Power Trip

By Andelman, David A. | Management Review, April 1997 | Go to article overview
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Power Trip

Andelman, David A., Management Review

Remember what telecommunication's deregulation did for the phone bill? Congress is about to do the same for the electric bill--in the kitchen and the cubicle. But don't blow a fuse yet.

What do a Midwest food processor, a large state university, and a casino and hotel complex all have in common? They're each about to have their own power plants. Entertainment, business and education going into the power business? That's precisely what they have in mind--along with two partner companies, Cincinnati's electric utility Cinergy Corp. and power-plant builder Trigen Energy Corp., which will construct and operate the facilities. The payoff? A 20 percent reduction in the cost of energy to their customers and a whole new business for the energy producers.

All parties have joined the latest unleashing of corporate America, a trend that if the 105th Congress has its way will only accelerate between now and the turn of the century: utility deregulation. Yes, a era is dawning in the way we light our buildings, fuel our factories, heat our offices in winter and cool our workplaces in summer. The era of deregulation that touched off the global revolution in telecommunications is now coming to another major utility-- power.

Washington, along with American business and industry, is frustrated by the old era of monopoly and poised to enter the new era of deregulation. It is a revolution that will transform the nature of the way power has been generated, transmitted and sold, virtually unchanged since Edison lighted his first bulb. Like telecommunications, utility deregulation is causing enormous ripples through the United States and beyond America's shores as well. U.S. utilities are merging as never before while at the same time reaching out to the world, buying and building electrical generating and transmitting facilities in an effort to guarantee a continuation of profits; the kinds of profits that have long fueled their prosperity, the kinds that may no longer be within their grasp on their home turf as competition lowers rates.

Already, CalEnergy Inc. has taken over Britain's Northern Electric Plc. for $1.54 billion, which will boost revenues of the California utility and help offset declines as deregulation arrives, threatening an 80 percent reduction in that utility's home-state contract revenues. Central and South West Corp. paid $40 million for a stake in Brazil's electric distribution company, Empresa de Electricidade Vale Paranapanema. Other companies are building generators in Indonesia and the Philippines and dipping their toes into China.

At home each year, the American power industry produces some 3 trillion kilowatt-hours of electricity for industrial, commercial and residential use, at an average cost of 7 cents per kilowatt-hour. The Edison Electric Institute, the power industry's Washington-based association, estimates that deregulation will knock a penny off that price and American power consumers--from General Electric and Alcoa down to a South Miami trailer park--will save an aggregate of $30 billion. And that doesn't include the steam heat, hot water and natural gas that most major investor-owned utilities now supply to consumers.

Indeed, the Washington-based Citizens for a Sound Economy (CSE), a public-interest research group, has projected an immediate $190 billion-a-year increase in the nation's overall Gross Domestic Product as a result of utility deregulation. "The effect on consumers is not restricted simply to rate savings" says William Armistead, the CSE's vice president for federal and state campaigns. "The prices of goods and services will be lower. If40 to 60 percent of the cost of an aluminum can is electricity, and you reduce the cost to produce that aluminum, you get cheaper CocaCola. Over the long term, costs at all levels will drop from 26 to 42 percent throughout the economy"

Power Players

These economics tell most of the story.

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