A little karate

On electricity deregulation 16

In The Karate Kid, Mr. Miyagi advises that "It is good to know karate. It is good not to know karate. It is not good to know a little karate." With the price caps now coming off in the few states that partially deregulated their electricity grids, there is a rising backlash against competitive markets, with some of that backlash even coming from normally pro-market groups like The Cato Institute. This backlashers generally argue that partial deregulation has taught us that deregulation doesn't work in the electric sector. But we ought to remember Mr. Miyagi's advice, lest we draw the wrong lessons from our little bit of karate.

This subject deserves more discussion on Grist, as evidenced by some of the debate which followed my last post. Let's take a closer look.

Critics of deregulation frequently point out the fact that the prices are higher in deregulated states than in restructured states. This makes a good sound bite, but is ultimately irrelevant, for the simple reason that prices were higher in those states before they chose to deregulate. (Indeed, high prices may well have contributed to those states' desire to try a new approach.)

Consider the following U.S. Department of Energy data: In 1992, before any state or federal deregulation was in place, the average price for power in those states that would eventually deregulate was 2.16 c/kWh higher than in those states that would remain regulated. By 2005 (the most recent year for which we have data available), prices were only 2.08 c/kWh higher in the states that deregulated in the interim. Yes, they were still higher, but on a percentage basis, the bigger price increases have been in those states that remain insulated from competitive pressure. Which means that given the underlying upward pressure on all energy costs, you're better off living in a state that chose to deregulate than one that didn't.

Perhaps the more interesting point is that those underlying price trends are increasingly affecting the coal belt -- which is essentially contiguous with those states which chose not to deregulate. This means that states that chose not to deregulate (a) have seen greater price increases, on a percentage basis, than those which did not deregulate, and (b) are particularly exposed to the next round of price shocks. The Clean Air Act made new coal plants much more expensive -- but the overbuild prior to the Clean Air Act ensured that we didn't have to build those new coal plants until very recently. Now that we've just about used up all the reserve margin in the system, regulators are forced to consider New Coal.

The prior overbuild has lulled us into a false belief that coal is cheap. The reality is that Old Coal is cheap. New Coal, which requires almost twice as much capital investment for pollution control as Old Coal, operates at 10 percent less efficiency (meaning more fuel price exposure) due to parasitic loads for pollution control and needs substantial investment in new transmission to connect to the market -- requiring a delivered retail rate of 10 c/kWh or higher to be cost competitive. If carbon legislation requires these plants to sequester their carbon, the delivered price will need to be closer to 17 c/kWh. At these prices, lots of cheaper (and cleaner) technologies make sense, and would surely be built, thereby compelling those coal plants to run fewer hours and take a massive equity penalty. No reasonable investor would pursue this path.

Here's the rub: regulated power markets are not dominated by reasonable investors. They are dominated by vertically integrated monopolies who need not build competitive plants -- they need only convince commissioners to guarantee their equity returns. The nuclear industry is a great example of how bad regulated markets are for your pocketbook. Whatever else one thinks of nuclear power plants, they are cheap to run, meaning that if they were owned by an economically disciplined investor, they would be run all the time. But wait: the regulated electric monopolies aren't subject to economic discipline. The more they spend, the more they get. So the nuclear fleet provides a great test of the costs of regulation. If regulatory models provided a differential incentive to preferentially deploy low-cost power sources, we'd expect it in nuclear fleet data. Let's look:

The DOE provides exhaustive data on the installed capacity (MW) and total generation (MWh) by state and by fuel type throughout the U.S. Taking this data, one can readily calculate the capacity factor of the nuclear fleet by state (that is, the total MWh, divided by the MWh that would be generated if the plant ran flat out, all year long). The top four highest fleet capacity factors? Massachusetts, Maryland, California, and Illinois (average CF = 94 percent). All are deregulated, though California only partially. The bottom four lowest fleet capacity factors? Alabama, Arizona, Wisconsin, and Missouri (average CF = 71 percent). With the exception of Arizona, all are insulated from competition.

