Getting conned by ComEd, or What’s a utility monopoly for?
revised and reposted 10-29-2007 12:27 a.m.
original post Friday, 8-3-2007, 3:50 p.m.

 Part one of a two-part essayWhat happens at an auction?

Whether the material on offer is famous artwork, the remains of an estate, multiple lots of fine wines, or a farm that went belly up, the point of an auction is to obtain competing bids in order to get the highest possible price for the seller. The shared expectation is that only one party other than the seller can get the goods, or win, and anyone who can’t offer more money than the top bidder loses. Whatever is in high demand is never a bargain at auction. Auctions are about maximizing income for the seller by getting someone who wants or needs the goods badly enough to be willing to pay a higher price than anyone else. No one is surprised when that happens.

So why did anyone believe energy companies and politicians when they told us that deregulating public utilities and allowing energy auctions would lower electric rates?

For those who think energy auctions are a good idea, I have two words: Enron. California. When energy costs in California skyrocketed a few years ago at a time demand increased and rolling blackouts became the norm, electric users paid insanely high rates while energy companies and their shareholders saw hefty profits. Firms like Enron made energy auctions possible and encouraged the excessive profits that buying energy ‘on the market’ instead of producing all a utility needs internally helped to create. Enron helped energy companies make obscene amounts of money even as they created an artificial shortage that allowed them to charge such high prices for energy bought at ‘market’ rates. And this subverted the purpose of giving public utilities a local monopoly.

Power is literally what makes modern societies run. It is an indispensable service. We grant electric and gas utilities favored status through regulated local monopolies because power is something consumers and businesses and governments can’t do without.

The idea of a local utility monopoly is that a utility gets an exclusive, captive market that will buy the energy it produces and in exchange provides reasonable rates to users. This is possible because the utility, by having no local competition, doesn’t have to spend the money on marketing or advertising that it otherwise would if it were competing for customers and can spend it instead on maintaining and improving its energy production and service while making a steady, if regulated, profit. The utility gets stability and predictability of demand and income to a considerable degree, and rate payers get lower rates than they would if power companies could charge whatever the market was willing to bear. The economy keeps running.

To help fund major capital improvements, utility companies went to the capital markets from the very beginning. Those willing to invest in utilities expected a small but steady, stable profit in return. And, in a move that sends a rational mind reeling today, utilities developed rate structures that charged lower rates to bigger users and higher rates to consumers. They did it to promote electrical use, which might have made sense when few had electricity in their homes or factories, but it completely discouraged energy conservation. For decades, that’s the way things worked. Until two things happened: nuclear power’s fall from grace, and the go-go market mania of the 1980s.

Nuclear power was supposed to be the cheap, clean alternative to coal burning, but it eventually proved to be neither. Utility companies that had over-relied on nuclear power to produce electricity discovered during the 1970s and 1980s that the nuclear option was possibly more expensive than it was worth. Plants aged and deteriorated and maintaining them became increasingly expensive, there was (and still is) no really good way to dispose of large amounts of nuclear waste that remains radioactive for hundreds of years, and consumers became increasingly disenchanted with the dangers of nuclear power plants, particularly after the Three Mile Island and Chernobyl accidents.

If consumers and voters were unhappy, investors were even more so. There were several prominent failures of nuclear-power based utility companies, and the cost of repairing or replacing reactors kept rising. The cost of repair and replacement was supposed to be borne by shareholders, who were there to take on risk, not rate payers. That’s part of what the term public utility meant: the utility provided a public service and kept costs down while getting the risk of competition eliminated.

Of course, utilities like ComEd in time discovered that they needed to invest in marketing anyway, along with lobbying, if only to sell themselves better to rate payers and regulators who were angry about lousy customer service, power plant accidents, and higher utility rates. So the advertising and marketing costs never went away and by now are a significant part of utility companies’ budgets; and though consumer watchdogs expected investors, not customers, to bear marketing and lobbying costs, the stockholders balked. Then the oil crisis of the 1970s and the cost of pollution controls for coal-fired generating plants further added to utilities’ expenses. Still, utilities didn’t restructure their rates to encourage lower energy use, which might have been helpful in lowering demand and eliminating the need to buy excess power from others.

