Electric Utility Deregulation

[Kidlicious]

Originally posted by Imran Siddiqui
Deregulation doesn't mean you abandon anti-trust laws . It just means that you allow more companies to come into the market.

And raise prices

[Adam Smith]

Originally posted by Kidicious
Deregulation is always an industry scam. It's just a matter of how much more money they can rip us off for. If you are fooled by big business than shame on you.

Lets see... US railroad rates are half what they were in 1980; consumers are saving about $28 bill per year; rr's are carrying twice the traffic with half the employees....

Shall I continue with other industries?

PS:
The fact that natural gas prices rose after deregulation is not necessarily bad. Regulation kept natural gas prices artificially low, and low prices were only available if you could find somebody willing to provide the gas. Virtually none of hte new construction in the 1970's and ealry 1980's even bothered to have natural gas service, and these folks are now paying for much more expensive electric heating, etc.

[chequita guevara]

Natural gas prices rose because they stopped storing gas, at least in the MidWest. Several mild winters had left the companies with an oversupply of gas, and so they stopped storing the gas, and the following winter, MidWesterners were screwed. I have an $1800 gas bill from my last winter in Chicago, when previously it had only been $300 for a winter.

Part of the problem with derregulation is that in order to take over contracts, companies do what they always do, underbid and overpromise. Water privatisation has been a sorry business in Britain, from what I've read, with water prices rising and service dropping. The same with train service. Elsewhere in the world, privatisiation has ment exchanging a government monolpoly for a corporate one. There was a virutal revolution in Bolivia to stop Bechtel from buying and dismanteling the water system there.

In Illinois, electric customers were offered a choice between electric companies, but if they switched from ComEd, they had to pay a fee which effectively negated the whole point of switching. ComEd claimed they needed to be compenstated for the nuke plants they built, which were still being paid off, even though they built these plants with the promise of so much power that it would be too expensive to actually bill for it. Illinois consumers were screwed coming and going. Here in Jax, we have publicly owned utilities, and my bills are lower than they were in Chicago.

[Imran Siddiqui]

Here in Jax, we have publicly owned utilities, and my bills are lower than they were in Chicago.

Could part of that be because... well, you are in JACKSONVILLE instead of Chicago?!

[Kidlicious]

Originally posted by Adam Smith
Lets see... US railroad rates are half what they were in 1980; consumers are saving about $28 bill per year; rr's are carrying twice the traffic with half the employees....

Shall I continue with other industries?

You could if you wanted to, but honestly I would never be convinced. I know the data goes both ways. I'm just skeptical when special interests starts lobbying government. Usually it's not broke, so I say don't fix it. The general case has been that when it is broke it's because there isn't enough regulation and more is needed, not the other way around.

[Kidlicious]

dp

[MichaeltheGreat]

Originally posted by Kidicious


You could if you wanted to, but honestly I would never be convinced. I know the data goes both ways. I'm just skeptical when special interests starts lobbying government.

And you think regulated monopolies aren't special interests or don't lobby government?

Usually it's not broke, so I say don't fix it. The general case has been that when it is broke it's because there isn't enough regulation and more is needed, not the other way around.

Hey, 1950's was good times. Let's keep everything the way they was, I'm sure nothing needs to be improved.

[Kidlicious]

Originally posted by MichaeltheGreat
And you think regulated monopolies aren't special interests or don't lobby government?

No, why would you think that. I know they do and I'm keeping my eye on them

[Kidlicious]

Originally posted by MichaeltheGreat
Hey, 1950's was good times. Let's keep everything the way they was, I'm sure nothing needs to be improved.

Well, I here that the 50s were pretty good. Unfortunately things have changed (well maybe its fortunate), but I see a scam coming when someone starts telling me how much better things can be when they are already good.

[MichaeltheGreat]

Re: Electric Utility Deregulation

Originally posted by PLATO1003
I was reading the magazine that comes with my electric bill today and their was an article that caught my eye.

Apparently just the idea of US Congress passing sweeping deregulation in the Electric Industry caused several states to actually pass deregulation bills. Most notably is California. The article blamed all the problems that California experienced on this action. It even suggested that this may have contributed to the Enron collapse. The article states that similar legislation is being considered again in Congress.

So... What do you know about this? and How do you feel about it?

Finally, I get time for the initial post.

Technically, the Congress wouldn't be involved in electric utility restructuring, which is what it's really called. Deregulation is just a buzz-word used to market it to the public. The legislation referred to was the Energy Policy Act of 1992, which mandated that the FERC (Federal Energy Regulatory Commission) oversee restructuring of monopoly electric utility markets within a reasonable period of time. FERC in turn mandated to the states that they come up with their own restructuring policies, or else FERC would do it for them.

