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By AL BERRIOS
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"We
charge you for the forest, not the tree".
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But our collective enthusiasm to compel the industry to send us lower electric bills came with an unexpected side effect, as all government controls do - the industry ended up only able to make money by treating us even more poorly than it did before! This revelation and many other fascinating aspects of the industry's move towards true customer choice were the answers I got from one of the country's foremost authorities on the industry, Ray Niles of RCNiles Capital, an energy fund. The following is my question to Mr. Niles, and proceeding that, his (slightly edited) thorough explanation. (I must confess to actually feeling less frustrated after reading what's going on):
# # #
Hi Ray,
I hope this email finds you well. I've lately become consumed with what I pay PSE&G, so I requested alternative electric energy supplier options (they pretty much have a monopoly on distribution). Of the list of 19, just 2 offer residential service to my zip code, and one of those is just to make my electricity green, no savings. (The other is DTE out in Michigan.)
My question to you is: does the residential customer really have any choices? It seems all of the options are for businesses.
To their credit, PSEG does offer many comprehensive programs, tips, and arrangements to "help pay", lower, and generally help make paying them less of a burden, however, I can't [help] feeling like I'm just not getting the choices I'm supposed to get in a dereg'd marketplace.
Any thoughts you can share with me on this will help alleviate my frustrations... thanks!
Al Berrios
Hi Al,
Your question is applicable for anyone who has a "choice" in any of the states that "deregulated" their electric utilities in the 1990s. These include California, Connecticut, Illinois, Massachusetts, Michigan, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island and Texas. The details of the deregulation plans vary by state, but all of them, to varying degrees, offer or did offer customers a choice of electricity supplier. Most of these states also mandated that utilities in their state had to divest all or a portion of their power plants. My answer is applicable to all of these states and, in important respects, to the entire country. PSEG is Public Service Enterprise Group, which provides electricity to parts of New Jersey.
Residential customers
don't really get much of a choice much of the time. I suspect that any deal
you are offered probably doesn't present much savings over PSEG.
As for why, it is quite complicated to answer. The simplest answer is that
the electric industry was never really deregulated, so deregulation can't
be blamed for what you are observing with regard to residential customer
choice.
Consider that "deregulation" in the case of utilities involved
something good (allowing entities other than utilities to build more power
plants) and quite a lot that was not good and "re-regulatory"
in nature. The good thing, allowing others to build power plants, should
lower prices over time because newer and more efficient plants will get
built.
However, that is true only if non-utilities are truly free to build plants. Being truly free would mean that they can: (a) charge whatever they want for power produced from those plants, (b) locate them wherever they can buy land, and (c) build the plants using whatever they think is the best technology. None of those things are true today. I'll address each of them:
a) Price Maximums = Expensive Power. Price maximums are set by federal and regional regulators in the wholesale power market. Capped prices mean capped profits and a reduced desire for companies to build power plants. If fewer new power plants get built, prices will remain high because electricity continues to be made with old, inefficient plants.
b) You Can't Build It Here. Local zoning rules, land use restrictions, environmental rules, and the "NIMBY" reaction of local politicians to a power plant in their local area makes it extremely difficult to locate new plants, especially where they are often needed, near urban areas where the customers are. "NIMBY" stands for "Not In My Back Yard."
c) Using the Best
Technology Is Forbidden. The cheapest technology for a new "base-load"
power plant, i.e., one that is designed to run 24/7, 365 days a year, is
nuclear. However, nuclear energy in America has been made prohibitively
expensive through unnecessary safety rules imposed after Three Mile Island
(
1).
No one has died from exposure to nuclear radiation in an accident anywhere
in the modern, Western industrialized world (which the Communist government
responsible for Chernobyl [2]
was not; no Western engineer would have built a nuclear power plant without
a containment vessel, which the Soviets did). Nevertheless, in America arbitrary
regulations have made nuclear energy almost prohibitively expensive.
So, with rules & regulations embodied in points 1-3, the electric industry
remains very highly regulated in a manner that results in high electricity
prices.
The other part of the answer is the re-regulation that was part of "deregulation".
Sound confusing? What makes it confusing is that when the "deregulators"
thought they were deregulating, they were actually re-regulating the industry
by imposing an artificial industrial structure on the utilities.
