Utility executives face volatile energy markets, skyrocketing fuel prices, and changing federal energy policies. How are utilities benefiting from the turnaround in energy trading?
The spectre of retail competition in electricity presents some difficult but solvable technical problems in creating new markets. It could lead to a new world of regulation. At the least, it will expose some currently protected utilities to potential losses that could prove substantial.
This prospect of losses has inspired some high-cost utilities to mount a formidable defense of the status quo, coupled with an aggressive offense to shape the transition. But in buying time, these utilities have not stopped simply at defining the agenda. No. By coining the "S" Word (ends with "tranded," begins with the letter between "R" and "T") and by creating the notion of a regulatory "Compact" (which guarantees a full recovery), these loss-threatened companies have cornered the debate with a brilliant strategy designed to minimize losses at the expense of others. They invoke the "Compact," while letting the "S" Word to the damage.
And here's the decidedly clever aspect of the plot: Once the "S" Word finds its way into everyday conversation, it will prove most difficult to eradicate.u1d
When Mother said never to use foul language, she might just as well have been talking about the "S" Word. It's offensive-particularly so as it rolls off the tongue of the regulator, in phrases that include such terms as "costs," "assets," "revenues," "investment," "benefits," "contracts," or "full recovery." Be fore-warned: Use the "S" Word and your integrity will be compromised. No one will respect you.
But more past the "S" Word and one can expose the vulnerability of the "Compact." Vociferous denouncement of the "S" Word is not nearly as effective as is a certain studied disregard, coupled with the use of the correct term.u2d
In fact, regulators should refuse to use or even acknowledge the "S" World-even in dealing with the Federal Energy Regulatory Commission (FERC), which has officially embraced not only the "S" Word, but full recovery, and therefore stands beyond salvation.
The "S" Word carries no standing in economics. It exists only to serve a special interest. The correct term-and the word that respects accepted usage in economics-is LOSSES.
Never, never use the "S" Word! Always say LOSSES!
Genesis (birth of monopoly)
In the beginning (the early 1900s) there was natural monopoly. It existed as a necessary evil, and excelled at exploiting economies of scale. Competition was futile (one producer would always emerge as dominant), so why waste resources in competition? Why not just go ahead and recognize the inevitable?u3d
Also, electricity was said to be "different," owing to the nature of its required capital investment (long gestation period, long life) and its unique network characteristics. Electricity was also deemed vital for safety, health, and the general well-being. Special treatment was required to mitigate risk. These factors led to the creation of an exclusive franchise with an obligation to serve. Utilities accepted those conditions in exchange for the opportunity to earn a fair return on investment-an arrangement not unlike a cost-plus contract for government defense procurement.
Then came the sabbath-a "day" of rest in the utility industry that lasted for some 50 years.