Nationwide, the average is 81 to 85 percent in favor of deregulated states, meaning that if you live in a regulated state, your utility is burning coal or gas at the expense of nuclear, and charging you for the difference. This is but one window into the story, but it is a story of overwhelming economic inefficiency on the part of regulated utilities. Expanding beyond nuclear, it means that so long as we remain shackled by the current regulatory paradigm, we should not assume that our electric utilities will preferentially deploy the cheapest generation. The economic benefits of energy efficiency or renewables not only don't matter to regulated utilities, they actually cost them money!

And these are precisely the vertically-integrated monopolies that Cato and their ilk suggest would be good for the economy. A little karate indeed.

The good thing is that there is a better way. Instead of drawing the wrong lesson from our little bit of upstream karate, let's extend the successes we have already seen in the deregulated states down to the retail level. At the load, customers can install on-site power plants that use low-cost opportunity fuels which cannot be cost-effectively collected and transported to central power stations. These customers can also recover waste heat from power plants that would displace other fuel use, enabling double or triple the overall power plant efficiency (and interestingly, returning to the efficiency levels the power industry achieved in 1910, before the current regulatory regime removed their incentive to conserve).

Where Cato suggests that "transmission and generation are substitutes for one another," these local plants actually displace transmission, cutting way back on the amount of capital that is presently being guaranteed by utility ratepayers. But getting this capital deployed first requires that we open up markets at the load side of the wire. The customer who tries to install that power plant today has no route to market except through the monopoly utility's wire. In 13 states, a third party who tried to build that plant and sell electricity to the host would run afoul of utility regulations that only allow the states' regulated utilities to sell kilowatt-hours. And so the plants don't get built.

If they were built, they would lead not only to lower power costs, but also to a more reliable grid (because more generators equals less probability of system-wide disruption) and lower carbon emissions (because more efficient power plants emit less CO2). What the world needs now is more deregulation, not less.

Sean Casten is President & CEO of Recycled Energy Development, LLC, a company devoted to profitably reducing greenhouse emissions.

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  1. Bart Anderson's avatar

    Bart Anderson Posted 5:31 am
    20 Sep 2007

    In the land of PR

    Some reasons for suspicion:

    1. Any article that ends with a general statement like "What the world needs now is more deregulation, not less" is making an ideological point rather than a technical one.

      My reaction is: it depends. It depends on who is doing the regulating, on who the market participants are, on who you are (some will benefit, others not).  I distrust any generalization that ignores these issues.

      And I think I distrust this argument in general. It has been used so many times in an unscrupulous, sloppy way - my skeptometer kicks in whenever I hear it.

      When I read the article, I have the feeling that someone is trying to sell me something. There is probably some truth in parts of the essay - but it's hard to disentangle. I'd prefer to get my information from a more objective source.

    2. When you cite studies about a specialized field, it is very hard for the rest of us to determine their validity. Are you cherrypicking data?

      It's hard to know whether to trust you or not. An effective PR trick is to throw technical information at readers like pixie dust.

    3. If you are an interested party to the discussion, you should really mention it in your post. On the plus side, you did give your background at your Gristmill bio:
      President & CEO of Recycled Energy Development, a company dedicated to the profitable reduction of greenhouse gas emissions. Past President/CEO of Turbosteam Corporation, and 2007 Chair of the US Combined Heat & Power Association.

    4. This essay reads as if it were written by a skillful PR person, rather than by an executive. Most execs I've met are too busy to spend the time polishing an article like this.

    Bart
    Energy Bulletin

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  2. infp Posted 5:35 am
    20 Sep 2007

    Once burned

    But can we trust our elected officials to deregulate the electric grid in the public's interest?  We saw what was done to California in 2001.  The reason many people cringe at the idea of deregulation is that they feel that the same special interests are likely to hijack the process again.  

