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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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IBEW Press Release- 9/29/02
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