The manner in which California approached restructuring was atrocious (the main bill was authored by a former Southern California Edison Co. lobbyist, who left a consultancy as a registered lobby to go to work as the chief of staff for the Assemblyman whose name appeared as the bill author. ), but that in itself was survivable. It's now been a matter of ideological fashion to blame the "California disaster" on whoever you never liked in the first place. Some people blame government regulators, some greedy utilities, some blame "those California environmental loonies," some blame greedy corporations trying to con their way into the utility market.

Reality is that a little of all those things contributed to those problems, and a few more factors nobody likes to be bothered with, because they're not ideologically useful.

Here's a quick rundown:

1. - Blame the fruity environmentalists. This is a cute charge, and the general idea is to blame the lack of generating capacity on treehuggers. Actually, a lot of the "treehuggers" are card-carrying Republican conservatives who didn't want power plants in their backyards either. Putting plants in the boonies doesn't work real well, and triggers real environmental delays, because you have to address much longer transmission paths for electricity and often for fuel.

A big cause of the transmission shortfall that people ignored was market factors. During the decade before restructuring and the disaster, there were virtually no additions of new generating capacity, but it just wasn't feasible to build new capacity - the economy was booming, so industrially zoned sites that had good gas and electric transmission access were few and far between, and usually every developer who owned such a site was thinking high-tech industrial park, so a big ugly power plant wasn't what he'd consider an attractive anchor tenant. Couple that with very low short-run wholesale costs, and you couldn't build new capacity and recover your investment - the cost of producing the power was over the market.

By the time restructuring hit, you had a seven to eight year boom in California, combined with drought conditions for three to four years in the southern Rocky Mountain, California, Southwest and Columbia River basins. Oooops, so much for the cheap hydro power the west counted on. You also had massive growth in neighboring states that traditionally had surplus power to sell to Cali, so the market changed far more quickly than anyone could respond to it.

2. - Greedy utilities. To some extent, this is true, what with starting in a 100% market share position, then whining about recovering 38 billion in so-called stranded investment, when in fact much of that was 10-30 year old investment largely or completely recovered in the rate base. In a healthy market, we could have paid them off and let them go away. Instead, in the market that developed, they got skinned too.

3. - Inept regulators and system operators. This is another one that's fashionable in the utility and lobbyist crowd ("WE won't be as stupid as those California people."), but doesn't really work either. The changes in market condition in 2000-2001 were totally unprecedented and extreme (three major areas in sustained drought conditions, a long term boom in growth in and out of state, followed by an extremely hot summer). To avoid something like the California disaster, you have to plan ahead in a 10-15 year timeframe for generation reserve, and 15-20 years for electrical transmission. All indications going into the disaster were that there would be adequate reserves and transmission access for any reasonably foreseeable market conditions, but that there would be a period of time where generation supply was tight, until the market price came up enough to support new capacity (or until the regulated market built new capacity and rate-based it)

Electricity is unique in that it's the only manufactured commodity where supply and demand have to essentially be matched continuously in real time - there's no commercially practical storage, and won't be for decades, at least. That's not good when you also have a long lead time to build new generating or transmission assets.

4. - Greedy corporations entering the market and rigging the system. Some of this happened, but it accounted for less than 20 percent (by the most optimistic interpretation), or maybe even less than ten percent (by more conservative interpretation) of the price movements. The basic claim was that generators were deliberately kept out of the market to drive prices. That can only work when you have very fragile supply-demand balancing, AND when you have a lot of assets in the market, so that you can withdraw some and make enough extra money to cover loss of that asset. As it turns out, much of the maintenance was necessary, or at least prudent, since much of the portfolio bought by Duke, Dynegy, etc. were existing utility plants that had been undermaintained from the late 80's.

I was one of the few and unwelcome who predicted repeatedly (and got blown off repeatedly) that Cali deregulation would raise prices substantially for the first several years, and that it would be about five years for the market to adjust. That last number got whacked because people are back to ignorant bliss. The "problem" got cured because of a series of changes in the initial factors that caused it in the first place: A recession, undoing much of the growth in the original boom, and a couple of mild summers, with a normal winter followed by a sustained, wet winter that is close to restoring normal hydro flows.

California can still end up in a bit of a mess, but a certain amount of peaking capacity did get shoved in during the panic, and both the necessary and unnecessary maintenance of a lot of generating assets has been performed, and won't be an issue for several years at least.

The real lesson is that restructuring can't just be dictated ideologically. Both the form and the timing have to consider objective market conditions and geographic considerations.

[MichaeltheGreat]

Originally posted by Kidicious


Well, I here that the 50s were pretty good. Unfortunately things have changed (well maybe its fortunate), but I see a scam coming when someone starts telling me how much better things can be when they are already good.

"Already good" is relative. I suppose it is nice to get subsidized by someone else, though, which is what individual consumers get from regulated monopoly setups.