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  3. NonprofitWatch Posted 5:51 am
    20 Sep 2007

    Hopefully You Don't Mean This as Dereg Example

    http://www.prwatch.org/node/6459


    The ExxonMobil Protection Agency

    The U.S. Environmental Protection Agency allowed an ExxonMobil employee "to peer review the science behind the agency's proposal to deregulate incineration of some industrial by-products," reports Integrity in Science, a project of the Center for Science in the Public Interest. The peer review was overseen by an EPA contractor, Syracuse Research Corporation (SRC). The ExxonMobil employee, Thomas Parkerton, told SRC that his "current employer (and the chemical industry in general) would benefit from" the proposed rule, yet he was allowed to review it, in an apparent breach of EPA guidelines. The rule would allow more than 107,000 tons of hazardous waste burned annually in specially-designed incinerators to instead be disposed of in industrial boilers or municipal incinerators. Consumer and environmental groups decried the "undue agency tolerance of conflicts of interest in its rulemaking process," and urged the EPA to "re-review the science and, if necessary, rewrite the proposed rule."

    bernardo issel - http://www.NonprofitWatch.org - bernardo (at) NonprofitWatch.org

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  4. Sean Casten's avatar

    Sean Casten Posted 5:59 am
    20 Sep 2007

    Bart

    I won't try to sell you on my personal bona fides - either you trust me or you don't, and all I can offer is as an unbiased account is that you do like you would do with anyone else.  Google me, ask around, see if I'm a trustworthy guy.  I think I am, but I'm biased.

    However, I would offer a few responses to your understandable skepticism:

    1. Yes, "deregulation is good" is an ideological argument, overused no less than it's opposite.  But let me be very clear about what I mean.  Many take this simply to mean private sector vs. public sector management, which too often translates as a wealth transfer.  (See: Haliburton's privatization of military contracts).  I use the word deregulation in it's purest, most market-oriented way: a place where competition works.  Not only by giving business a financial incentive to succeed, but also by imposing financial penalties if they fail.  (Current electric reg does neither, since efficiency is a pass through and if they fail, we just bail them out - see PG&E.)  This means that we need to allow free entry and exit into the market, but also need to impose vigorous anti-trust enforcement to ensure that no one company can dominate it's position.  This is back to my Halliburton example: replacing one monopoly with another is no one's idea of a functioning market.  Ditto for California dereg, where the machinations of Enron were grossly unethical and distortive, but resulted in no small degree from the fact that the regulator did not shift their responsibilities from consumer protection through rate-setting to consumer protection through anti-trust enforcement.  They bear as much of the blame for what happened as Enron did.

    2. As to my objectivity, I can only offer my favorite David Lee Roth quote: "We don't act this way because we're in rock & roll; we're in rock & roll because we are this way."  Ditto for my business.  Do I have a vested interest in the creation of markets that allow people who deploy cheap, clean energy to keep some $ for the benefits they create?  You bet I do.  But the reason I'm in this business is because (a) I am a passionate environmentalist and (b) I believe that if you want to leverage your successes, you better find a way to be successful profitably.  The things we do as a business are those things which - in an economically rational world - would profitably reduce greenhouse gas emissions.  Are we economically rational?  Not at all.  But I do believe that Churchill had it right when he said that "you can always count on Americans to do the right thing, but only after they've exhausted all other options".  To those of us who have spent decades in this industry, the problems are no less apparent than the solutions, and we believe that regulation will eventually adopt to remove the goofy disincentives to energy conservation.  

    3. I'm not cherry picking data, but I will admit that the data surprised me.  My general opinion of the restructuring that has happened to date (a much more accurate description than "deregulation") is that it's been far too little and in the wrong place to have any impact.  What's remarkable is the success it's had largely in spite of itself.  In essence, it has proven what needs no more proof, that Adam Smith was right - given competitive markets, the pursuit of profits will benefit the consumer.  And just the little bit of competition that has been injected into power markets have brought about significant consumer benefits, which are concentrated in the restructured states.

    4. I take your last comment as flattery.  Thanks.

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  5. Sean Casten's avatar

    Sean Casten Posted 6:03 am
    20 Sep 2007

    Nonprofitwatch

    See my comment to Bart.  The opposite of regulation is not anarchy, at least if the intent is to build the public good.  Yes, many companies ask for lighter regulation, and that is not in any way my point.  The presence of competition is in no way incongruous with the maintenance of regulation.  Home builders are deregulated, but they still have to build to code.  I would take your example as a request to remove the code, but this is simply an example of how the term "deregulation" has been bastardized.  (I'm all ears for a better term.)  What we need is in fact a removal of guaranteed monopoly protections of the most inefficient businesses.

