Please explain to me the economics of utility deegulation

General Questions
#1

Lately I’ve been getting phone calls from telemarketers offering to be either my phone service provider or my electricity provider. They’re telling me that they can provide the service more cheaply than Verizon or Con Ed, while it’s a) coming over Verizon’s/Con Ed’s lines, and b) if a problem happens in my line, it’s still Verizon or Con Ed service personnel who come to my aid. My questions are as follows:

  1. If everything they’re doing is provided by Verizon/Con Ed, then how are they able to offer it for cheaper than V/CE?
    1a) I understand that on actual objects for sale, a retailer can offer it for less than the manufacturer themselves might offer to the general public. But that makes sense for tangible objects, where selling requires storing inventory, delivering the item, etc, so a manufacturer will offer it to retailers at a wholesale price, allowing the retailer to undersell the manufacturer’s attempt to sell directly to the consumer. But how could this be true of phone service or energy?
    2)What he heck IS this company providing? What do they do, other than sell and bill?
  2. Is this a viable economic model? Or is it a pyramid scheme (albeit a legal one) that will eventually collapse once Verizon/Con Ed realizes it can directly offer the same price they are?
#2

Sorry, that title should say “deregulation”.

#3

IANAE, but my understanding of the economics of utilities is that the act of billing itself–and the associated regulations–are where the bulk of costs come from. Maintenance of the utility is handled by Verizon/ComEd for a monthly fee paid by your new provider. They undercut Verizon/ComEd by developing cheaper ways to, e.g., read your meter/phone logs, transfer data to paper bills, field the inevitable questions from customers about their bill, streamline bank transactions, and handle collections.

For phone service, I know for a time–as part of the breakup of ATT–Ma Bell was required to provide access to her infrastructure at a below-market price, but i don’t think that is true any longer (now’s where we need an expert to help explain)…

#4

Utility deregulation is a very complicated controversial topic.

Historic operating condition of US power grid:
Large investor owned utilities had monopoly over production and distribution within their areas. Amount of generating capacity required was set by a regulatory body. Prices that could be charged were set by a regulatory body to allow a moderate profit. Any stupid moves by the power company were thus covered by future rate increases, barring some just hideously stupdendously insane mistakes that could not be justified.

Utilities were required to have a large amount of margin (~20%) for power fluctuations in the form of power plants sitting there idle most of the time. This provided great reliability but much wasted capital. In addition, the guaranteed profits and no competition led to very few radical innovations and a very cautious industry. Independent power producers were ata large disadvantage, because they could build a plant, and then the power company could refuse to let them use their wires, or would only pay a small fraction of what the new plant wanted for power.

So enter the “Magic of the market!”
Deregulation happened at different paces and in different ways in different states. Generally, the industry was broken up into power plants, transmission grids, and local distribution centers. And Thus Enron was born. Companies could be set up to buy power from a power plant at whatever rate they could get, negotiate transmission costs with the transmission companies, and then pay a fixed rate to the local distibrution company to get it to your house.

Power costs are really very nebulous things. A huge portion of your daily power bill goes towards paying of the plant that was built to supply you with power rather than the actual fuel spent to create the electricity. And many plants are sitting there idle or at part load. So a plant could decide that it is willing to sell power more cheaply to a trading firm if it can guarantee that it is able to sell all the power the plant can produce. Or so goes the argument in favor of deregulation.

But in my view, it is really a shell game. Traders are in there to make profits. The costs of any power plants built or fuel burned are eventually going to be born by the consumer no matter how it is juggled around. Far more paper trading has occurred than technical innovation. Any cost savings are going to be at the expense of maintaining a proper reserve, leading to artificial power shortages as seen in California, and brownouts as we get to the point where no-one wants to pay for the needed reserve.

#5

I couldn’t tell you because my community (Denton, TX.) has continued their ‘wait and see’ approach to deregulation that results in the continuation of service monopolies that mean we pay far higher prices than people in Dallas/Ft. Worth/every other suburb do.

So I can say that deregulation does work, but i can’t answer how :slight_smile:

#6

No, what it means is that in a patchwork situation, people outside the system can be scewed by those inside it. The power companies WANT to be deregulated to be able to boost prices and profits. They benefit by cutting prices in the deregulated areas and charging whatever they are allowed to in the regulated areas. To you, looks like you are missing the boat. To the power companies, it looks like they are about to sucker in another town.