Odd little bit of filler in a NW Arkansas newspaper this week. Bloomberg's In East, power costs fall, bills rise, tells Arkansans about utility hijinks in another part of the country. But these hijinks aren't local only to the east, they're as old as the utility business itself.
When regulation or markets find savings for ratepayers, utilities raise rates elsewhere to make up for it. Utilities, for the most part, are afraid of change. They refuse to make themselves relevant in a brave, new consumer-driven world. Instead of offering products and services that consumers actually want, utilities continue to force consumers to accept the products and services the utility wants to provide. At some point, utilities are going to make themselves irrelevant, because a consumer-driven world is here and it's not going away.
Ohio's utility tedious twins, American Electric Power and FirstEnergy, epitomize utility hijinks to ward off this brave, new world. While being all for deregulation of generation in Ohio when it was profitable, FirstEnergy has changed its tune and wants its generation to be regulated again. In West Virginia, FirstEnergy "sold" generators owned by its competitive affiliate to its distribution affiliate. The problem?
When regulation or markets find savings for ratepayers, utilities raise rates elsewhere to make up for it. Utilities, for the most part, are afraid of change. They refuse to make themselves relevant in a brave, new consumer-driven world. Instead of offering products and services that consumers actually want, utilities continue to force consumers to accept the products and services the utility wants to provide. At some point, utilities are going to make themselves irrelevant, because a consumer-driven world is here and it's not going away.
Ohio's utility tedious twins, American Electric Power and FirstEnergy, epitomize utility hijinks to ward off this brave, new world. While being all for deregulation of generation in Ohio when it was profitable, FirstEnergy has changed its tune and wants its generation to be regulated again. In West Virginia, FirstEnergy "sold" generators owned by its competitive affiliate to its distribution affiliate. The problem?
Spot power traded in the market run by PJM Interconnection LLC has averaged about $31 a megawatt-hour this year. That's less than half the $84.55 average in 2008.
Suddenly, competitive plants that were making a profit for the utility were not longer profitable. PJM's "market" had worked so well that older plants that are more expensive to run (such as antique coal plants) were no longer profitable. In a market situation, these plants would close and be replaced by cheaper alternatives, such as natural gas plants. Instead of changing though, the tedious twins sought out ways to make consumers pick up the costs of their plants so they could remain open and "competitive" in PJM's "markets."
After stashing their West Virginia plants in the state's regulated system, the twins came up with an idea to thwart Ohio's supposedly "competitive" generation system by selling the plants' generation into the state's regulated distribution system. The companies concocted power purchase agreements, whereby all regulated distribution system customers would make up any market shortfalls by purchasing the "competitive" generation at the company's cost. In turn, the company would sell the generation into PJM's "market" and leave consumers with any balance the "market" didn't cover. That's the definition of anti-competitive. No other generators in Ohio have the option of having regulated distribution customers pick up the cost of anti-competitive plants. If other plants aren't profitable, they close. That's how the "market" works.
But these utility schemes aren't long term commitments, no matter what the utility promises to score regulatory approval. The minute these schemes aren't profitable, the utility will propose a new scheme to make sure the profits continue. Does anyone actually believe that AEP and FirstEnergy will honor these PPAs in later years if they actually do begin to pay consumer returns at the expense of the company? Hell no. If that ever happens, the utility will find a way to get out of them and return them to a "competitive" business model. The utility never loses in our current regulatory system. The consumers are the perpetual losers.
Another utility scheme is to make up for losses on the competitive generation side by increasing profits on the regulated business side. Regulated transmission pays great returns and can earn additional financial incentives through federally regulated rates. It's not like we "need" a whole bunch of new transmission, it's that utilities need a way to make money. All of a sudden the transmission system, long neglected, has become rickety and failing and must be replaced. Serendipity! If a utility can earn double-digit returns building or rebuilding its transmission, then that's what they do. Utilities with stated rates are paid a set amount for maintenance of their transmission assets. But what happens if they don't spend all that money? It's added to share holder dividends. So, if a utility is hurting and looking for ways to increase share holder returns, the first thing they may do is cut maintenance spending. A look at any utility's quarterly calls with investors demonstrates that cuts to maintenance happen all the time in order to boost share holder dividends. But what happens to the transmission assets that aren't maintained? They become rickety and begin to fail. Serendipity! At that time, the utility determines that the transmission line needs to be completely rebuilt and earns a double-digit return on its "investment."