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  6. Sean Casten's avatar

    Sean Casten Posted 6:09 am
    20 Sep 2007

    infp

    I am a broken record, but ... see my comment to Bart.  Alfred Kahn, former head of the Civil Aviation Administration, FCC and NY Public Service Commission had this to say about the way that good deregulation happens (bear in mind that this is from a guy who was active in the deregulation of three industries: airlines, telecoms and natural gas):

    "Deregulation shifts the major burden of consumer protection to the competitive market, and therefore, in important measure, to the enforcement of antitrust laws"

    This is deep wisdom, and goes to the heart of why CA  got as bad as they did.  The utility regulators didn't ask to have their jobs eliminated (as one would not expect them to), but equally, no one from the governors office said "you know what - this is an industry that is prone to concentration, and so we ought to be vigilant against the rise of unregulated monopolies"  (which are, after all, worse than regulated monopolies, since the latter are at least subject to earnings caps.)  I'm not suggesting that we shouldn't hold the Enron's of the world accountable, but the regulators deserve a bigger slice of blame than they got.  Instead of focusing on the signs of market gaming (which, at least in hindsight, were visible in CalPX power prices), they focused on bailing PG&E out of bankruptcy and looking for scapegoats.  We can learn from that lesson, but let's not draw the wrong lesson that we need to spend more time looking after those poor shareholders of regulated utilities.

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  7. NonprofitWatch Posted 6:59 am
    20 Sep 2007

    Sean, Response To Tyson Slocum Whom You Slimed?

    Did you ever get back to him in regards to his response to your comment about him?
    Would you please post for us to read?

    I think you were quite harsh on Slocum in stating that


    I wouldn't put any stock in what Tyson Slocum has to say about the ways to restructure markets.  Apropos of my comment about the propensity of the world to believe things that a $400 billion industry says, one of the worst offenders are the so called "public advocates" who have come to drink far too much utility Kool Aid as it relates to their long standing efforts to conflate the interest of a utility with their consumer.  (For example, an oft used tactic of a utility to block the installation of cleaner power is "if you let them build that plant, it will lower our returns and we'll have to raise rates to other consumers.")
    http://gristmill.grist.org/story/2007/9/12/886/58611

    Sadly, I think your criticism about "not put any stock in" and drinking "too much utility Kool Aid" better applies to NRDC, Environmental Defense, and other mainstream environmental groups whom I'm comfortable to charge as being on the take and corrupted when it comes to the utilities.

    Not that the consumer groups are necessarily perfect. Do you have specific examples upon which you based these comments? Regarding which groups?  I'd be very interested to learn.

    By the way, I was friendly with Slocum in the past when I lived in DC and as I clearly recollect, his project Critical Mass Energy Project were quite critical of deregulation as it took place in California and elsewhere, including raising the concern about the new natural gas plants which as I understand some now blame for the high cost of electricity in the deregulated states. But I've barely been in touch with him the last 4 years, missing him when he spoke at a NYC event, and him not having time to connect when he came in to appear on the Colbert Report. I found the video of that show with Slocum in case you'd like to see the person you slammed.   http://www.comedycentral.com/sitewide/media_player/play.j ...

    Also, from what little I know,  I don't like the recent settlement by Public Citizen with the company planning a new coal plant in Texas about which a post turned up here http://gristmill.grist.org/story/2007/9/2/10513/26789 , but on various fights, outcomes have been skewing in favor of business interests -- often with the the collusion of other enviros -- against the efforts of Public Citizen, and perhaps this contributed to their decision to reach the settlement.  Also, Sierra Club, Environmental Defense,and NRDC have set precedents on agreeing to coal plants which probably made it harder for Slocum's group to take a harder line.

    bernardo issel - http://www.NonprofitWatch.org - bernardo (at) NonprofitWatch.org

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  8. Bart Anderson's avatar

    Bart Anderson Posted 7:15 am
    20 Sep 2007

    Just sign it over to trustworthy Uncle Bart

    Thanks for your mature replies, Sean. I'm impressed with your ability to flog a decent sentence - a rare talent among business people.

    But back to the issue of deregulation.  Consider it this way.

    A salesman comes into your office, offering to sell you a product that will transform a process on which your business depends.

    Trust me, he says. I'm a nice guy..  He probably is a nice guy, but you would still want to know his credentials, his track record.

