Throw in the Towel
on National Utility Deregulation
By Edwin D. Hill
September 30, 2002
 In
public policy, as in boxing, there are times when we need to ask
how much punishment is necessary before we say "enough?"
The concept of an open, competitive, deregulated market for electricity
is staggering on its feet, an abject, bloodied failure. Amazingly,
there are still some, including supporters in Congress, who want
to send that pugilist out for another round. And thats bad news
for the public.
The debate over the deregulation of both the wholesale and retail
electricity markets has been raging since passage of the National
Energy Policy Act of 1992. Proponents of "open competition"
pretty much carried the day during the giddy economic heights of
the 1990s. Their reasoning, championed by Enron and others, was
that deregulation and restructuring of the industry would break
the monopoly over the generation, transmission and distribution
of electric power and encourage new competitors to enter the market
in these key areas of the industry. The ensuing competition would
supposedly lead to significantly lower prices.
It hasnt quite worked out that way. Large utilities sensed the
prevailing wind and consolidated over large areas to ensure that
competitors had less chance to break into their expanded market
territory. Some new entrants sensed opportunities to "game"
the new system by snapping up power generation facilities. Others,
such as Enron, positioned themselves as major marketers of electricity
to local utilities.
These new companies became a predatory force in the industry. They
swooped down on California, a state that was the first to embrace
the promised benefits of deregulation. Californias law, passed
in 1996, contained the fatal flaw of capping prices to consumers,
while failing to maintain adequate controls on wholesale prices.
The power marketers gouged the states utilities through high electricity
prices, bringing about the bankruptcy of Pacific Gas and Electric
and forcing others to the brink, and introducing Californias residents
and businesses to the unwelcome concept of the rolling blackout.
In the process, Enron and their ilk transformed Californias budget
surplus into what is today a $24 billion deficit, as the state was
forced to intervene. Even the sight of Enron officials in orange
jumpsuits wont assuage the damage done in the Golden State.
In stark contrast are Wisconsin and many Southeastern states that
resisted full-scale deregulation and restructured their systems
under the watchful eye of public regulators. Even as Enron, Dynegy
and other pro-competition players have lost as much as 95 percent
of their stock value, companies in the states that took a balanced
approach are showing stock gains of between 12 and 28 percent. Public
power cooperatives, most of which opted out of deregulation, have
been relatively stable, according to a recent report by Standard
& Poors. Success, of course, is not measured in stock prices
alone. The states that resisted radical deregulation have also been
free from wild price swings and economic disruption.
Was California an aberration? A similar fate could befall much
of the nation if actions being considered by Congress and the Federal
Energy Regulatory Commission (FERC) come to pass.
Congress has before it comprehensive energy legislation that would,
among many other provisions, repeal the Public Utility Holding Company
Act (PUHCA) of 1935. This law scorned as a "New Deal relic"
by Enron officials and others limits the ability of large holding
companies to buy and hold more than one utility without approval
from the Securities and Exchange Commission. The law was enacted
because at the time about 15 large holding companies controlled
the electric utility system. Their size and power enabled them to
ignore customer needs and focus instead on increasing their heavily
leveraged acquisitions and driving up their stock value. Sound familiar?
Repeal of PUHCA would remove a consumer protection that has served
Americans well for nearly 70 years and topple the remaining cornerstone
of the regulatory compact between utilities and the public. This
provision would unleash the predatory practices seen in California
and elsewhere upon the entire nation.
Congress has not imposed full-scale deregulation on the national
level on the well-grounded fear of unintended consequences and the
sheer complexity of the system. Congress is right to address national
energy issues through comprehensive legislation. Including PUHCA
repeal as part of the bill, however, could wreak economic havoc
on a nation that is already reeling.
In the meantime, FERC, the same agency whose slowness to take action
against Enrons market manipulation in California prolonged that
states agony, is also attempting a federally imposed solution.
In August, FERC set forth a highly controversial plan to govern
competition throughout the country, imposing a centralized and heavily
monitored market. In effect, it would force transmission owners
to surrender control of their systems to grid operators. For example,
the lines that Maryland and D.C. customers paid for through their
local utility rates over the years would now be open to anyone,
but the owner of the lines would not be able to give preferential
rates to these local consumers. These rules earned the applause
of the Washington Post ("Electric Efficiency,"
editorial, August 12, 2002) and others who continue to believe that
deregulation can somehow be done right.
FERC is taking a curious approach. In its attempt to resuscitate
deregulation, the commission is proposing to impose more government
rules over the system. In so doing, FERC would strip local companies
and state regulators of their ability to manage their systems to
best meet the needs of their local or regional markets. In other
words, the commissions solution is to restrict the freedom of businesses
for the ostensible reason of creating more freedom in the industry.
Deregulation proponents cannot have it both ways, supporting increased
regulation to create a free market.
Congress, FERC and the remaining cheerleaders for deregulation
should stop trying to prop up their battered abstract principle.
They, like the American people, should trust the evidence yielded
by their own eyes and ears. The machinations of the star players
of deregulation have already taken a heavy toll on the nations
economy. The restructuring of the industry has placed a premium
on profit at the expense of vital maintenance, service and reliability
to commercial and residential consumers. Congress and FERC should
strike a blow for consumers and give electricity deregulation what
it deserves a one-way ticket to Palookaville.
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