Tuesday, November 13, 2001
Changes may lead to fewer utilities
Electric deregulation could spark mergers

Ironically, utilities successfully campaigned in the first decade of the 20th century to protect their industry from competition.

By LOIS CALIRI
THE ROANOKE TIMES

As electric deregulation gets under way in earnest in Virginia, some observers worry that mergers will result in a return to the days when only a few powerful companies controlled the industry.

Proponents of deregulation say new markets will emerge and consumers eventually will benefit from lower prices. Competition has forced utilities to scrutinize costs and develop new technologies, and provide low-cost, reliable power, said Dan Carson, president of American Electric Power in Virginia and Tennessee.

While deregulation breaks up old monopolies, it also marks the rise of multistate and international holding companies and consolidation of potential competitors, said Scott Ridley, a writer and policy analyst on electric utility issues and principal in Ridley & Associates, a consulting firm in East Harwich, Mass.

Indeed, instead of increasing the number of new electricity providers, deregulation may reduce the number. "We now see utilities in a merger spree," the United Mine Workers of America, which is critical of electric deregulation, said in a position statement.

The number of registered utility holding companies has more than doubled in the past nine years, from 14 to 30, according to an American Public Power Association report. The 30 registered holding companies own 70 electric utilities that serve about 32 percent of all electricity customers. When measured by number of electric customers, 13 of the 25 largest utilities, including all affiliates and subsidiaries, are registered holding companies.

But as long as state or federal rules protect consumers from power market abuse, it's not going to make any difference whether there are four, six or 60 players, said Ken Schrad, spokesman for the State Corporation Commission. An SCC survey in May found that 94 percent of the 1,000 Virginia residents surveyed wanted six or fewer competitors in Virginia.

Some Wall Street analysts support the "40 in 5” concept in which the number of utilities would be reduced to 40 in five years. Others envision five or 10 global holding companies ultimately controlling much of the energy market in the United States.

"Such prospects raise significant questions about market power and the ability of the FERC, Federal Energy Regulatory Commission, and state commissions to adequately oversee the industry and assure the viability of competitive markets, especially during a formative transition period," Ridley wrote.

"Clearly, if competition is to work, consumers must have options that provide them with market leverage within a restructured framework," Ridley wrote.

Ironically, utilities -- which now support deregulation -- successfully campaigned in the first decade of the 20th century to protect their industry from competition.

By the late 1920s, 16 holding companies, run by financiers, controlled 85 percent of the nation's power supply. They also controlled the railroads, coal companies, banks, real estate firms and a host of international operations. In 1932, set the stage for New Deal laws.

In 1935, Congress passed the Public Utility Holding Company Act, forcing the breakup of those huge companies. These large, unregulated monopolies controlled prices and territory of service. Cooperatives started to service rural areas that were unprofitable for investor-owned utilities.

President Franklin Roosevelt and Congress created today's framework. The utilities were obligated to provide reasonably priced, reliable power to customers in exchange for exclusive franchises in certain geographic regions. But monopoly was only the most obvious benefit, wrote Richard Hirsh, author of "Power Loss: The Origins of Deregulation and Restructuring in the American Electric Utility System."

Hirsh, a professor of history and science and technology studies at Virginia Tech, said utilities gained another special privilege, eminent domain. That allowed them to acquire private property needed to serve the public.

"In few other businesses outside the public utility realm did privately owned companies obtain such a valuable right," Hirsh said.

Rates were set at the state level for retail sales and at the federal level for wholesale sales. In real dollars, rates declined from the turn of the century until the late 1960s.

Then, things changed.

Utilities, which had witnessed rapid growth of demand throughout the first half of the century, built lots of power plants. With the oil crisis of the early 1970s, electric prices began to go up for the first time in history. Many public utility commissions would not allow utilities to recover the cost of building plants. Simultaneously, technology changed. Development of combustion turbines meant that small gas plants could compete with large coal plants. Electricity could be shipped to greater distances, making regional transmission grids possible.

A new law was created, the Public Utility Regulatory Policies Act of 1978.

For the first time, utilities were required to purchase power from alternative sources of energy, including solar, geothermal and other renewable sources of energy.

In 1992 Congress passed yet another law, the Energy Policy Act, which authorized the Federal Energy Regulatory Commission to order utilities, on a case-by-case basis, to allow their competitors to use their transmission lines. Wholesale buyers of electricity could shop freely.

Then, in April 1996, FERC issued landmark orders mandating open access to transmission lines and allowed utilities to recover costs they made in infrastructure investments

In 1998, two electric industry groups asked FERC to place a moratorium on mergers.

FERC acknowledged its role in merger review was critical in forming competitive markets, but declined to institute a moratorium. Just months earlier, the nation's largest merger was proposed: AEP and Central and Southwest Corp., to serve 4.7 million customers in 11 states stretching from Michigan to South Texas.

FERC Commissioner William Massey said at the time the merger could create incentives for AEP or CSW to use their transmission lines to frustrate competitors and raise prices in markets where the merged company would sell.

The merger was completed in June 2000.

Some regulators have questioned whether such giants benefit consumers. And, according to United Mine Workers, experience with industries such as airlines, trucking and telecommunications show that deregulation leads to:

 Reduced maintenance and safety

Loss of employee job security

Reduced wages and benefits

Bankruptcies and consolidation into fewer firms with more market power.

But the benefits could come to large industrial users, who hope for a 5 percent to 10 percent savings in a competitive market, said Marc Yacker, director of government and public affairs at the Electric Consumers Resource Council, a Washington, D.C.-based association for industrial companies.

Lois Caliri can be reached at 981-3117 or loisc@roanoke.com.

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