    When you bring up some examples of similar products that have failed, he says, Well, that's not the sort of product I'm talking about. I'm talking about an ideal product which won't have those shortcomings.

    If you bring up a specific example (e.g. California and Enron), he says, Well, what do you expect? The customer was foolish to have trusted the salesmen (Enron).

    *

    The devil is in the details. Just about everybody believes in "the magic of the markets" - including the Chinese Communists ("To get rich is glorious") and the Russian Communists (during the NEP).

    There are always going to be conflicts of interest, problem areas, tendencies for corruption.  Personally, I think that there is a lot of truth in your argument (and that of pro-market Jason Scorse) if it's presented realistically rather than as a religion.  

    If you are asking us to "buy" your argument, tell us what is likely to go wrong, what safeguards should be put in place. Tell us too, when it is inappropriate to deregulate markets.

    Isn't this how you would drill that salesman in your office?

    Bart
    Energy Bulletin

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  9. Sean Casten's avatar

    Sean Casten Posted 7:18 am
    20 Sep 2007

    Nonprofitwatch: yes, but...

    I have had extensive email exchanges with Tyson since that post, all of which were considerably more civil (on both of our parts) than the earlier exchange.  Their length, detail and - at least in my case - attached spreadsheets and documents on my email do not recommend themselves to posting on a blog thread.  Nor frankly, does decorum.

    That said, I would summarize our exchange as being that we are in broad agreement on goals, but in strong disagreement on paths.  Perhaps he will chime in here, but in the meantime, I would characterize the difference as on the one hand philosophical (I, more than he, believe in the power of competitive markets to deliver social goods), but also more quantitatively comparative.  Specifically, I find the work of Public Citizen - and many others of their ilk - disappointing in it's failure to truly appreciate the costs imposed by our current regulated system.  Any system that uses twice as much fuel to provide useful energy today than it did 100 years ago is a gross failure, both in terms of the economic and environmental consequences.  (Remember, this is both the biggest industry in the country by revenue and the biggest CO2 emitter.  Go back to 1910-level efficiencies and you have massive reductions in both.)  The reason we were so much higher in 1910 is because the industry at that time was subject to competitive pressure.  If Edison didn't make sure his power was cheap, Westinghouse would steal market share with him.  Today, if your utility doesn't give you cheap enough power, they... issue a PR statement.  Which, if you read carefully between the lines says "Come on - whaddaya gonna do about it?"

    This is a huge silent cost that no one talks about - but when we frame regulation/deregulation arguments in the mode of the devil you know vs. the devil you don't, we should at least be honest about the devil we know - and it's a nasty devil.  Given this history, I find it morally and economically problematic to recommend any course of action that doesn't run as fast as possible away from the status quo.  And while I will accept reasonable debates about the appropriate way to structure the transition, I do not accept claims that we don't need to change - or worse, that the world was better before we started to introduce a modicum of competitive discipline (and incentive) into electricity markets.

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  10. Sean Casten's avatar

    Sean Casten Posted 7:43 am
    20 Sep 2007

    Bart

    Excellent questions, which unfortunately deserve a more detailed response than this format allows.  I'll try to be brief:

    1. When in doubt, re-read Adam Smith.  Pro-market is not same thing as pro-business, notwithstanding what the Wall St. Journal might lead you to believe.  Smith was pro-market, and so long as we structure deregulatory processes with that in mind, we will generally do well.  But as soon as we trip towards pro-business, we get pork.  The idea that businesses are efficient because they have profits is bogus.  Businesses are efficient because they're trying to make a buck (positive incentive) and they're scared to death of having to face staff if they can't make payroll next week (negative incentive).  Both incentives are innate to competitive markets.  Regulated monopolies have neither.

    2. Wherever we can, put a price on externalities.  Much of what we label as market failures are in fact regulatory failures, in that we gifted externalities to favored interests (a perfect case of pro-business malaise).  If we're concerned about markets failing to price in CO2 emissions, put a price on carbon (and do so without gifting allowances to those who already pollute).  But then get out of the way - don't pick winners or favorite technologies, at least not until we've satisfied ourselves that we can't use competitive markets to address that particular externatlity.

