Published on Saturday, March 4, 2006 by the Boston Globe
Deregulation Hasn't Worked
by Robert Kuttner
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Consider the experience of electricity rate-payers in Massachusetts, where the Legislature deregulated electric power in the late 1990s. The move broke up integrated and regulated utility companies and allowed markets to set prices.
In theory, this shift was supposed to free utilities to shop for the best price of wholesale power. Consumers in turn could shop among utilities for the best deal. The market would deliver power more efficiently and reliably, and everyone would be better off.
It hasn't worked out that way. During the 1990s, before deregulation, retail electricity prices in Massachusetts were essentially flat, at around 9 cents per kilowatt hour. Adjusted for inflation, prices had actually dropped. Since deregulation, prices have risen about 50 percent. Between November 2004 and November 2005 alone, consumers got hit with rate hikes averaging 28 percent, according to the US Department of Energy.
But this just reflects the rising cost of fuel, right?
Wrong. The states that kept integrated public utilities, which both produce power and sell it to retail customers, have enjoyed much lower consumer electricity prices. In a number of states in the Southeast and in Michigan, for example, recent rate hikes have been in single digits.
Several states that deregulated electricity imposed temporary caps on rates. As these caps expire, consumers face price hikes bordering on the astronomical.
According to The Wall Street Journal, Delaware consumers face hikes of 59 to 117 percent. In Texas, rates have risen more than 80 percent. It is the states that have maintained integrated and regulated utilities or, better yet, public power companies that have been best defended against rising prices of natural gas and other fuels that power generators.
So who did benefit? Private utility companies, of course. Freed from price regulation, they could increase their prices and profits.
Electricity is pretty much a necessity. Unlike filet mignon, consumers don't reduce their purchases much when electric power prices rise. They just tighten their belts in other ways. Between 2002 and 2005, the index of public utility stocks, once the safe but humdrum investment of widows and orphans, rose at twice the rate of the stock market.
In addition, deregulation leaves the power grid less reliable. After the great blackout of August 2003, investigators found that coordination and maintenance of the grid had suffered; no part of the deregulated industry had adequate responsibility for spare capacity and maintenance.
Why doesn't deregulation lead to more efficient electricity markets? Because electricity isn't like other commodities. For one thing, electricity can't be stored, but utilities need to maintain spare capacity for peak demands. In the old days of regulation, those costs could be built into the rates that regulators permitted, so capacity was roughly in line with demand and there was no profiteering based on temporary scarcity.
Secondly, operating costs of different parts of the industry are very different. Instead of smoothing these out and producing protection against price spikes, deregulation invites windfall profits. For example, coal still accounts for about half of electricity generation in the United States, and costs to coal-fired plants (as well as hydropower and nuclear power) have not increased as fast as those that use natural gas. Regulated states benefit from this, because they base retail prices on actual costs.
But under deregulation, local utility companies must purchase their wholesale power on the open market. The lower-cost coal, nuclear, and hydro-power plants have enjoyed windfall profits as they adjust their prices upward to the prevailing market price.
Moreover, unlike in ordinary markets, the higher prices do not signal producers to invest in additional capacity. ''There's a very narrow corridor between not enough capacity, which is bad for reliability, and too much capacity," says Richard Rosen of the Boston's Tellus Institute.
Lately, there has been a huge outcry against the Bush administration's decision to permit the company that operates America's largest ports to be sold to a buyer in Dubai. Electricity is also vital infrastructure. Alien terrorism is not the only threat to a reliable infrastructure. In this case, the threat is a home-grown ideology.
Robert Kuttner is co-editor of The American Prospect. His column appears regularly in the Globe.
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