The "deregulators" developed the belief that they knew better than the utilities what business structure they should have. So, they broke apart the utilities, much in the same way AT&T was broken up by deregulators in 1984 (that action was also a mixed bag of "re-regulation" and partial deregulation, but that is another discussion).
They forced the utilities
to sell their power plants, and then they forced the utilities to allow
others to use their distribution wires to deliver electricity to customers.
That is why someone other than PSEG can "sell" you power even
though they do not own the wire that delivers it to your house. Instead,
PSEG owns the wire and you pay PSEG to have that other company's power delivered
over PSEG's wire to your house. It is similar to how competing long distance
companies would use Verizon's local phone lines to provide you with long
distance service.
The result of the artificial manipulation of the utilities' corporate structures
and business practices is that they operate in a manner less friendly to
customers. Until the pseudo-deregulation in the 1990s, utilities were vertically
integrated. They owned their power plants. That enabled them to offer power
at predictable prices. However, by artificially separating utilities from
their power plants, they were forced to buy power solely in the wholesale
power markets. In itself, that might have worked out okay, but regulators
also forced the utilities to buy power under relatively short-term contracts.
As a result, short-term price fluctuations get transmitted to customers.
To summarize the point about re-regulation, the artificially broken-up structure
of utilities makes them less economically efficient, with the result that
power prices are both higher and more volatile to customers.
Sound complicated? It is. Is it deregulation? No. Is it a mess? Indeed,
it is.
Fixing the Mess
I will give a hint of what a proper government policy toward utilities should be: hands-off or laissez faire. In particular, utilities should get no legal monopoly protection. Anyone should be free to start up a business selling electricity to customers. If this were permitted, we would likely see a lot of technological and business structural innovation, such that utilities would look a lot different than they do today.
For example, developers
may build "mini-utilities" with small power plants to provide
power to residential sub-divisions. Large commercial buildings may find
it is economical to self-generate using gas-fired generators in their basement.
It is even conceivable that individual homes may be powered by micro-generators
the size of air conditioners (3).
Large utilities are
likely to still exist, but they may actually compete with each other, with
the customer benefiting from lower rates. Or, large utilities may function
largely as back-up sources of power to whom electricity customers would
pay a fee for that service.
All of this innovation could happen if utilities were truly deregulated
and politicians stayed away from the business of providing electricity.
None of it will happen under the current structure, which mixes a few, tentative
measures of market freedom with a whole lot of contradictory government
control.
Utilities today are
arguably the most regulated private industry in the country, with a welter
of overlapping local, state (4)
and federal (5)
authorities all having a hand in how they are run. With that many cooks
in the kitchen, is it any wonder that the pies they make taste so awful
and cost so much?
Bottom line for you personally: without knowing the details of the offers
from other electricity suppliers, I suspect you are better off, in terms
of hassle and probably even money, by staying with PSEG!
Bottom line for the country: we all pay too much for power and will continue
to do so until true deregulation occurs. But, before that can happen, people
need to draw true conclusions about the ersatz-deregulation that has been
attempted already.
Sincerely Yours,
Ray
P.S. - There are other aspects to this complicated problem. One of them (to be discussed) is the price and profit controls on electric transmission lines that prevent enough new transmission lines from being built. The result is that the electric grid is ossified and subject to blackouts, and power is too expensive.
Note: ©
2007 Raymond C. Niles. Content published with permission from author. For
more information, please contact Mr. Niles at 
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Footnotes
(1) Three Mile Island from Wikipedia.org: http://en.wikipedia.org/wiki/Three_Mile_Island_accident
(2) Chernobyl from Wikipedia.org: http://en.wikipedia.org/wiki/Chernobyl
(3) Example of micro-generator: http://energy.ingersollrand.com/IS/product.asp-en-18220
(4) National Association of Regulatory Utility Commissioners, http://www.naruc.org/displaycommon.cfm?an=15
(5) Federal Energy
Regulatory Commission, http://www.ferc.gov/industries/electric.asp
Al Berrios is Managing Director of al berrios & co., a pure strategy consulting firm, specializing in advising organizations + entrepreneurs on managing their enterprises in a service economy. Write or Subscribe to Consumer Strategies Report.
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