    3. Some stuff may well end up ultimately being outside the purview of markets.  In the jargon of the trade, these "natural monopolies" are those in which there is no economic gain to be had from multiple, competing services.  A police force is the classic example.  This is a hard exercise to do rigorously, and I generally find that the list of things that are labeled as "natural monopolies" speak more of the failure of vision of the speaker than they do of any innate characteristic of the industry.  (A favorite example of this is the 1876 Supreme Court Case Munn v. Illinois - one of the earliest pillars of US regulatory law - which makes the case for grain elevator regulation by pointing out the number of businesses which must, by their nature be regulated "since time immemorial" including "ferries, common carriers, hackmen, bakers, millers, wharfingers, innkeepers".  It's one I especially like to cite whenever someone tells me how their industry is widely understood to be a natural monopoly.)  That said, where such industries do exist, let's make them arms of the gov't - putting a for-profit monopoly in place creates nothing but a tax (paid to monopoly shareholders) on the service provided.  The police force in your town certainly wouldn't be more efficient if they had a profit incentive - why delude ourselves into thinking that the wires utility is any different?

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  11. KenG Posted 9:43 am
    20 Sep 2007

    Deregulation Data

    I'm a deregulation fan and I don't think you tried to cherry pick the data, but one of the basic rules of analysis is, given a trend, to look at the other potential factors behind the data points. The Nuclear test of deregulation fails this rule.

    First, including Illinois as a deregulated state is problematic. Although the state passed deregulation legislation, it never actually happened. The utilities agreed to a rate reduction and 10 year freeze in exchange for deregulations. When the 10 year freeze recently expired, the legislature effectively re-regulated the market by negotiating new reduced rates. The real answer is that Exelon is the best nuclear operator in the country, regulated or not.

    Second, the low performing states plant capacity factor is dominated by Palo Verde, a somewhat troubled plant in the only deregulated state in the group. The trend seems weak.

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  12. JMG's avatar

    JMG Posted 1:54 pm
    20 Sep 2007

    What phase do you propose deregulating?

    A problem with this discussion is that it treats electricity, our only truly national commodity, as if it were a single, uniform thing, rather than at least three very distinct industries (generation, transmission, and distribution to customers; possible a new segment is emerging as a subset of distribution, service to small distributed generators who may, at any moment, by feeding rather than taking from their local distribution network).

    Electricity IS a natural monopoly in the distribution segment because the marginal cost is below the average cost -- so one supplier will always be able to undercut competitors and drive them out and capture the service territory.  Moreover, environmentally, the tendency at this phase is to reward energy hogs for their wastefulness with lower rates, since the contribution to costs of supplying 20,000 kWh a year to a residence costs is the same as if you supplied them with 6,000 or 12,000 kWh a year to that residence.  An unregulated market would quickly return us to the days of "Speedy Kil-o-Watt" and the "All-Electric Gold Medallion Home."

    I suggest you quit with the word "deregulation" because there is, in fact, no such thing as a deregulated business outside of the Sopranos.  The word is a conceptual nullity that actually conveys no useful information, about like calling someone a liberal or conservative.  If what you're after is an end to cost-recovery ratemaking for generation (say, with rising carbon efficiency standards), say so.

    But if you just keep banging the drum for "deregulation" you'll keep getting the same results as obtained to date.

    Save the world: Reduce greenhouse gas emissions 5% annually.

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  13. Sean Casten's avatar

    Sean Casten Posted 11:31 pm
    20 Sep 2007

    Ken

    Ken:

    Fair criticism, but it results more from the interests of brevity when I only listed the extremes at either end.  Note though that as a population, all restrutured states still have a 4% efficiency advantage (85% to 81%).  

    That said, you asked the question so I provide below the full data (from 2005).  States are listed in rank order of capacity factor, and the code at the back is taken from the National Regulatory Research Institute's definition of their deregulatory status (F=Full Restructuring, L=Limited Restructuring, S=Suspended/Reversed Restructuing, R=Traditionally Regulated).

