Can Electricity be Manipulated

Ken Silverstein | Sep 16, 2010

The tsunami created by the 2008 financial meltdown is still reverberating. It's felt by the broader economy -- and even the electric sector.

But those in the energy field are fighting the notion that power companies and big banks follow the same mindset. Despite the restructuring process that has taken place since the middle 1990s, utilities are still closely monitored and their ability to control or manipulate markets is almost impossible.

Others, however, have a different thesis. They are drawing a corollary between the banking crisis and power companies, noting that big business simply can't be trusted until it is tightly controlled. Utilities should not take their distrust personally. The same applies to Big Oil, with a strong emphasis being put on how the BP oil spill could have prevented if the government had just done its job.

The COMPETE Coalition, an electric industry trade group dedicated to open markets, commissioned a study that it says will dispel the erroneous assumption that a nefarious link exists between competition and deregulation: "In light of the recent Wall Street meltdown, it's important to know regulation and oversight at the federal and state levels is as strong as, or stronger, than it has ever been. Restructuring in the nation's electric industry has created competition and consumer protection," says Joel Malina, executive director of the COMPETE Coalition.

Estimates are that the electric utility industry is now a $350 billion a year money making machine. A lot of businesses want a piece of that. Some entrenched incumbent utilities are satisfied with control over their jurisdictions, realizing that they can safeguard their shares. But smaller players want access to their markets, emphasizing that they can deliver superior products and services.

About the half the states had restructured their electricity markets by the late 1990s. But their bubbles burst during the California debacle, which was followed by the Enron mess. Recession and the decline of bond ratings in the unregulated sphere followed. The debate rages as to how the experiment could have gone so sour, with the blame spread among regulators, legislators and power providers.

Things have shaken out somewhat in the intervening years. Now the focus is more on wholesale markets, or the independent power producers selling directly to big industrials and other electric companies. It's been about giving those unregulated entities fair access to the transmission lines.

At the wholesale level, the Federal Energy Regulatory Commission oversees the process and ensures that interstate commerce rates are "just and reasonable." At the retail level, the state utility commissions ensure equitable rates to end-use consumers.

California Debacle

Critics of deregulated electricity programs say that because the commodity is essential, it should not be left to free markets to determine how it will be allocated and priced. They furthermore say that it is particularly sensitive to price manipulation. That's because electricity cannot be stored, raising the possibility that some unscrupulous providers could take down power plants for a period of time, which could erode supply relative to demand - and jack up prices.

That's what happened in California in the late 1990s. And where was FERC, those electricity critics ask? It sat on the sidelines until the situation got so bad that it had to act. "The ultimate problem is that the market is designed to maximize profits for the power companies, and it's costing consumers more money," says Tom Smith, director of the Public Citizen in Texas, in an electricity deregulation blog.

Advocates of free markets say the process can work for electricity, just as it has done for the telecom and natural gas industries. Deregulation of the natural gas industry, for example, is said to have produced $600 billion in savings since 1992. That's when alternative suppliers gained the right to access pipes, says Center for the Advancement of Energy Markets, which did an analysis of the situation.

Today, open access to the transmission wires has been responsible for the increase in green energy now available to many consumers. And while the regulatory changes to allow such progress have hit some roadblocks along they way, the various stakeholders have adjusted their course, says COMPETE. It says that regulation and oversight is stronger now than before the process started in the mid 1990s.

Deregulation has worked in key states, the group says. It points to Pennsylvania, which has seen a hefty portion of business and residential customers switch to alternative providers.

"Well-structured electricity markets perform well, and we are seeing huge consumer benefits," says Bill Massey, counsel for COMPETE and a former FERC Commissioner. "Competitive electricity markets have clear market behavior rules and multiple layers of regulatory oversight - the electricity industry is among the most regulated in the United States despite the movement to competition. Federal and state oversight ensures consumer protection, financial integrity and reasonable prices."

True believers say that deregulation cannot be judged based upon the results of a flawed model. Rather, it has to be evaluated over time and across different industries - a position that provides a wider perspective. The benefits of open markets are multiplying as green energy gains a firm foothold and the states begin to make inroads.

So what do you think? Please share your thoughts by posting a quick comment below, or by sending me a longer reply to energybizinsider@energycentral.com.

Can Electricity be Manipulated?