Two new developments show how the restructuring of the electricity industry has gone astray, leaving customers with higher bills.
Restructuring began when the federal government opened the grid – high voltage wires – to buyers and sellers, both independent of the systems’ owners. Electric transmission became a common carrier, like a bus line, required to carry paying customers.
This change happened because the government finally realized that ownership of power plants did not have to be a monopoly. By introducing competition among power suppliers, prices should come down.
Competition would also create marketplaces where sellers and buyers could carry out their transactions.
Of course, as with other markets, government might have to adopt and enforce rules to ensure that the power markets operated fairly and nobody would be cheated. Most markets have developed on their own, but under government regulation.
But this time, it would be different. The Federal Energy Regulatory Commission decided to prescribe how the market would work and even designate the marketplaces. Though FERC tried and failed to impose a one-size-fits-all approach nationally, it laid down market rules.
It started off all right, taking steps to ensure that transmission owners could not use their control of the grid to favor their own power plants.
But, each time a new defect in its rules has appeared, FERC has tried to fix it by making the rules more burdensome and complicated.
It bought into the theories of Prof. William Hogan, a Harvard University economist. His ideas of how the market would work do not correspond with how it really works, but FERC has not backed off. His theories have ended up costing customers.
Hogan said that if one part of a market faced higher prices than another, the high-price market ought to buy into a financial deal allowing it to gamble on getting a payoff if the price difference materialized. With its payment from the deal, it could offset its higher power costs. FERC approved the gamble.
But utilities and towns are not usually gamblers. “It’s really a big boys’ game,” said one financial analyst. Last week, Bloomberg reported that investors, not utilities, made almost $2 billion in the first three months of this year by gambling on the difference between expected and actual prices.
Of course, they might run the risk of losing their bets. But a couple of banks were caught rigging bets, and they paid fines.
The risk reduction plan offered nothing to the customers who simply paid the higher price.
Also, last week, a federal appeals court upheld new FERC rules that will end up requiring more major transmission lines. The rules require customers to pay the costs of connecting renewable power, especially wind generation, to the grid. That’s a subsidy to investor-backed developers.
In New England and other marketplaces, Hogan’s theories have harmed customers in other ways.
Before restructuring, power was delivered across the region by the New England Power Pool. It would identify all the available generation and select generators to supply the region based on the cost of fuel each used.
That meant the lowest cost power was selected first and then generators were added, in order of cost, to cover all power usage. Each was paid its own cost.
These days, power is selected based on the price at which sellers offer it to the market. But all suppliers are paid the same – the price paid to the highest bidder whose power is used.
The theory is that bidders into the market will keep their prices low to be sure to be selected, making the highest price paid to the last supplier less than it otherwise might have been.
Nice idea, but in a market where all the players get to know what all the others are likely to do, prices don’t necessarily come in low. Even if the theory worked, the last bid price, which all suppliers get, is likely to be higher than the average price if each were paid its own costs.
In short, New England has competition, but that doesn’t assure lower prices for customers. Competition, no matter how it works, has become an end in itself and is not guaranteed to produce its desired effect.
Through its government-created markets, FERC has made electricity different from other markets, but its rules have not produced lower rates, the supposed goal of competition. Most benefit from restructuring has gone to investors.
All of this gets a bit complicated, but the simple conclusion is there’s still no proof that customers are better off with a “restructured” electric industry.