Reflections on the U.S. Electric Power Production Industry: Precedent Decisions vs. Market Pressures

By Cope, Robert F., III; Dismukes, David E. et al. | Journal of Legal, Ethical and Regulatory Issues, January 1, 2003 | Go to article overview

Reflections on the U.S. Electric Power Production Industry: Precedent Decisions vs. Market Pressures


Cope, Robert F., III, Dismukes, David E., Yeargain, John W., Journal of Legal, Ethical and Regulatory Issues


ABSTRACT

This research chronologically explores how the unique strategies of over-capitalization through regulated nuclear power ventures and deregulated market power and manipulation were used to increase investor-owned electric utility shareholder wealth. Under regulation, shareholder wealth was relatively stable and expected to grow into the immediate future through nuclear power over-capitalization. With the introduction of deregulated power markets, some utilities seem to be resorting to strategies of market power and manipulation to increase shareholder wealth at the expense of rate payers.

One can argue that the over-capitalization strategy started with The National Energy Conservation Policy Act in 1978. When combined with a broad interpretation of prudence, support was provided for investor-owned utility management's decision to venture into nuclear power production. Several years later, the United States Congress enacted legislation to fully deregulate the electric utility industry with The Energy Policy Act of 1992. Deregulation has severely undervalued nuclear power ventures to the point where investor-owned electric utilities are asking for stranded cost recovery from state regulatory agencies. Without recovery, utilities seem to be resorting to strategies of increasing shareholder wealth through market power and manipulation to subsidize their losses and increase revenues. No better evidence exists than California's recent energy crisis.

INTRODUCTION

The electric power industry of the United States is in the midst of a revolutionary transition from vertically integrated, regulated run monopolies to fully unbundled industries with competitive generation facilities, and regulated transmission and distribution systems. State legislative bodies and regulatory agencies throughout the country are struggling with the challenges of restructuring. Industrial customers, as well as residential and commercial customers are still questioning current regulatory practices.

Before 1973, the electric power industry was characterized by predictable regulatory policies and steady growth. Power production strategies focused on economies of scale, and competition within the industry did not exist. After 1973, the industry entered a second period that was much more turbulent and less predictable due to soaring energy prices. An energy policy shift in 1978 combined with a broad interpretation of prudence provided support for investor-owned utility management's fuel choice decision to venture into nuclear power production. Under regulation, shareholder wealth continued to be relatively stable and expected to grow into immediate future.

Several years later, the United States Congress set in motion plans to fully deregulate the electric utility industry. The Energy Policy Act of 1992 is currently restructuring the industry from vertically integrated and regulated run monopolies to fully competitive unbundled industries of generation, transmission, and distribution. Deregulation has severely undervalued nuclear power ventures to the point where investor-owned electric utilities are asking for stranded cost (fixed cost) recovery from state regulatory agencies. Without recovery, some utilities seem to be resorting to market power and manipulation to subsidize their losses and increase revenues for shareholders. No better evidence exists than California's recent energy crisis.

Harvey Averch and Leland Johnson (1962) published their landmark paper hypothesizing the performance of monopolies subject to regulation. The concerns of Averch and Johnson, and most economists, reflect distortions in the economy that are counter to economic efficiency. Their hypothesis and methods still embody a widely accepted interpretation of the over-capitalization of an investor-owned monopoly under regulation. Our research explores how the unique strategies of over-capitalization through regulated nuclear power ventures and deregulated market power and manipulation were used to increase investor-owned electric utility shareholder wealth through time at the expense of rate payers. …

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