Outage challenges deregulation;

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Questions focus on whether competition in electricity works

The Detroit News

The lights hadn’t been turned back on yet, but the spotlight already was shining down on the experiment of electricity deregulation.

The power blackout last week in Michigan, Ontario and several states stretching Northeast immediately renewed questions about whether efforts to make electricity a cheaper product also made it more unreliable.

The massive disruption in electricity service has regulators, lawmakers, utilities and consumers asking just how much control the government ought to have over the production of power and how it flows to the lamp on a nightstand or the air conditioner in an office complex.

“It’s a fair question to ask,” says Anthony F. Earley, chairman and chief executive officer of DTE Energy Co. “Throughout the process of deregulation, we’ve said that the regulated system produced the finest system in the world. Competitive systems are also very successful.

“Most of the American economy is built on a competitive system. … The question we have to ask is: Was that regulated model a better model for what we want out of the system?”

Efforts to introduce competition in the electricity business have proved more complicated than with phone service, airlines and other deregulated businesses.

Deregulation largely grew out of the 1992 federal energy act, but the demand for it came when corporations with costly power bills started noticing that electricity prices were 13 cents per kilowatt hour in New York but 4 cents in Kentucky, says Peter VanDoren, editor of the free-market Cato Institute’s publication called Regulation.

The companies, which like other consumers were locked into buying from the local regulated utility, began to demand the right to import energy from less expensive out-of-state sources under the threat of moving their business across state lines.

As a result, 18 states have agreed to allow competition in the industry in some form, with a few others in varying stages of getting in or out of deregulation.

Typically, utilities separated into companies that either generated power or controlled the transmission or distribution systems, but not all three.

For example, International Transmission Co. in Ann Arbor now owns and operates the electric transmission system in southeast Michigan that was run by DTE Energy before the state started restructuring the industry. And Trans-Elect Inc. of Reston, Va., runs the transmission lines that service Consumers Power Co. customers elsewhere in Michigan.

While the restructuring allowed power generators to compete for business by changing prices, transmission rates remain closely regulated. The transmission part of the business is viewed as a natural monopoly because regardless of where power comes from — a plant fueled by nuclear, coal, gas or renewable energy — there is only one power line into a typical house or business that suppliers have to share.

Yet there are new strains on the transmission systems because energy is being imported from much greater distances and from more sources along the same lines that once just piped energy from a local generator into nearby neighborhoods. The interconnections were never imagined when the grid was designed.

Fred Smith, president of the Competitive Enterprise Institute in Washington, D.C., says energy supplies and demand have increased since electricity generation was deregulated, but the power grid remains under regional power monopolies and price regulation. The result is its capacity has grown very little.

The ability to import energy is important to states like Michigan, which produce less electricity in summer than is needed for cooling and lighting.

Michigan has inched slowly toward deregulation without a lot of controversy.California, meanwhile, came under sharp criticism for the way it set up its system after blackouts a couple of years ago.

“Done right, there’s every indication it creates a more competitive marketplace and lower rates for consumers,” Energy Secretary Spencer Abraham says. “Done wrong and you can do what California did and you force your companies to buy in one market deregulated and not be able to pass on fluctuations in price to users, and you can have the problems you had. There are good models and bad models.”

Deregulation splits critics

Critics of deregulation generally fall into two camps, those who think it’s gone too far and those who think it hasn’t gone far enough. As U.S. Rep. John Dingell, D-Dearborn, puts it, there are two possible solutions: “One is to get in all the way and the other is to get the hell out.”

VanDoren says the partial regulation is “the worst of both worlds.”

“It’s like we’re half pregnant,” he says.

A California-based consumer group called Foundation for Taxpayer and Consumer Rights has urged the White House to put a moratorium on legislative and regulatory efforts to expand deregulation.

“Blackouts are a symptom of a strained system, and it cannot be denied that deregulation has exacerbated the strain,” Douglas Heller, senior consumer advocate, said in a letter to President George W. Bush.

“The incentives of an unregulated energy market contradict the mandates of public safety and the American economy. Without the discipline of regulation, these catastrophes are not surprising: Why would a private corporation ensure reliability and maintain excess power, when scarcity drives prices higher?”

