Coal gasification as a transition plan to build lead time to develop sustainable, climate-friendly energy technologies....
Back to the Ratebase
for the potential of competition in power generation. Such reformers battled the American utility-industrial complex all the way to the U.S. Supreme Court-and won.
Or did they?
"We're seeing a very disturbing national trend that is taking several different forms," Smutny-Jones says. "Various parts of the country are taking a huge step backward."
He's referring to the growing trend toward utilities bringing formerly unregulated power assets into the regulated rate base, either directly, by acquiring or transferring ownership, or indirectly, through special-purpose affiliates and contracts. Many such deals, Smutny-Jones says, have the effect of freezing out competitive suppliers and leaving ratepayers holding the risk. Others act as a safety net, he says, for affiliated companies that have failed in their unregulated business ventures (see sidebar above, "No Safety Nets Allowed").
"You need a long-term memory in this business to recall that the good-old days of cost-plus regulation weren't all that good," he says. "It's obvious that utilities would like to get back into the generation business, because it's a great deal having ratepayers trapped to cover your managerial mistakes. But that's not appropriate."
Vertical integration is returning to the U.S. utility industry. The combination of illiquid wholesale markets, tighter credit requirements and a preponderance of distressed merchant plants has set the stage for utilities to acquire unregulated generation capacity to serve retail loads. And while even detractors admit that each of these transactions might have merit, they argue that the trend raises difficult questions about what supply procurement practices are appropriate in today's halfway-deregulated power market. "Without a doubt, the decades-long trend away from utility-owned generation has reversed," says Jeff Bodington, principal of financial advisory Bodington & Co. in San Francisco. (See Figure 1, "U.S. Power Plants Sold, 2003," p. 35). "Now the question is, how much will we backtrack?"
In 2003, just over 1.4 GW of unregulated generating capacity was converted into rate-based assets, for the bargain price of $585 million. In the coming months, if major deals already announced proceed, at least another 5.6 GW of unregulated capacity will move into the regulated rate base. (See Figure 2, "Building Rate Base," p. 37).
This trend is fueled by a variety of factors, but the key trigger in many cases seems to be the fear of blackouts. "Utilities see shortages coming," Bodington says. "In part, utilities were shocked by the Northeast blackout last year, and in particular some municipals want to island themselves so they can be insulated from regional problems. With the many difficulties in the power industry, one of the surest ways for a utility to get regulatory approval of new capacity is to put it in its rate base."
Many such deals, however, are coming under fire. The merchant power community, for example, has a litany of complaints about this trend. They argue that in general, such transactions might reduce competition by removing suppliers from the market. These deals tend to be inherently discriminatory, they say, and some of them amount to procurement decisions being made without the benefit of a transparent and fair approach to