Ralph R. Mabey, trustee in the Chapter 11 bankruptcy proceedings of Cajun Electric Power Co-op., has entered into an amended asset-purchase agreement with Louisiana Generating LLC for the purchase...
Investor Beware: Don?t Overestimate Financial Returns In a Restructured Electric Industry
truly a reflection of state politics (em a process that is driven by a two-year legislative election cycle. In some states, such as New Hampshire, even the gubernatorial cycle is a two-year cycle. Today's surplus generating picture, with marginal cost of production below average cost of production, has made deregulation and restructuring attractive because of short-term rate reduction possibilities. History suggests that making long-term bets when the economic picture can be drastically affected by short-term political considerations is extremely risky, particularly in states at the forefront of electric industry restructuring.
A Bureaucracy Like No Other
The political and regulatory picture is made more risky by an entrenched consumer advocacy infrastructure that does not exist in other business environments. In the case of airlines and telecommunications, the primary regulatory battles were fought at the federal level with various states involved as parties, but not as decision makers. The regulator, such as the FCC or CAB, conducted a series of complex regulatory proceedings. However, the proceedings were fairly judicial with rules generally understood and followed.
By contrast, the tone in many states in the electric utility marketplace is different. An extensive infrastructure of consumer advocacy in many states makes a consistent, reliable application of regulatory principles difficult to achieve. All the states at the leading edge of restructuring have full-time consumer advocate departments within state government (em departments that are active litigants in electric rate proceedings. Some states have two such departments. Connecticut has three! These groups typically cast all issues in a highly charged, short-term framework that has enormous political appeal to those seeking immediate electric rate reductions or other "consumer benefits." The focus of these consumer advocacy departments is invariably oriented toward residential customers, usually at the expense of business customers, and always at the expense of the owner of the asset, which cannot easily be moved. There is no indication that these groups will be dismantled or diminished on a going-forward basis, and we can be highly confident that these groups will be involved in attempts to force electric production bus bar costs down when the current surplus picture reverses or when marginal production costs again rise above embedded costs.
No Easy Platform for Growth
One of the underlying initiatives in any effort to restructure an industry is to grow consumption as a means of delivering value to customers and investors. No one would suggest that the transition from a highly regulated environment to an open, market-driven environment has been easy for the airline or telecommunications industries. Indeed, in many cases investors have yet to see assurance that commitments made in these industries will return value over the long term. At the same time, however, whatever value has been returned to shareholders and customers is clearly rooted in the growth that these industries have seen.
Without doubt, the transition from regulated to market-driven for the airline and telecommunications industries would almost certainly have been disastrous were it not for the explosive growth these industries have experienced in the past decade. The electric utility industry has no such