Dingell, who has written energy policy on Capitol Hill for years, says deregulation is causing “a significant lack of investment” because there’s no incentive for companies to invest in transmission lines when they can’t pass the cost on to consumers and the same lines are being used by out-of-state generators who won’t have to share the cost of the upgrades.

“People are not finding that deregulated facilities and a deregulated energy industry draw the kind of investment that is needed,” says Dingell, the ranking Democrat on the House Energy and Commerce Committee. “You have already seen these things happen in California, blackouts and huge price spikes, all manner of abuses and outrages, some of the same phenomenon you see here.”

One transmission operator says the allegation that companies like his won’t invest in their only product is “complete bunk.”

“It’s a fallacious, dishonest argument,” says Bernie Schroeder, president and chief operating officer of Trans-Elect.

“When I make an investment decision, it’s in transmission, because that’s all I do. How are you accountable? You are accountable by the market. The worst thing I can do is have a screw-up like last week — that would ruin my business.”

Schroeder says he understands why transmission systems have to be regulated and isn’t pushing for them not to be. He also doesn’t back the suggestion that companies like his should be given additional “incentives” to maintain their systems.

“If you’re truly independent, you’ve got all the incentives you need,” Schroeder says. “Some people are asking for incentives to fix what they already own. That’s like going to a restaurant and having to give a bonus to the cook to cook.”

Larry Bruneel, vice president of government relations for International Transmission Co., agrees that companies like his have plenty of reason to expand and improve because the Federal Energy Regulatory Commission already provides incentive rates to do just that.

Coalition wants federal power

But groups like ABATE, the Association of Businesses Advocating Tariff Equity, a coalition that represents industrial and other large volume energy customers, want any solution to include more power in the hands of FERC.

ABATE spokesman David Waymire says FERC needs to be able to dictate that electricity grid upgrades are made to ensure that power flows better and more economically, particularly through congested points shared by utilities that are reluctant to step up and pay for them. The politics of energy are very regional, he says, and some states need to work more closely together.

“More power for FERC means more power for Michigan,” Waymire says.

FERC Chairman Pat Wood III says regulatory certainty and other incentives for investment are clearly needed.

“Right now, there is no federal regulatory authority over reliability, but we can, as economic regulators, continue to intensely monitor the grid and markets to ensure that they are operating soundly,” he says.

Smith, of the Competitive Enterprise Institute, says reverting to the old system of regulating both generation and the power grid won’t work.

“The problem with the ‘good old system’ is that it had little innovation, high rates and you still had blackouts,” he says.

But another proposal, to allow the federal government to run the superhighway for electricity by pre-empting the authority of the state and regional regulators, is problematic as well.

More partnering suggested

It’s difficult for any government agency to manage something as complicated as the electrical system, Smith says. They have enough difficulty managing roads and highways, which often get congested, he says.

Smith proposes that the federal government encourage, but not require, state and regional regulators to stop creating price controls on electricity prices and instead figure out ways to partner with other companies to provide alternative routing of electricity.

For example, state and local officials could try to have electrical companies partner with water departments or cable companies to route power lines near water lines by using their ability to create rights of way. This would be a better approach than Bush’s proposed federal pre-emptory power, which essentially would give the federal government eminent domain power to condemn
property so more transmission lines could be laid, Smith says.

Some consumer groups want deregulation stopped in its tracks because it splintered responsibility for the overall reliability of the grid.

The trade group that represents companies that serve 70 percent of all electric customers in the country says the jury is still out on deregulation. It’s still in “an embryonic stage” compared with the telephone business, for example, and hasn’t been given a chance to play itself out fully, says Jim Owen, spokesman for the Edison Electric Institute.

While wholesale competition among power generators largely has been successful, the retail end of the equation is still developing, Owen says. Some states that switched to a deregulated system drew few competitors from which customers could choose their energy provider.

“Our view is it takes a while to grow a mature, competitive market, and we’re still early on in that process,” Owen says.

“We clearly recognize we need to do more to reinforce the grid and to bolster it and to upgrade it where necessary and make sure we accommodate that challenge and reinforce the reliability,” he adds. “Still not knowing the specifics of what caused last Thursday’s (blackout), the silver lining in all this — and we hope there is one — is that the chaos and unfortunate result last week has
ignited a national debate about the adequacy of our power grid, which we think is a good thing.”

Consumer Watchdog
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