[Ned]

Che, I somewhat agree with one of your statements: changing from a government regulated monopoly to an unregulated monopoly is not necessarily good - because you still have a monopoly.

Just privatizing something does not guurantee better performance. Ditto deregulation. Once needs COMPETITION.

Until the California consumer has a choice of power providers at market rates, there really is no true competition in California. "Partially" deregulating the "back end" while keeping the prices regulated at the "front end" lead to a disaster.

MtG, correct me if I am wrong, but there were two critical mistakes made in California: 1) not allowing the utilities to buy power with long term contracts; and 2) not guaranteeing that prices charged the consumer would at least cover the cost of power.

[Adam Smith]

Kidicious:

You could if you wanted to, but honestly I would never be convinced. I know the data goes both ways.

In other words, don't confuse me with the facts.

Aside from the California debacle (more below), and the cable television industry (not real deregulation) the US evidence is quite clear. Cliff Winston, an economist at the Brookings Institution, has been following the effects of deregulation in various industries including airlines, trucking, railroads, telecommunications, cable television, brokerage, banking, petroleum, and natural gas. He concludes that

The evidence clearly shows that microeconomists' predictions that deregulation would porduce susbstantial benefits for Americans have been generaly accurate; hence their predictions from additional benefits from continuing the process should be taken seriously.
Clifford Winston, "Economic Deregulation: Days of Reckoning for Microeconomists", Journal of Economic Literature, September 1993, p. 1286

Industries are likely to behave quite similarly when it comes to adjusting to deregulation, and that their adjustment, while time consuming, will raise consumer welfare - significantly even at first, and increasingly over time.
Clifford Winston, "U.S. Industry Adjustment to Economic Deregulation", Journal of Economic Perspectives, Summer, 1998, p. 108.

The Brookings Institution is a Washington think tank which has long been associated with the Democratic Party. (Full disclosure: I contributed data and analysis for the railroad industry for both of these articles.)

MtG:

Greedy corporations entering the market and rigging the system. Some of this happened, but it accounted for less than 20 percent (by the most optimistic interpretation), or maybe even less than ten percent (by more conservative interpretation) of the price movements.

The latest study by Severin Borenstein (Berkeley) James Bushnell (Berkeley) and Frank Wolak (Stanford) concludes that exercise of market power by generators accounted for a substantially greater proportion of the overcharges.

We present a method for decomposing wholesale electricity payments into production costs, inframarginal competitive rents, and payments resulting from the exercise of market power. Using data from June 1998 to October 2000 in California, we find significant departures from competitive pricing during the high-demand summer months and near-competitive pricing during the lower-demand months of the first two years. In summer 2000, wholesale electricity expenditures were $8.98 billion up from $2.04 billion in summer 1999. We find that 21 percent of this increase was due to production costs, 20 percent to competitive rents, and 59 percent to market power. Borenstein, Bushnell, and Wolak, "Measuring Market Inefficiencies in California's Restructured WHolesale Electricity Market", American Economic Review, December 2002, p. 1376.

As Ned mentioned, most of this problem could have been avoided if utilities had been allowed to sign long-term power supply contracts.

Chegitz:

ComEd claimed they needed to be compenstated for the nuke plants they built, which were still being paid off, even though they built these plants with the promise of so much power that it would be too expensive to actually bill for it.

There is still an issue of what to do with the capital costs of generating plants which are no longer competitive in a deregulated environment. This is known as the stranded cost issue. Stockholders assumed this risk when they invested in the company, so stockholders should bear the charges. Looks like ComEd has successfully lobbied the Ilinois Legislature to dodge this responsibility. Hopefully other legislatures will do a better job. The PJM gird (Pennsylvania - Jersey - Maryland) and the Texas grid certainly seem to be working well. Other areas are still moving toward deregulation.

Ned:

Just privatizing something does not guurantee better performance. Ditto deregulation. Once needs COMPETITION.

There are three layers to the electricity market: generation, transmission, and distribution. All three were regulated. There rae plenty of independent generators who can access the grid, so generation is now considered competitive. Transmission is also generally considered comeptitive, except in areas where competition is limited by objections to building new transmission lines. Distribution, the "last mile" to your house, is still a natural monopoly. Ie., it would be much more costly to have two separate sets of local electric distribution lines, so instead we get one regulated company. Regulation needs to be maintained here, but could still be improved.

[Kidlicious]

Originally posted by MichaeltheGreat


"Already good" is relative. I suppose it is nice to get subsidized by someone else, though, which is what individual consumers get from regulated monopoly setups.

If it is nice, I wouldn't be able to tell. What matters to me is if my electric bill goes up or not.

[Kidlicious]

MtG,

Lets get down to the bottom of things. The producers knew what the demand for electricity would be in California. They decided not to meet that supply and create a shortage. You can apologize for it all you want, but it wont pass over here.