Flaws Seen in Markets for Utilities

[YankeyMCC]

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A growing chorus of large industrial power users, municipal utilities and consumer groups say there is a reason the price of electricity has not fallen since the federal government opened the heavily regulated utility industry to competition a decade ago. The new markets, they argue, do not work right.
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For one thing, when electricity producers offer to supply power for use the next day, utilities pay everyone the highest price accepted. One study in Texas, where electricity bills have been rising sharply, found that because of this auction system, consumers pay a lot more than they would have under the old system where the state regulated prices.
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“My studies show it is easy to learn from the signals given by others how to get the benefits of colluding without breaking the law,” Professor Talukdar said.

“Economists have this faith in markets, this blind faith that markets are always a good thing,” the professor said, “but the design of markets matters a great deal and the design must be verified to see if it really works as a free market.”
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http://www.nytimes.com/2006/11/21/business/21utility.html

[Big Sky Boy]

1. A few observations

I haven't actually studied the problem, so all I really have are anecdotal observations. But when the numbers are in, I think we are all going to come to realize that this experiment in deregulating energy has been a total failure.

I spent most of my teen years in eastern Washington state. With abundant hydro-electric generating capacity (thanks to Roosevelt's WPA projects), the entire region at that time could boast the cheapest electric rates in the world. I heard my parents talk about paying nine, twelve or eighteen dollars a month to the Grant County Public Utility District.

Those cheaper rates translated into an enormous competitive advantage with regards to attracting and keeping industry in the state. Alcoa with its smelters and Boeing with its fabrication facilities.

When government (or quasi-governmental agencies) were responsible for building and maintaining power plants, they did long-range studies to determine projected needs over the next 20 years or more--not just the next quarter. Their planning always erred on the side of over-capacity, because the political ramifications of running out of power were just too terrible to think of.

Inefficient: Certainly. But was that such a bad thing?

After nearly two decades of de-regulation. What we have seen is that profit-driven energy companies don't build power plants. They don't want that much debt on their books. They'd rather buy power from someone else and there is only so much "excess" power to go around. Nearly all of that ancient over-capacity is gone. Washington state now sells all of its "excess" power to California. My parents pay as much, if not more, than everyone else in the country and the competitive advantage the state used to have has evaporated. Alcoa and Boeing have both significantly down-sized, cut jobs and closed plants--and higher energy costs were a deciding factor.

When these profit-driven energy companies do build power plants, they opt for smaller, cheaper facilities that almost always burn hydro-carbons (natural gas or coal). They are terrible for the environment and only offer an incremental increase to an already strained power grid. In short, they are short-term solutions and do nothing to solve our long-term energy needs.

I know the government-regulated model is far from perfect. I haven't forgotten the Washington Water Power fiasco--They floated a multi-billion dollar bond for the construction of several new nuclear power plants--only to mismanage the projects so badly that they were never completed and WWP was forced to default on the bonds. But it wasn't the planning that was flawed--just the execution.

I don't believe we are going to see a serious increase in generating capacity without government investment--and that kind of investment requires government oversight (read regulation).