Today's Article
In electricity, the
"invisible hand of the
market" is robbing
Americans blind.
"invisible hand of the
market" is robbing
Americans blind.
The American Spark
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In Electricity, "Market Discipline" Producing "Rate Shock"
By Cliff Montgomery
The idea was simple: if inefficient governments would just allow "the invisible hand of the market" to control the pricing of
our electricity, this will mystically unleash waves of competitive virtues. Innovation would burst forth, and of course prices
must fall.
But as an October 15th story in the New York Times put it, "A decade after the federal government opened the business of
generating electricity to competition, the market has produced no such decline."
In fact, there are currently more rate increase requests than ever before, according to Jim Owen, a spokesman for the
Edison Electric Institute, the association for the investor-owned utilities that provide about 60 percent of the nation’s
power.
True, about 40 percent of all electricity customers--those in 23 states and the District of Columbia where new competition
was approved--tended to pay modestly lower prices over the past decade.
"But those savings were primarily because states, which continue to have some rate-setting power, imposed cuts, freezes
and caps at the behest of consumer groups that wanted to insulate customers from any initial price swings," said the
Times.
The last of those rate protections expire next year, and the Federal Energy Regulatory Commission (FERC) and other
federal agencies warn in a draft report to Congress that “customers may experience rate shock” as utilities become less
controlled under greater de-regulation.
Already upset about rising prices, California and five other states have suspended or delayed transition to the
"competitive" system.
Customers in other states are facing rude surprises.
In Baltimore, an expected whopping 72 percent rate increase in electricity prices has aroused so much protest that the
state legislature met in special session, where it arranged to phase in the higher costs over several years. In Illinois, rates
are about to rise as high as 55 percent over the current set rate.
The FERC draft report to Congress was unable to specify any overall consumer savings.
“It has been difficult,” the report admitted, “to determine whether retail prices” in the states that opened to competition “are
higher or lower than they otherwise would have been” under the regulated system.
But in politics, there's an old adage: when all else fails, deny the obvious.
Joseph T. Kelliher, the FERC chairman, still insisted that eventually “market discipline will deliver the best prices” and noted
that every administration and Congress since 1978 had pushed the industry toward competition. He added that the
commission recognized a need for “constant reform of the rules.”
And still, Kelliher's "market discipline" has not occurred. The problem? Some utilities do not buy electricity from the
cheapest supplier, but rather from a sister company to the utility, even if that electricity is more expensive.
And if electricity is needed from more than one producer, utilities pay each one the highest price accepted in the bidding,
not the lowest.
"This one-price system, adopted by the industry and approved by the federal government, is intended to encourage
investment in new power plants, which are costlier than older ones," said the Times.
Critics have a one-word counter to the one-price theory: Enron. The scandal-plagued, former energy giant with such close
ties to the Bush Administration artificially drove up prices in California through this auction system, then passed the
increases on to customers.
What's more, a slew of energy corporations withheld or limited production for California even when demand was at its
highest, thus further jacking up prices.
How ferociously did these companies rig the de-regulated system? During the December 2000 blackouts in southern
California, the wholesale price of electricity jumped 1,000 percent from the previous year of regulated prices. That's quite a
jump.
Under de-regulation, some of the biggest winners have been corporations that resold power plants they had just bought,
thus making a large profit. In other cases, investors have bought power plants from the utilities at what proved to be
bargain prices, then sold the electricity back at much higher prices than it would have cost the utility to generate the
electricity.
One of the best-known corporations to do such things has been the Carlyle Group, the private equity firm which has
worked so much with former president George H. W. Bush--the father of the current president--after Bush Sr.'s loss to Bill
Clinton in the 1992 presidential election.
Even some advocates of "unfettered competition" are ready to throw in the towel on this one. They include the Cato
Institute, a leading promoter of libertarian thought that favors the least possible regulation.