    MA - 93% - F
    MD - 92% - F
    CA - 90% - S
    IL - 90% - F
    SC - 89% - R
    GA - 89% - R
    PA - 88% - F
    NC - 88% - R
    VA - 87% - F
    MI - 87% - F
    NH - 87% - F
    IA - 87% - R
    NY - 86% - F
    NJ - 86% - F
    TN - 86% - R
    TX - 85% - F
    AR - 85% - S
    MN - 84% - R
    MS - 84% - R
    VT - 83% - R
    CT - 82% - F
    KS - 82% - R
    LA - 80% - R
    FL - 80% - R
    WA - 78% - R
    NE - 77% - R
    OH - 76% - F
    MO - 74% - R
    WI - 70% - R
    AZ - 70% - F
    AL - 69% - R

    Slice that data anywhere you want, but it's clearly not cherry picking.  The median CF in the list is 85% (TX/AR).  9/13 (69%) of the restructured states are above the median, while only 3/13 (23%) are below.  By comparison, 5/16 (31%) of regulated states are above the median, 11/16 (69%) below.  Which is why I made the point in my post that if you live in a restructured state, you are statistically more likely to be served by a utility that is burning coal/gas/oil when they could be running their nukes.

    I should note that there is an innate problem with single-year tests, especially in the nuclear industry that's dominated by big plants; one long outage really skews the data.  (CT is a good example).  I have not yet fully looked at that data, but just looking at 1990 is instructive.  If we take the same dataset and roll back the clock to 1990 (e.g., before any state had deregulated, and therefore when our experiment can control for other variables), we find that the CF in states which would eventually deregulate was 54%, while the CF in states that would remain regulated was 65%.  In other words, while all states have gotten better at running their nukes, the rate of improvement is significantly better in the states that deregulated (as we would expect, since those states now have a profit incentive to run those plants better). So to the extent that Exelon is now a really good nuke operator (which I agree with), they didn't start that way.  And the data strongly suggests that the fact that they are in a state where they can earn more money by running their cheaper plants better played a significant role in boosting their performance.

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  14. Sean Casten's avatar

    Sean Casten Posted 11:45 pm
    20 Sep 2007

    JMG

    Comments:

    1. I accept that we need a better word than deregulation, but I do sometimes feel like Bono on the live version of Helter Skelter ("Charlie Manson stole this song from the Beatles... We're stealing it back.")  The term has been bastardized by those who confuse pro-business with pro-market.  I'm all ears for a better term for the latter, but this is the classic sense of the term - and is broadly consistent with the approach taken to the deregulation of railroads, telecoms, airlines and natural gas.  

    2. Yes, there are different elements of the grid with different regulatory constraints, but given 100 years of regulated monopolies, one can make too much of these distinctions.  When you factor in the cost of transmission and distribution, local generation is by far the cheapest source of power on an all-in basis by virtue of (a) lower total capex and (b) lower total opex.  In a fully deregulated grid where market participants could profit from low-cost generation, this is what would get installed.  (Indeed, of all the DG installed to date in the US - which is about 10% of our generation - <10% was installed by regulated utilities.)  This is why I criticized Cato for saying that generation competes with transmission: it only does so in a market that continues to preferentially make investments at the expensive end of the wire.  Introducing competitive forces throughout would shift capital allocation downstream and thereby render the idea that generation doesn't work without transmission+ distribution moot.

    3. To the extent that electricity is a natural monopoly at the distribution level (which I don't entirely agree with), it's certainly not because of marginal/average cost considerations.  After all, getting electricity to the distribution level requires first generating it in big, central plants, paying for capital recovery on the generation and transmission side and paying for line losses throughout.  It is actually quite simple to generate electricity at the load for a lower marginal cost except in those locations that have chosen to subsidize central generation.  This is key.  In Canada, they have historically paid for part of the price of delivered (central) power with income taxes, creating a huge disincentive on the margin to invest in local efficiency.  We consistently provide cheaper capital to central plants (by virtue of commission guarantees of capital recovery), thus offsetting costs of their inefficiency.  The Clean Air Act grandfathered pre-CAA sources, such that a point source at the load that reduces NOx/SOx requires extra capex and opex for pollution cleanup that the dirty upstream guy does not.  Take these distrotions out of the system though and there really is no comparison - as amply evidenced by the fact that so much of our grid now depends on local generation (in spite of these barriers), virtually all of which has been deployed by the private sector.

