More States Now Thinking Twice About Utility Deregulation

Apr 17, 2001

More States Now Thinking Twice About Utility Deregulation

The California power crisis is giving other states second thoughts about the possibility of deregulating electric utilities, according to power professionals working with state governments.

One of those states is North Carolina, where legislators made the decision to deregulate in October 1998, according to Al Conyers, chief financial officer of ElectriCities of North Carolina. He spoke as part of a panel of experts on deregulation at MBIA Inc.'s Public Finance Eastern Regional Client Weekend in Puerto Rico last week.

Though North Carolina has not abandoned its decision to deregulate, its deregulation process has been significantly delayed as Conyers and other power officials monitor the progress of other states undergoing the deregulation process. Meanwhile, South Carolina, Louisiana, and Colorado are still debating about what deregulation could mean to its consumers.

"The North Carolina Legislature understands that a restructuring plan must include the power agencies and it understands that any restructuring plan that provides a choice to consumers must receive input from power agencies," Conyers said. "All options that are being discussed have ensured that the debt of the agencies are paid."

Conyers said that, at present, the abandonment of the deregulation process is not an option and that a study of how deregulation is affecting other states is being conducted by the state Legislature.

Gary Krellenstein, a vice president in J.P. Morgan Securities Inc.'s municipal finance group, said that even though a Los Angeles Times poll recently showed that 54% of those asked did not believe there is an actual power shortage, the power supply problem in California is very real and the problem could spread to other parts of the country.

Because of this, he said, many states that had agreed to deregulate are slowing the process or putting those plans on hold. Texas, he noted, is the only state that is moving ahead with its deregulation plan.

Krellenstein blames three things on the current California power supply problem: bad luck because the state suffered a hot summer, a cold winter, and a drought; a bad plan because the state was only half deregulated; and bad assumptions regarding pricing since legislators initially thought that consumers could decide the lowest-cost provider of electric service.

"There is no light at the end of the tunnel," he said. "It will take years to get out of this situation. If we have a hot summer, we will have power problems throughout the nation. If you're traveling through the U.S. this summer, better pack your flashlight."

Where do the power systems that have deregulation plans in place plan to go from here? Conyers said his power management company is taking matters slowly.

"I think this gives us the opportunity to focus on that which will lower generation and distribution costs," Conyers said. "We are looking at merging systems, since that has saved 15% to 20% in distribution costs in the past. And the Legislature must not forget to keep the cities involved."

Even though these are hard times for investor-owned utilities like Southern California Edison Corp. and Pacific Electric & Gas Co. in California, it may be public power's finest hour, said Alan Richardson, executive director of the American Public Power Association.

At this time, Richardson said, states that don't have structured power systems are looking good for the first time in many years.

Richardson feels that Congress doesn't want to take on the issue of deregulation as a way of solving the power crisis, and is instead spinning the crisis to accomplish other objectives.

"The federal government set up a structure to make competition work in the power market," Richardson said. "However, the public is skeptical."

He also noted that supply is an immediate problem that must be dealt with and mentioned the Path 15 transmission line which provides power from Northern to Southern California. The line is presently strained.

"Perhaps the U.S. Navy can tie nuclear power to the Golden Gate Bridge in an effort to provide extra supply," Richardson joked.