“We recommend total abandonment of restructuring,” Cato said. If the public rejects a greater embrace of markets, Cato
wrote, the next best choice would be a “return to an updated version of the old” system.
By Cliff Montgomery
The idea was simple: if inefficient governments would just allow "the invisible hand of the market" to control the pricing of
our electricity, this will mystically unleash waves of competitive virtues. Innovation would burst forth, and of course prices
must fall.
But as an October 15th story in the New York Times put it, "A decade after the federal government opened the business of
generating electricity to competition, the market has produced no such decline."
In fact, there are currently more rate increase requests than ever before, according to Jim Owen, a spokesman for the
Edison Electric Institute, the association for the investor-owned utilities that provide about 60 percent of the nation’s
power.
True, about 40 percent of all electricity customers--those in 23 states and the District of Columbia where new competition
was approved--tended to pay modestly lower prices over the past decade.
"But those savings were primarily because states, which continue to have some rate-setting power, imposed cuts, freezes
and caps at the behest of consumer groups that wanted to insulate customers from any initial price swings," said the
Times.
The last of those rate protections expire next year, and the Federal Energy Regulatory Commission (FERC) and other
federal agencies warn in a draft report to Congress that “customers may experience rate shock” as utilities become less
controlled under greater de-regulation.
Already upset about rising prices, California and five other states have suspended or delayed transition to the
"competitive" system.
Customers in other states are facing rude surprises.
In Baltimore, an expected whopping 72 percent rate increase in electricity prices has aroused so much protest that the
state legislature met in special session, where it arranged to phase in the higher costs over several years. In Illinois, rates
are about to rise as high as 55 percent over the current set rate.
The FERC draft report to Congress was unable to specify any overall consumer savings.
“It has been difficult,” the report admitted, “to determine whether retail prices” in the states that opened to competition “are
higher or lower than they otherwise would have been” under the regulated system.
But in politics, there's an old adage: when all else fails, deny the obvious.
Joseph T. Kelliher, the FERC chairman, still insisted that eventually “market discipline will deliver the best prices” and noted
that every administration and Congress since 1978 had pushed the industry toward competition. He added that the
commission recognized a need for “constant reform of the rules.”
And still, Kelliher's "market discipline" has not occurred. The problem? Some utilities do not buy electricity from the
cheapest supplier, but rather from a sister company to the utility, even if that electricity is more expensive.
And if electricity is needed from more than one producer, utilities pay each one the highest price accepted in the bidding,
not the lowest.
"This one-price system, adopted by the industry and approved by the federal government, is intended to encourage
investment in new power plants, which are costlier than older ones," said the Times.
Critics have a one-word counter to the one-price theory: Enron. The scandal-plagued, former energy giant with such close
ties to the Bush Administration artificially drove up prices in California through this auction system, then passed the
increases on to customers.
What's more, a slew of energy corporations withheld or limited production for California even when demand was at its
highest, thus further jacking up prices.
How ferociously did these companies rig the de-regulated system? During the December 2000 blackouts in southern
California, the wholesale price of electricity jumped 1,000 percent from the previous year of regulated prices. That's quite a
jump.
Under de-regulation, some of the biggest winners have been corporations that resold power plants they had just bought,
thus making a large profit. In other cases, investors have bought power plants from the utilities at what proved to be
bargain prices, then sold the electricity back at much higher prices than it would have cost the utility to generate the
electricity.
One of the best-known corporations to do such things has been the Carlyle Group, the private equity firm which has
worked so much with former president George H. W. Bush--the father of the current president--after Bush Sr.'s loss to Bill
Clinton in the 1992 presidential election.
Even some advocates of "unfettered competition" are ready to throw in the towel on this one. They include the Cato
Institute, a leading promoter of libertarian thought that favors the least possible regulation.
“We recommend total abandonment of restructuring,” Cato said. If the public rejects a greater embrace of markets, Cato
wrote, the next best choice would be a “return to an updated version of the old” system.