The transmission investment smorgasbord is why rates have increased, despite falling generation prices:
After stashing their West Virginia plants in the state's regulated system, the twins came up with an idea to thwart Ohio's supposedly "competitive" generation system by selling the plants' generation into the state's regulated distribution system. The companies concocted power purchase agreements, whereby all regulated distribution system customers would make up any market shortfalls by purchasing the "competitive" generation at the company's cost. In turn, the company would sell the generation into PJM's "market" and leave consumers with any balance the "market" didn't cover. That's the definition of anti-competitive. No other generators in Ohio have the option of having regulated distribution customers pick up the cost of anti-competitive plants. If other plants aren't profitable, they close. That's how the "market" works.
But these utility schemes aren't long term commitments, no matter what the utility promises to score regulatory approval. The minute these schemes aren't profitable, the utility will propose a new scheme to make sure the profits continue. Does anyone actually believe that AEP and FirstEnergy will honor these PPAs in later years if they actually do begin to pay consumer returns at the expense of the company? Hell no. If that ever happens, the utility will find a way to get out of them and return them to a "competitive" business model. The utility never loses in our current regulatory system. The consumers are the perpetual losers.
Another utility scheme is to make up for losses on the competitive generation side by increasing profits on the regulated business side. Regulated transmission pays great returns and can earn additional financial incentives through federally regulated rates. It's not like we "need" a whole bunch of new transmission, it's that utilities need a way to make money. All of a sudden the transmission system, long neglected, has become rickety and failing and must be replaced. Serendipity! If a utility can earn double-digit returns building or rebuilding its transmission, then that's what they do. Utilities with stated rates are paid a set amount for maintenance of their transmission assets. But what happens if they don't spend all that money? It's added to share holder dividends. So, if a utility is hurting and looking for ways to increase share holder returns, the first thing they may do is cut maintenance spending. A look at any utility's quarterly calls with investors demonstrates that cuts to maintenance happen all the time in order to boost share holder dividends. But what happens to the transmission assets that aren't maintained? They become rickety and begin to fail. Serendipity! At that time, the utility determines that the transmission line needs to be completely rebuilt and earns a double-digit return on its "investment."
The transmission investment smorgasbord is why rates have increased, despite falling generation prices:
As the price of electricity in the region fell by half over the past decade, utilities raised monthly bills for residential customers by 26 percent, according to government data. Consumer advocates say the power companies are using falling electricity costs as cover to raise other charges. Utilities counter that they are passing on billions of dollars' worth of government-mandated improvements to long-neglected infrastructure.
Consumer advocates say this scheme isn't "fair" to consumers. But no end to the transmission feeding frenzy is in sight. While utilities spend their cash on profitable transmission investments, less profitable investments in the distribution system suffer. When state-regulated distribution investments pay an equal or better return than federally-regulated transmission investments, perhaps we'd see some attention paid to our rickety and failing distribution system.
Here's the lesson: The utility always wins because regulators have been conditioned to care about the utility's well-being over that of the consumer. After all, the utility is a constant in the regulatory realm, while consumers rarely show up. Only when regulators force better solutions will consumers benefit. Perhaps that's when utilities will realize they need to make themselves relevant to consumers by offering products and services consumers want, instead of force-feeding them the products and services the utility wants to offer.
Here's the lesson: The utility always wins because regulators have been conditioned to care about the utility's well-being over that of the consumer. After all, the utility is a constant in the regulatory realm, while consumers rarely show up. Only when regulators force better solutions will consumers benefit. Perhaps that's when utilities will realize they need to make themselves relevant to consumers by offering products and services consumers want, instead of force-feeding them the products and services the utility wants to offer.
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