Meanwhile, the Reagan era ushered in a make-money-damn-the-consequences mentality on Wall Street. Sure, there had always been robber barons in business, but now there were corporate raiders like T. Boone Pickens and Carl Icahn, whose sole purpose in life seemed to be buying up and breaking up companies to maximize profits regardless of the costs to consumers, employees, or local economies. To them, a public utility is no different than any other corporation – in their view, it exists mainly to provide a profit to shareholders, never mind that it might provide a critical public service and thus maybe shouldn’t be treated like any other business.

Deregulation was another idea that reared its ugly head during the 1980s. Reagan himself encouraged it, believing strongly that anything connected to government was part of the problem, that regulation was and is always bad for business, and market forces are always a better alternative (he forgot, perhaps, if he ever knew, that pro-market economist Adam Smith himself said that a completely free, unregulated market is a dysfunctional one. Or that the natural tendency of a completely free market is to steadily eliminate competition and move first to oligopoly, then to monopoly, thus raising prices for all consumers). The notion of deregulation persisted as part of the Republican party line over four decades and into the new millennium, including in its wake such financial disasters as the savings and loan debacle and its horrendously expensive bailout during the ‘80s and the California electric power crisis of the last decade.

Still, the market maniacs seemed to have learned nothing even as Wall Street became further and further complicit in pushing companies to focus on improving short-term stock prices instead of long-term results or actual products and services. Not even the dot-com bust at the turn of the millennium or the recent brokerage firm scandals (wherein brokers touted the stocks of companies that were clients of those firm’s investment banking divisions, which is deceptive and illegal) seem to have given deregulation fans pause.

It’s in this environment that some public electric utilities decided to appease Wall Street and make more money for shareholders another way: they created corporate structures that would allow them to artificially inflate the price of providing electric service without increasing the cost of actually producing it and having two opportunities to make money on the same unit of energy instead of just one. This gets around any need for actual deregulation, as only the direct energy provider, the public utility service, is regulated while the corporate parent is not.

ComEd is a perfect example: it created a corporate parent or holding company above itself, Exelon Corp., which now owns its power plants. ComEd itself now does nothing but provide service to customers. It generates no power but pretends to buy power on the market; in reality, the vast majority of its power is supplied by Exelon Corp. and the very same power plants that supplied it before. Exelon, meanwhile, can charge ComEd whatever it thinks it can get away with for the power it produces, whereas before, ComEd got that same power at cost because it owned the power plants.

In the past, when demand for power was great, such as during a heat wave, ComEd would buy any extra power it needed from other utilities on the national grid that had excess to sell, or from Canadian utilities that had excess. The bulk of its power came from the generating plants that it owned. Now, in theory, ComEd is buying all of its power at so-called market prices, even though most of it still comes from Exelon plants, and it’s been crying that it will go bankrupt if it doesn’t get a rate increase to cover the inflated price that Exelon and other energy companies like it are charging.

In this case, competition through market forces merely means that a critical resource will be more expensive as private energy companies charge public utilities whatever they like. The energy companies know that the public utilities without their own generating plants have no choice but to pay whatever the going rate is, even if that rate is artificially high.

And this is where getting politicians like State Sen. Emil Jones on their side comes in. ComEd could never get away with huge rate hikes on its own: it needs complicity from politicians and agencies like the commerce commission for that.

Which is exactly why you shouldn’t buy any manure they give you about going broke. You’re already buying an excessively expensive service as it is. What you need is a permanent way to avoid some of that cost, and the legislature’s compromise plan won’t do that. Neither will ComEd’s scam.

So why is anybody listening to either of them?


Next: a public power-generation alternative