    4.  My point is broader than removing cost-plus pricing.  Competitive markets give incentives for success, but also impose penalties on failure.  One of my favorite quotes on the costs of monopolies is "the greatest monopoly rent is a good nights sleep".  Knowing that your success is uncapped is one level of pressure, but knowing that if you don't keep seeking more success you may end up declaring bankruptcy is a different beast.  This is deregulation, in the truest sense of the word.  And it's not the Sopranos, because - as I've now said too many times - the opposite of regulation is not anarchy.  

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  15. jsc Posted 10:50 am
    21 Sep 2007

    Utility deregulation

    Unregulated competition can never work for the electric utilities industry because electricity is unlike any other consumer product.            

    With electricity, consumers will never have many of the choices that they have with other products, such as automobiles.

    For example:

    In the automotive market a customer can buy a new car from many different manufacturers, foreign and domestic.  In the electricity market, maybe a customer can buy new electricity from only a few domestic suppliers.

    A customer can chose between many different types and qualities of vehicles and models.  All electricity is basically the same, provided it is reliable.

    A customer can repair and continue using his old car.  Electricity cannot be repaired or re-used.

    A customer can rent a car.  Electricity cannot be rented.

    A customer can use public transportation instead of buying a car.  In the electricity market there is no analogous public alternative.

    A customer can hire cabs instead of buying a car.  In the electricity  market, there is no analogous alternative.

    In some circumstances a customer can walk or ride a bike instead of using a car.  In the electricity market, there is no analogous alternative.

    In many cities, it is not necessary to own a private car.  Everyone must use electricity.

    Thus, an automotive manufacturer must compete not only against other manufacturers, but also against a wide variety of customer choices.  These customer choices do not exist in the consumer electricity market.  

    Unregulated competition in the electric utility industry is a disaster for consumers because there will always be insufficient customer  choice.

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  16. Sean Casten's avatar

    Sean Casten Posted 11:23 pm
    23 Sep 2007

    JSC

    I think you oversimplify.  The arguments you make as to why electricity cannot be deregulated apply equally to many industries that have been successfully deregulated from natural gas to railroads.  (Indeed, virtually identical arguments were raised by AT&T to sustain their monopoly - and the completely unexpected revolution in services and delivery for that industry argues against too much future prognostication, especially in an industry that has been so insulated from the kind of creative customer service that only comes from competition.)

    More broadly though, you need to separate the commodity (electricity, very easy to deregulate) from the delivery system (transmission & distribution, arguably harder).  But to the extent that a section of the system is "underegulateable", that argues for making it a gov't responsibility rather than sticking a profit tax in the chain.  Transportation is instructive: we may only have a finite number of rail lines, but we still have multiple companies that use those lines and compete for our service.  (Ditto for highways/trucks).  And while we do have gov'ts running the infrastructure, we still let competitive businesses use that infrastructure.  In electricity, we've hopelessly confused the two, giving the company who built the wire the right in perpetuity to own the market that the wire connects to - and we all pay the price.  

    But look at all the ways we sacrifice efficiency absent deregulation:

    1. Why shouldn't you be able to contract with any number of generators for your power?  (Right now, your utility does that contracting for you, and with all costs being pass throughs, has no incentive to negotiate a better deal).  

    2. Why shouldn't you be able to put a solar panel on your roof and negotiate a price for excess electricity with your neighbor?  (Right now, that rate is set by your utility & utility commission, and is independent of the specific value that your neighbor might place on that excess electricity).  

    3. Why shouldn't you be able to run an electric wire from that solar panel to your neighbor and bypass the utility system (right now, that's a felony offense).  

    4. If your utility makes a dumb investment that never delivers on it's anticipated capex or power delivery, (see: Shoreham) why shouldn't utility shareholders bear that cost?  (Not in a regulated market, where the act of a commission approving the project immediately earns capital recovery, through the magic of the "regulatory compact".)

    5. Why shouldn't generators have incentives to make cheaper power (which, in an era of pricing pollution, increasingly also means cleaner power)?  In a regualted market where savings are passed through, that incentive isn't there.

    Bottom line: it is in utility's interests to sustain the belief that there industry is so unique that it can't possibly be deregulated.  But it is not in yours.

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