Utilities: An Electric Shock: For Consumers, Higher Prices. for Investors, Deregulation Could Be the Next Big Thing
First came road rage (infuriating traffic), then phone rage (incomprehensible bills), then air rage (need I even mention airports?). For the next frustration of everyday life, I offer you "juice rage"--the shock of deregulated electricity.
If it drives you crazy to have to figure out which phone company costs less, just wait until the juicemen come. You'll be asked to pick an electrical service to deliver the power that runs your home. Different companies will offer different discounts, rates and fees. And just when you've got it figured out, rates will change again.
For as long as you've been turning on lights, you've bought power from a local monopoly at rates OK'd by your state's public-utility commission. Now, around half the states are working toward free-market pricing, with more states ready to jump aboard. The major utilities already face modest competition in New York City and much of Rhode Island, Pennsylvania, Massachusetts and New Jersey. Texas will deregulate in 2001 and most of California by 2002.
Then there's San Diego, the nation's freest kilowatt market so far. Competition was supposed to bring costs down. But a scorching summer drove up demand for limited supplies of power, shooting free-market prices into the sky. Homeowners saw their bills double from last summer's levels. After an outcry, government imposed temporary price caps. But consumers have seen the future, and hate it. Heat waves also drove prices in New England and New York.
Not ready: In some ways, the electricity markets aren't yet ready for retail competition. For example, power can't easily move around the country because of the limitations of regional grids. Price competition is modest, at best. Some utilities charge that, in the wholesale markets, bidding has been rigged (the Federal Energy Regulatory Commission is investigating). "It's like the stock market in the 1920s, before the Securities and Exchange Commission was created," says Bruce Radford, editor of Public Utilities Fortnightly magazine in Vienna, Va. "It's the wild West."
But if, as seems likely, average prices rise in the years ahead, deregulation won't be to blame. Instead, we're facing an "electricity-capacity emergency," says analyst Edward Tirello Jr. of the investment firm Deutsche Banc Alex. Brown. For various reasons, utilities haven't been building many new power plants. While they fiddled, the New Economy started chewing through kilowatts like a grasshopper cloud. As consumers, we're plugged into multiple phones, faxes, computers, electronic appliances and Sega games. As Netnicks, we add to the millions of Web sites running 24/7. As business people, we're building vast business-information and e-commerce networks, relying on power supplies that we seem to think descend from heaven. "The shortage wasn't foreseen and it's worse than we think," Tirello says. It can take years to get new power plants approved and built.
So it seems that prices were going to rise, with or without deregulation. That's going to attract new investment, which will create more supply, says Roger Conrad, editor of the Utility Forecaster newsletter. …