Remora

Tyson Slocum in Public Citizen has written an article (malheureusement, reader, it is a PDF document) which states the case against the current form of energy deregulation. He gets off to a rousing start:



"If the purpose of electricity deregulation is really to imporve the quality of people's lives by lowering the cost of a critical commodity, it has obviously failed, as demonstrated in every state which has chosen to deregulate. Power companies, free from the oversight of state regulators, have quadrupled prices for Montana industrial consumers, doubled prices in many Northeast and Ne England states, and driven one of California's utilities to bankruptcy. Whereas consumers have been left to pay higher prices, energy corporations in dergulated markets have made record profits."



Slocum is not completely convincing, since his case depends on tacitly defending the old system. That old system was, to say the least, environmentally harmful, and as Slocum acknowledges, deregulation became attractive partly because state regulatory commissions and monopoly energy suppliers basically laid a plutonium egg with the building of vastly expensive nuclear power plants, the costs of which were distributed to the consumer. Although why the past tense? These costs are still being destributed -- Slocum explains the beautiful phrase, 'stranded costs,' which is the justification, written into many state legislative energy deregulation bills, for having the taxpayer cushion the always stressed energy companies with pleasing pillows of tax dollars -- 28 billion, to be exact, in California alone - to pay for their enthusiastic building of white elephants in the seventies and eighties.



Yet Slocum has a point about electricity and its marketing. The pressure on power companies came partly from their decreasing rate of return on investment, compared to other industrial sectors. To become attractive to investors, the power industry needed to make itself 'sexy'. There's a certain irony here: in game theoretical terms, the very force of rationality, ie the profit motive, turns the rational game player into an irrational enthusiast. Here's a quote from an executive of a Michigan energy company, GE Power, from a 1999 Forbes article written by Debby Scheinholtz and Julie Koerner about power deregulation:



"We are actively engaged in helping these companies achieve the synergy they expect from the reaggregation of resources taking place in the energy sector." In the first quarter of this year, Nardelli reports, GE closed 20 long-term service agreements that range from 8- to 15-year terms and represent $1 billion in future revenue. "That�s a business we weren�t even thinking about four years ago," says Nardelli. "By developing product and service offerings throughout this expanded, outside-in view, we can continue to grow our business and, more importantly, help make our customers more successful."



Notice the fallacy, here: that one can treat electricity much like one treats a bond, buying and selling 8 to 15 years in advance on a product that (a) can't be stored, (b) has vastly uncertain transmission costs, (c) has a fragmented customer base, and (d) is unpredictably generated. This isn't wheat we are talking about. Notice, too, the seed for what Enron apparently did -- selling and reselling energy futures, Enron booked profits to itself in real time that would only exist ten years from now, if ever.



As for the end consumer, as Slocum points out, the slight profit margin accrued from selling energy to, say, Limited Inc, gives the power companies an incentive to skew their pricing in a strange tier -- on average, big industrial consumers are charged a fourth to a half less than individual consumers. Since those larger customers have an advantage in negotiating energy futures, if for some reason energy costs go up, who is going to subsidize power company losses? You got it: the miserable private consumer. The Limited Incs of the world, god bless 'em.



The old solution to this was price caps. And Slocum makes a pretty good case that price caps work -- that is, that prices go down without supply going down. The peculiarity of the energy market is embodied in the paradox that when prices go up, supply can go down -- that is, it is possible to squeeze the end consumer for more money by limiting energy generation. This is California's claim about the power company gang bang of the year 2000. In a market in which competition is tied to less strict supply parameters -- say, bread -- the limitation of supply by a few market makers would simply encourage smaller bread companies to compete. But the only people who really compete in the energy market are the sellers of energy 'instruments' -- those, like Enron, who sold an abstract representing the power produced by some other company and transmitted, often, through a system owned by yet another company. Enron's goal was to be, in essence, asset free -- to make a cost free profit by exchanging instruments it had neither to produce nor transmit. Enron's business model has been endlessly discussed, but it seems pretty simple when you look at it: like the confidence men/tailors in Hans Christian Andersen's story about the emperor's new clothes, these guys were weaving invisible garments out of immaterial thread.