The Galveston County Daily News

Starting in the 1990s, 19 states took at least some steps toward rolling back electricity regulations that had stood for six decades. The idea was sold on promises that competition would lower prices. However, electricity rates went up in every case.

In fact, while electricity prices have increased by a little more than 16 percent on average since 2002 in states that are still regulated, they’ve gone up by an average 29 percent in those that deregulated.

The fiasco California suffered was so bad that it suspended much of its deregulation in 2001. Virginia re-regulated its market earlier this year. Illinois added new regulations after the state attorney general in March accused big suppliers of manipulating the market.

In Texas, the state’s biggest generator also is suspected of market manipulation. Electric consumers were so mad over their electricity bills that one company and its prospective buyers had to spend $17 million this year to beat back laws that would have imposed new regulations.

So what went wrong?

A SPECIAL MARKET

As a political matter, words like “competition” and “choice” trump words like “regulation” almost every time. But as a practical matter, when it comes to electricity, the benefits of the free market might not apply.

Franklin Roosevelt and Samuel Insull didn’t agree on much when it came to electricity. But they agreed that the unique nature of electricity companies made them almost automatic monopolies.

After all, you’d have to be crazy to build multiple sets of utility poles and power lines to compete for business carrying electricity. “Deregulation” gets around that by continuing to heavily regulate transmission while deregulating generation and retail sales.

But there are other factors that make electricity a special market.

The central-station electricity industry that powers the world today was Insull’s brainchild. In 1932, the implosion of the Insull electricity empire prompted a raft of reforms and new regulations that stood until the 1990s. As they pushed reforms, Roosevelt and others wanted to make sure that power companies only got reasonable profits from ratepayers.

They broke up the unregulated interstate holding companies that controlled most electric companies and they encouraged public ownership of electric power.

But perhaps most importantly, they passed securities and exchange laws that made companies account more clearly for their profits. That enabled state regulators to better determine whether ratepayers were getting gouged.

The result was the system of power regulation that operated everywhere until a decade ago.

EARLIER FLAWS

A big reason why the federal government and some states started rolling back regulations is that the old system had its failings.

“It was no peach,” was how Kenneth Rose, an economist who is an expert on electricity deregulation, described it.

Since profits were regulated, power companies tried to expand their revenue by building new power plants. Companies could use the costs from those plants to justify rate increases to regulators.

The result was plants that were unnecessary and that were more expensive than they needed to be even if they were, Matthew White, an economist at the University of Pennsylvania’s Wharton School, has said.

Some of the nuclear power plants built in the 1970s are perhaps the prime example. Plagued by cost overruns and safety problems, construction of such facilities ground to a halt until Congress revived it in 2005 with vast, new subsidies.

Also in the '70s, the cost of the fuels that powered electric generators skyrocketed, prompting increases in the cost of electricity. Those prices had been falling since Insull started building the central-station power industry back in the 1890s.

In the 1970s, as it was looking at electricity regulation, the federal government was taking steps to deregulate the airline, natural gas and telecommunications industries.

As those experiments appeared to go well, businesses and policymakers began to wonder, could the electricity industry be deregulated as well? Wouldn’t prices come down if electricity companies could compete for customers not just in their regions, but also outside them?

THE PATH TO DEREGULATION

The government at first took baby steps, in a few instances requiring companies that owned power lines to allow other generators to send their electricity across them at a fair price.

Then, in 1996, the government opened the flood gates, issuing an order requiring all owners of power lines to grant access to all comers. In the following years, states deregulated their electricity markets to varying degrees and prices went … up.

Asked why, many power companies cite the fact that the cost of natural gas has skyrocketed in recent years as it has come into vogue as a clean-burning fuel.

But in many cases — including that of Texas — increases in the cost of electricity have far outstripped the cost of gas. And, much to the outrage of Texas ratepayers, once gas prices started to fall in the aftermath of hurricanes Katrina and Rita, power prices stayed high.

Experts say the unique nature of electricity might be to blame for the apparent failure of the market model. For starters, it’s hard to get into the game and start competing to sell wholesale electricity.

To build a coal-fired “baseload” plant costs at least $1 billion and takes years to build. It’s hard to get lenders to put up that kind of money for a venture in a market where’s there’s truly tough competition.

Secondly, it might be simply impossible to make wholesale power sales truly competitive.

There’s no economical way to store electricity, so it must be consumed virtually at the instant it’s generated. To do that, every deregulated electricity grid must hold auctions several times an hour to balance out the market’s needs.

By watching each other in repeated auctions, electricity suppliers might be able to figure out each other’s strategies, allowing them to offer power not at the lowest possible price, but at one they know will be just below the lowest bidder.

Sarosh N. Talukdar, an engineer at Carnegie Mellon University in Pittsburgh, last year built a computer model that appeared to demonstrate just that. After 100 auctions involving 10 buyers and 10 sellers, the sellers were getting “near-monopolistic” prices.

If correct, that model would support what Insull and Roosevelt always said about electricity: that it just doesn’t lend itself to competition.

SEARCH FOR SOLUTIONS

Some in the Texas Legislature took steps earlier this year that they thought would make the electricity market more competitive and bring down prices. Most significantly, they proposed to cap how much generation capacity a single company could control.

But that and other proposals were beaten back by a $17 million lobbying campaign by those involved in the largest leveraged buyout in history: that of Texas electricity giant TXU. Now Texas ratepayers likely will have to wait until the 2009 legislative session before any changes will be made to the deregulated market.

In response to allegations of manipulation of the Illinois power market, the legislature there passed a law this year forcing the industry to give customers a $1 billion rebate. It also requires the state to buy power on customers’ behalf, instead of selling it at auctions that the attorney general said were manipulated. It can even get into the business itself if it thinks customers aren’t getting a good deal from private providers. Maryland regulators, smarting from a consumer backlash, are studying the Illinois plan.

In Virginia, lawmakers worried because deregulation was going badly elsewhere and regulations on the state’s largest utility were set to expire in 2010.

So they passed a law pegging generators’ minimum profits to the profits their counterparts get in other Southern states. If profits reach a certain level, generators are required to share them with customers.

Rose, who until last year work as a consultant to Virginia state regulators, doesn’t think much of the arrangement. He said it’s a lot more generous to power companies than it is to customers.