Electric Utility Deregulation: Yea or Nay?

In the thread California, the Designated Bad Guy. Energy, Politics or Both? began by Freedom on 21 May 2001, flowbark observes (31 May):

Well, is there any interest (other than my own) in persuing this?

Personally, i feel that deregulation was being pushed on an uninformed public. I feel that, given the entire story, the general population of California would have been able (by raising a loud enough voice) to avert the problems that beset them.

First off, i think that you have to realize that deregulation would be of little or no benefit to the average residential customer. The competition would be for large commercial and industrial customers; why try to recruit 10,000 residential customers (complete with all all the problems those individuals will cause) when 1 large industrial customer will give you the same market share?

Proof? 1 month after deregulation began in California, Enron pulled out of the California residential market stating that that profit margins were too low (they would however, actively solicit commercial accounts). For the story: http://sacramento.bcentral.com/sacramento/stories/1998/04/20/daily5.html

This is just one of many aspects of deregulation to be considered. It is, however, the one that will have the most immediate impact on your power bill.

Fiat Lux

The lesson of the California power crisis wasn’t “deregulation is bad,” no matter how much Gray Davis bleats to the contrary. The lesson is “partial deregulation can cause serious problems.”

In California, the ultimate end-users of electric power were not paying market rates for their electricity. Thus, as power supplies became more and more scarce, end users had no incentive to reduce their consumption.

Thus, retail sellers of electricity had to sell a lot of electricity at a fixed price, but had to *buy[/] that electricity at market prices – prices which, for a variety of reasons (most notably, a lack of production capacity) continued to rise. You don’t have to be a genius to see that if it costs more to make something than you can sell it for, you’ll lose money.

California further screwed up its deregulation scheme by forbidding long-term, fixed price contracts. Long-term contracts are an effective hedge against price fluctuations: in times of rising power prices, the buyer of power benefits; in times of falling power prices, the seller benefits. But the California legislature, assuming prices would fall forever, incorrectly saw long-term contracts as a means for wholesalers to reap greater-than-market revenues. Dumb move. Buyers of electricity were at the mercy of the spot market when prices started rising.

Deregulation, if done “all the way,” is indeed a good thing. Like any market mechanism, it provides the most efficient allocation of a scarce resource. But for it to work, ultimate end-users must pay the market price; that way, those who value electricity the most will use it, and those that value it less will reduce their consumption. Also, you have to allow the companies involved to hedge their risk.

#%*(@! stupid VB coding…

If a mod has a sec, could they drop an “i” in the brackets after “buy” in the second paragraph?

IMHO, electricity deregulation is a bad idea. It seems to me that, for various social reasons, it’s a good idea to build plenty of excess capacity into the electrical grid. In the past, the way this was done was for regulators to tell the power companies how much capacity to build, and to allow the power companies to recapture the costs of unused capacity in the form of slightly higher rates.

If electricity generation is privatized, there will be economic pressure on generators to operate on much slimmer margins.

As an analogy, consider the airline industry which is fairly competitive. As a result, airlines are loath to let equipment and other resources sit idle or partially used. With everything stretched to the max, even small problems can result in cascades of delayed and/or cancelled flights.

It seems to me that analogously, electricity deregulation will result in more frequent and more serious power outages in exchange for only minimal savings for the average consumer.

I’m not an economist, market expert, or indeed anything relevant to this discussion, but I can point out that the electricity market in the UK has been pretty much deregulated for some time, and we don’t suffer from “more frequent and more serious power outages”.

Well, I suppose that an ounce of practical observation is worth a pound of theorizing.

I’ll rethink things.

I’ve worked in the electrical utility industry for the last 16 years. Yep, bet on it. Deregulation is coming whether you want it or not. We’ve been gearing up for it for the last 5 years. The problems encountered, who pays for the lines that distribute the power, since the lines can be used by anyone? Who is responsible to keep them in a safe condition? Just an example of some of the issues. It is true, the commercial users will be the ones that benefit the most from deregulation. Most residential customers will see a substantial savings the first year (be sure, extra sure, that you read the fine print when signing on with an electrical provider) then after that most will see a higher electrical rate than they are presently paying.
You will see electrical companies go under, bought out, resold over and over, until you’ll have only a handful of providers. It will be much like the telephone industry. They will beat a path to your door to get your business, but in the long run, they are all the same and you won’t save any more with one than you will with the other. But the packaging will look good.

I’ve never heard this before. In what sense are they deregulated? Can consumers choose from different power companies? Or is it simply a case of private providers competing for govt contracts?

Consumers (both private, corporate and public) can buy electricity from any company. (Since all power is pooled through the national grid, it obviously doesn’t matter if a customer in John O’Groats buys electricity from a company with power stations in SW England).

Electricity firms (many of which have merged with other utilities firms) compete strongly for private consumers; since these firms also tend to provide gas, water and financial services, winning a broad customer base is just as important as clinching big company/government contracts.

In addition, I heard on the news today that all price controls on gas and electricity are to be scrapped. So I guess we’re going to be about as close as you can get to total deregulation (UK). My observations? My bills are fairly low and I’ve not experienced a power outage in years. In my time in the US, I was astonished at the regularity of power cuts, but that may have had as much to do with the idiots at ComEd(y).