Tuesday, October 24, 2006


A cover story in yesterday's New York Times exposed serious problems in the recent wave to deregulate energy - In Deregulation, Plants Turn Into Blue Chips.

This has been the recent trend in energy production and distribution - deregulate the industry in the hope of stimulating competition and lowering consumer utility bills.

But this Times story points out that although massive investment firms may have been able to profit from deregulation - to the tune of billions and billions of dollars in just a few short years - consumers have not seen the wonderful benefits that were promised. In fact almost the opposite has happened - competition has not occurred, and consumers have paid the price for the profits the investment firms are reaping.

But even as some investors have profited handsomely by buying and sometimes quickly reselling power plants, electricity customers, who were supposed to be the biggest beneficiaries of the new system, have not fared so well. Not only have their electricity rates not fallen, in many cases they are rising even faster than the prices of the fuels used to make the electricity.

Those increases stand in contrast to the significantly lower prices in other businesses in which competition was introduced, such as airlines and long-distance calling.

Some electricity customers are also being saddled with monthly surcharges to cover construction costs for plants that were sold at bargain prices and then resold at huge profits. Some of these surcharges will continue for years.

And, look what market is analyzed as an example of the worst affects of deregulation:
Take the case of the Texas power plants. After the Texas Legislature, urged by Enron and big industrial customers, voted to make electricity generation a competitive business, the utility serving the Houston area sold 60 power plants that generate most of the power for the area to four investment firms — the Texas Pacific Group, the Blackstone Group, Kohlberg Kravis Roberts and Hellman & Friedman — which soon resold the plants at the $5 billion profit.

But state regulators have ordered electricity customers to pay an average of $4.75 monthly for 14 years to finish paying for the construction of the power plants, plus interest.

And the utility that sold the plants, Centerpoint, is suing for even higher payments from customers. Houston-area consumers now pay among the highest electricity rates, nearly double the national average.

Supporters of deregulation said customers would benefit from healthy competition among a growing number of electricity producers. But such competition has not developed.

Yuck. Talk about a total lack of planning...or at least planning with consumers in mind.
Many of the power plants that were sold are still owned by the utilities’ parent companies; they were simply transferred from the regulated utilities to unregulated sister companies. Some regulators allowed utilities to favor the sister companies with long-term contracts even if they did not offer the best price for electricity.

In fact, independent electricity producers argue that their modern generating plants often sit idle while older, inefficient plants owned by politically powerful utilities and their unregulated sister companies whir around the clock under long-term contracts. For example, Calpine, an independent generating company, and some big industrial customers have complained that Entergy, the Louisiana utility holding company, is favoring its own plants when Calpine’s power would be cheaper. Congress has ordered studies of the issue.

Because utilities are still allowed to pass on the cost of the power they buy, they have little incentive to choose a cheaper supplier. Electricity customers therefore end up paying more than they would have to if electricity production were truly competitive.
It’s a great deal, having ratepayers cover your managerial mistakes.”

This is what happens when you allow the energy companies to control energy policy within the states and federal government. There is no one left looking out for the consumers. Deregulation is good only for the utility companies, not for us consumers.

This is an excellent example of why there are some key industries that it makes complete sense for governments to highly regulate. I fully believe in the free-market, however, there are key industries that provide critical national services that our government has a responsiblity to oversee to protect consumers from this very type of activity.

(As an aside, deregultion played a major part in the power "shortages" in California some years ago, which played a part in exposing Enron as a manipulitive corporation, rather than the corporate beacon that they had generally been perceived of previous to the California episode.)

No comments: