last spring when peak demand outpaced supply, and incumbent utilities faced bankruptcy because price caps stopped them from recovering the high wholesale costs. CA has abandoned retail consumer choice and set up a new state power agency, while incurring liabilities of more than $12 billion for long-term power contracts as the purchaser of last resort.  However, the anticipation of profits has spurred a run on building new power plants for the wholesale market by merchant generators. A study issued in January by A.G. Edwards & Sons, Inc. forecasts that the frantic pace of constructing new generation plants will assure more than adequate surpluses for the next few years in all the nine regions coordinated by the North American Electric Reliability Council (NERC). This splurge in power capacity has reduced wholesale prices and squeezed profit margins, depressing the stock market valuation of these firms, and making it more difficult for them to spend the marketing money needed to further stimulate retail competition. To compensate, suppliers have cut back plans for new power plants, according to the A.G. Edwards report.  Even so, adequate surpluses are forecast to prevail through 2004, after which demand may again stress supply, raising pressure on wholesale prices, and possibly triggering a new construction boom. Whether you like this news or not depends on your viewpoint, either consumer or investor. As the report to investors notes, “We are encouraged by the current round of scaling back of [construction] plans, which could shorten the down cycle in power prices [and increase profits].” Complete details are available from offices of A.G. Edwards & Sons, Inc.Not all is rosy, however. Peaks and valleys in power plant construction raise fears that future demand will outpace supply enough to create more CA-style price spikes and outright shortages manifested in blackouts. For example, more than one third of the 29 new plants approved by Texas have been shelved, creating concerns about long term future needs. Plus, NERC analysts forecast that power grid congestion will get worse during the next decade as little new transmission capacity will be added, unless FERC enables adequate profit margins and loosens control. They are hoping that new regional transmission organizations will address this goal. FERC chair, Pat Wood has said that the creation of four independent regional transmission grids will probably be measured “in months, not years.” The ability of FERC to police the national electric grid is being investigated by a special project of the General Accounting Office, watchdog of Congress. Deregulation means that power suppliers no longer have a guaranteed profit. Neither do consumers have a guaranteed supply. Deregulation of natural gas has weathered just such problems. Until things got settled in Georgia, about 130,000 customers found themselves temporarily without any gas supplier. Today, many would say they preferred regulated monopolies. At least they were assured about supplies and confident that prices would not spike out of control.Continue >> Part 2) Enron - Is Capitalism In Trouble?

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