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A Monopolist Takeover

Dominion and AEP want to put the toothpaste back in the tube, but re-regulation could get messy.

Fortnightly Magazine - March 2007

occurred in part because capacity growth in the 1970s and 1980s turned out to be much less than expected, mainly because of conservation efforts in the wake of the various Arab oil embargoes.

Now, as the industry heads into a big build with capacity shortages in some parts of the country—and as high prices loom—the industry’s policy reverses again.

It may be that in choosing the preferred model of regulation—whatever form it may be, whether ratebase regulation or RTO-styled competitive markets—the need to raise capital (or not) for a plant building cycle is, as it always has been, the prime factor dictating policy.

Genies and Toothpaste

As convincing as the arguments from AEP and Dominion may be, it might just be too late for others to climb on the bandwagon. The move to competition took a lot of utility assets and placed them in private hands. Unless the government is going to begin confiscating that private property, the power plants and infrastructure that has been sold are now operated by private unregulated entities to run as they please. AEP and Dominion can only re-regulate because they still are vertically integrated. So, are there any other forces at work?

“FERC and certain industry players have a renewed sense of re-regulation, and I fear even a rollback of many years of competitive evolution,” one insider at the Exnet conference told me, on the condition of anonymity.

“And after hearing Morris, it only reinforced some of these trends. I fear these issues also are being caught by the politicians, who find it a ripe breeding ground for posturing,” said the industry consultant.

His take is that “there is too much hard evidence to turn the tides of competition, and when markets get a taste of competition, they usually don’t go back.”

“However, I do think the regulatory compact will remain as a parallel path, particularly in certain areas of power generation, new build and environmental issues,” he added. “So, this hybrid industry is apparently here to stay.”

C&I: The Power Behind the Policy

There is yet another force pushing utilities to consider re-regulation: commercial and industrial customers—the very customers that pushed for restructuring in the first place. John Anderson, president of the Electricity Consumers Resource Council (ELCON), has been very vocal about his dissatisfaction with “organized markets.” Today’s organized markets (PJM, NYISO, ISO-NE, and MISO), he has said, neither are competitive nor advancing the cause of competition. The benefits are so questionable that all alternatives—even a return to traditional cost of regulation—should be explored, he has said.

That’s a strong statement, coming as it does from a strong supporter of competitive markets. In a presentation last year, Anderson said that the regulated environment produced mixed results. “Some utilities were relatively efficient, but many others were not. Very few were customer friendly. [Furthermore], utilities viewed regulators as their ‘customers’ and had no incentive to lower rates or seek lower-cost power.”

Anderson listed seven conditions needed for a competitive market that are not being satisfied in current “organized markets”: 1) price as an interaction of supply and