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TransActions - January 2001 (Vol
101)
According to California Governor Gray Davis, the end of deregulation may, indeed, be near. California's utility rate crisis is so severe Davis has met with Federal chairman Alan Greenspan and Treasury Secretary Lawrence Summers to explore the consequences of California's dilemma on the national economy. The Bloomberg News reported on December 27, 2000 that Davis called deregulation of wholesale utility prices and power generation a "failed Experiment" and cautioned that "if deregulation fails in California, deregulation is over in America". Davis said he would use emergency powers if necessary to solve the state's energy problem. He said the state would focus its efforts on more conservation while accelerating plans for more power plants. The Davis/Greenspan/Summers meeting came as PG&E's Pacific Gas and Electric and Edison International's Southern California Edison units face more than $8 billion of losses from soaring power costs and regulations barring them from raising rates. With their credit rating under review for a possible downgrade, PG&E and Edison can't sell more short-term debt, or commercial paper. More than $2 billion of the short-term debt matures in the next two months. A default on the IOUs typically triggers defaults on a company's other debt, which totals more than $20 billion for the two utilities. In addition, a breakdown in electrical service could be catastrophic to California's economy, which makes up about 11 percent of the U.S. gross domestic product. The utilities have been forced to pay power prices as high as 100 times last year's average because of a supply shortage, cold weather and surging natural gas prices, analysts said. The situation in California has deteriorated to the point of intervention and overall revision of the process by the Federal Energy Regulatory Commission and by the U.S. Secretary of Energy, Bill Richardson such the current process is no longer deregulation at all but a hodge podge of regulation and high cost power. It is up to California, however, to find rate relief because the Federal Government does not regulate utility rates. This is a scary proposition since the only alternative seems to be to raise utility retail rates on people already paying more than anyone else in America! Unless, of course, deregulation is dead. Many things besides California suggest deregulation is at least sick.
Deregulation of anything...airlines, long-distance phone service, utilities...is supposed to give customers a choice. With competition, customers are promised better products or services as well as lower costs. In some cases, reality actually lived up to most of the promise. Lower air fares and long-distance rates actually occurred. But sometimes you had to 'know the ropes' to take advantage of them. For instance, take the cost of flying from Atlanta to San Diego. A normal ticket on the non-stop flight went for $1900. GDS Associates discovered that by driving from Atlanta to Birmingham (145 miles) in a rental car, taking off from Birmingham, then flying back to Atlanta and catching the original non-stop flight to San Diego, the ticket price was only $218. That example suggests the current status of deregulation of electric utilities. If you have access to the right markets, if you 'know the ropes', you can benefit. Large industrial and commercial customers benefit because they have on-staff or on-call lawyers and experts whose job it is to not only know the ropes but take advantage of them. The residential customer, has been left in the dark. All he or she knows about utilities is the bill that arrives every month. Yet suddenly every John and Jane Doe is being told to choose a utility generation provider. They hear a foreign language being spoken..."unbundled services", "stranded cost charges", "wires companies". John and Jane look at one another with glazed expressions with no idea what all the babble is about. In Pennsylvania, for instance, residential customers have been able to choose their electric energy providers for two years! Yet today, 9 out of 10 customers still buy power as they always have...from their local electric utility. This is reality! Making a change in anything is not easy for human beings because the status quo for most people represents a comfort zone. The voices of deregulation seem to have ignored this basic fact. It takes a clear, cohesive presentation of facts and rewards for most people to even consider change...whether it is changing jobs or breaking a habit or trying new golf clubs or moving from one house to another, etc., etc. It can only be surmised that the people who should have been communicating factually and clearly with residential customers...simply didn't know what to say! There is no established precedent to quote, no history to suggest that retail customers will be better off if they switch, no credibility for the whole idea of deregulation. And the facts from Pennsylvania they'd just as soon sweep under the rug. The 1 out of 10 who did switch in Pennsylvania have experienced no real cost savings! Same tune, different verses In New Hampshire, the Public Service of New Hampshire's bankruptcy and $2.3 billion in stranded costs make the prospects for residential customers to save money pretty bleak. In Montana, locally produced power got exported to California. Montana Power's customers had to pay California rates! (Montana Power quit the electric utilities business and went into telecommunications.) In Connecticut, nothing is happening. Even with the door wide open for upstart companies to generate and supply power, the wholesale prices are too high for new suppliers to make a profit off the standard offer price. No one is willing to start supplying! In Missouri, Nevada, New Mexico, New York, Oklahoma, West Virginia and Maryland, there is skepticism from legislators, bitter accusations back and forth, special hearings, confusion, even calls for re-regulation of the whole process. In Alabama, Louisiana, Mississippi, deregulation and restructuring is under slow study with no immediate action plans. And in Georgia, the deregulation of the natural gas industry had so many negative repercussions that electric utilities deregulation is being soft-pedaled at best. A whole new ballgame. An obvious question is...if deregulation works for other industries, why not electric utilities? Well, it really is a whole new ballgame. To get power to the home and business there must be fuel, a generation plant, transmission lines and a distribution system. Historically, one company owned all components. The company had guaranteed customers and a fair, if low, return on investments. It was a no-sweat, no surprise situation. The company served all customers under generally uniform rates that were based on average overall costs. The company could easily track usage and plan its capacity so that no shortages existed. Then along came the thought that such a monopolistic situation caused inefficiency, bloated payrolls, overall complacency. Competition was needed to create 'dog eat dog' efficiency and lower rates! A plethora of deregulation ideas spewed forth, but so far none of them have worked well. They haven't worked because of three major weaknesses:
As you know, the cost of generating is mostly fuel and the price of gas has more than doubled in the past year. Until some technological breakthrough is achieved it is a zero sum game. For every winner, there has to be a loser, and the loser could very likely be the residential rate payer. If that happens, we're likely to have another American Revolution. To avoid such a happenstance, we must take to heart lessons learned so far.
For more information, contact Jim McGaughy at 770-425-8100 e-mail:info@gdsassociates.com.
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