In electricity, the”invisible hand of themarket” is robbingAmericans blind.
In Electricity, “Market Discipline” Producing “Rate Shock”By Cliff MontgomeryThe 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.
