PowerFacts

EPSA TO THE NEW YORK TIMES: “THERE YOU GO AGAIN” (EPSA PowerFact)

“While the second installment is a modest improvement over the first one, both articles reflect a fundamental misunderstanding of the many important differences between states and regions in how electricity is generated, transmitted, distributed and regulated. Developments in restructured regions are intertwined with developments in regions that did not restructure, and simultaneous events are incorrectly presented as causing one another, muddying the choices policymakers and stakeholders face in providing affordable and environmentally responsible electricity.”

John E. Shelk
President and CEO
Electric Power Supply Association
October 27, 2006

Where The Times Got It Right

1. This week’s installment did explain some of the reasons why the full benefits of competition have not materialized in all states and regions.

2. The article correctly points out that in non-restructured regions, utilities that own both generation and transmission favor their own more expensive generation even when more efficient, less expensive power is available from others to serve customers.

3. The article properly described the anti-competitive impact that occurs when utilities are allowed to return failed power plant investments to its rate base, protecting their shareholders at the expense of their ratepayers.

Ten Reasons Why This Week’s Article Fell Short

1. Even a casual reader is struck by the blaring inconsistency between the first and second stories. The first carried the headline “Competitive Era Fails to Shrink Electric Bills.” By contrast, the premise of much of the second article is that “such competition has not developed.” One week “competition” is blamed for failing to reduce bills, but the next “competition” has not developed. Which is it?

2. The writer repeats the error of comparing electricity to airlines and long-distance calling. Airlines and long-distance were “deregulated” on a national basis without multi-year rate caps or other “transition” mechanisms. When such competition was introduced, competition delivered. By contrast, power generation was not unbundled from transmission and distribution in many regions and it was not “deregulated.” Despite the fact that this week’s story is laced with examples of intrusive regulation that interfered with competitive outcomes, the Times continues to call it “deregulation.”

3. The writer confuses wholesale and retail competition. The article is wrong in saying that “not enough new competitors emerged” where states required utilities to spin off generation. Wholesale markets that serve these regions are very competitive as determined by the Federal Energy Regulatory Commission and independent market monitors.

The vibrancy of this competition is proven by the number of suppliers participating in state-sponsored auctions, the number of generators and marketers with FERC approval to sell wholesale power at market-based rates, and the many new financially strong competitive suppliers entering these markets.

4. As to retail competition, the series has not adequately explained that residential retail competition cannot develop where rates are artificially low. The series has yet to discuss the high degree of retail competition to serve commercial and industrial customers (C&I) in states where such customers have a choice. The dramatic jump in C&I customers switching to competitive suppliers in Delaware after that state allowed wholesale competitive bidding to set the price shows that competition can and will work when constraints are removed.

5. It is fitting that the last installment appeared on a Monday as one of its flaws is to engage in aggressive “Monday morning” quarterbacking to sensationalize a hand fall of transactions. It is easy from the vantage point of 2006 – at a time of rising demand, a reduction in the over-capacity of recent years, and a resurgence of interest in coal and nuclear plants – to question prices paid for power plants in years past and the profits made in recent transactions.

6. The utility economist quoted is just plain wrong in saying that the spun-off plants are the same plants producing the same power just at higher rates. The fact is that the new owners took on the significant risks of owning nuclear and coal plants in the 1990s when natural gas was seen as the fuel of the future. The new owners invested heavily in these plants, including absorbing the costs of environmental upgrades. As a result, with the discipline of competitive forces, the old nuclear and coal plants under new ownership run much more efficiently. This is a major benefit of competition. The statistics on these improvements were supplied to The New York Times but have yet to appear in either of the first two stories.

7. The article incorrectly implied that the transactions involving the Texas plants are to blame for electricity rates and a supposed lack of new development. The risks associated with the transactions described in the article fall on the companies’ shareholders, not the ratepayers. By stepping in when they did, investment firms kept plants operating and assumed risks that under the command-and-control regulation in place before competition would have fallen on ratepayers. Far from new generation being thwarted, Texas has seen among the greatest plant additions to serve new demand and replace older, costlier, more polluting plants. While Texas, like other regions restructured and not, needs even more generation, competitive suppliers have announced plans for major investments in new plants.

8. The article misses the mark as to why there was a recent slow down in new plant development. The article fails to mention the large expansion of new capacity in the late 1990s. It takes years to work off that temporary over-supply. This capacity – where it was allowed to compete for demand – is a benefit. It was built at the risk of competitive suppliers – when those plants didn’t run, they didn’t get paid (whereas ratepayers under monopoly regulation are stuck with cost overruns and “stranded costs”). The article cherry-picks those transactions where the seller made money, omits any reference to those where the developer lost money (including went bankrupt), invokes Ralph Nader, and blames “competition.”

9. The article gives an unchallenged voice to politicians who would sacrifice the future of their state’s economy and electric systems for political gain. One of the reasons investment in some states has lagged is the hostile political environment. Why would anyone invest in a state that would talk of keeping the investor from a fair chance to earn a return of and on the hundreds of millions of dollars in capital required for a new power plant? How is it that having the state (in other words, taxpayers) assume that risk is better?

10. Subsequent installments should present the stark choices now facing policymakers – matters only confused by the first two articles. The nation needs new generation, new transmission, enhanced distribution, demand response, and other measures that entail significant costs and commensurate risks. Those who want competition to fail because it’s in their business’ interests would use the series for their gain, as a letter to the Times (Oct. 21) from the national spokesman for monopoly utilities attests. The Times’ readers will be best served by a forward-looking series that tackles these subjects in a sober manner, not a sensational one.

CONTACT: JOHN SHELK
(202) 349-0154or 703-472-8660

EPSA is the national trade association representing competitive power suppliers, including generators and marketers. These suppliers, who account for nearly 40 percent of the installed generating capacity in the United States, provide reliable and competitively priced electricity from environmentally responsible facilities serving global power markets. EPSA seeks to bring the benefits of competition to all power customers.