Bailing out the utilities is no way to bring competition to the electric industry

Picture this: a forum in downtown Boston on the major economic development issue of the decade. The panelists include Ralph Nader and the head of the Heritage Foundation; libertarian Barbara Anderson and statist Jim Braude; gubernatorial contenders Joe Malone, Patricia McGovern, and Ray Flynn. Can you think of one term to describe the odd gathering? How about “total agreement?”

That’s right. If they were talking about the bill deregulating the electric industry that passed last fall on Beacon Hill, they’d all turn emphatic thumbs down.

And for good reason. Massachusetts has some of the highest electric rates in the nation — approaching 50 percent above the national average. It should have been good news that the Legislature, the Governor, and the Attorney General approved a plan that breaks up the monopolies and promises competition plus a 10 percent reduction in bills. Unfortunately, if the new law stands, we will continue paying nearly 50 percent above the national average and Diogenes will find his honest man before we locate real competition. Meanwhile, places like Japan and Germany produce the same products with half the energy costs. File under “opportunity lost.”

The new deregulation law looks like the second coming of the S&L bailout.
It did not have to be this way. We all know that Massachusetts will never be a low-cost state, so our focus has been on becoming a high-value one — good schools, well-trained workers, solid physical and human infrastructure. But occasionally, we are treated to a chance to bring certain critical costs in line with our competitors. Deregulation was just such a case.

If done right, customers could shop for electricity like they do for a long distance phone service, buying power from any supplier in the U.S. or Canada. Prices could have come down one-third to one-half. And the environment would have benefited as customers had the option of choosing “green electricity,” like solar power.

Yet instead of ushering in this era of cheaper, cleaner power, the deregulation law looks more like the second coming of the S&L bailout.

This results from a new legal fiction, euphemistically called “stranded costs.” That’s the term that government-protected monopolies use to describe the huge debt they incurred from investments in nuclear power and other equally bad ideas. Starting March 1, the law requires all consumers to pay a rotten investment “transition charge” (euphemism #2) to their current electric company, even if they choose a new supplier. That’s right. We pay all of it, every month for a decade.

In Massachusetts alone, the costs, even after the utility companies sell their bad assets, will run nearly $10 billion, with the average residential consumer paying roughly $3,000 over seven years to this hidden tax and businesses much more. In excess of 30 percent of your new bill will fund this mismanagement fee. That’s why in a poll last year of the Massachusetts members of the National Federation of Independent Business, nearly seven out of 10 favored deregulation, but fewer than half continued their support if stranded costs were charged primarily to ratepayers.

We Chicken Littles are told not to worry, because all will be fixed in the long-sought-after age of competition. And it might have been, had we moved toward real competition.

Real competition would favor cleaner, more cost-effective firms. But in fact, those with the worst management and lowest efficiency will fare the best. How does a new subsidy-free firm entering the market compete with one propped up by the up-front cash that a complex legislative financing scheme (“secularization”) would allow? Count ’em: 10 billion dollars in front-end cash. Is this what Adam Smith had in mind when describing the magic of the market’s invisible hand?

And for those few true believers still holding out hope…don’t. The first two highly touted sales of power plants should bring back memories of airline deregulation’s broken promises. While the press has celebrated the prices that New England Electric System (NEES) and Boston Edison Co. got for their non-nuclear assets (nuclear, once “too cheap to meter,” is now too expensive to unload), what’s been ignored is that large, local monopolies are being replaced by larger national monopolies. NEES sold its assets to the largest private utility monopoly in the nation, the Pacific Gas and Electric Co., and Boston Edison sold its plants to Sithe Energies Inc., one of the 10 largest privately owned utilities in the world.

Proponents of the deregulation bill, such as Attorney General Scott Harshbarger, dismiss critics with arguments that are as weak as this legislation. These “transition costs” have been part of consumer bills for decades, we’re told. True enough. But if we are to embrace such logic, we should do nothing about health care reform (since people have already been sick for years) or teen-age smoking (the kids are already smoking). Just because a bad idea has been around for a long time, doesn’t mean it should take up permanent residence.

They also say 10 percent savings is quite a deal. And it would be, were it real. But if as a result of offering the up-front rate cuts, a utility fails to make enough profit, it can plead hardship and increase the “bad investment” charge in subsequent years, recovering the losses on this initial rate cut from future consumers (and with interest). Net result? No discount. And no real competition, as the new market entrants cannot offer a discount, take a loss, and then come back and make it up with a “bad investment” surcharge.

Critics are also accused of wanting the utilities to eat it all (although the Attorney General himself, in mid-1996, told The Boston Globe that the utilities had no legal right to charge for, nor should the consumers pay, a penny of these stranded costs). I wouldn’t go as far as either the all-for-the-ratepayer Harshbarger of 1996 or the nothing-for-the-ratepayer Harshbarger of 1997. The solution? Sharing. Let the ratepayers pay for those investments that government required the companies to make, while utility shareholders fund those that resulted from the poor management of the executives they hired — just as in any private company.

Finally, for all you visionary economic thinkers, consider energy deregulation done right in the context of the growing importance of the global marketplace. Structural changes from expanding world trade, developing countries’ labor markets, and labor-saving thinking machines, require that the Commonwealth’s political and business leadership to be ever vigilant in bringing home new opportunities for Massachusetts. The new global economy requires that we carefully think through what’s next in markets and also find areas where products or systems can be done cheaper, faster, and cleaner. Where can we dramatically cut costs or tighten the belt in order to effectively compete internationally? Energy deregulation, if done right, is the one area that offers substantial cost reductions for every Massachusetts business almost immediately.

Meet the Author
If officials on Beacon Hill had taken time out to attend that mythical gathering of the strangest of bedfellows in downtown Boston, they would have heard all of them say that a 100 percent utility bailout is a 100 percent bad idea. They would have passed a plan in which someone other than the utilities are guaranteed winners. But since they didn’t, it’s the public’s turn to work for real rate relief.

That’s why I’ve pushed for a ballot referendum that would repeal this anti-competitive, anti-environmental bailout and replace it with one that works for us. Once that’s done and the public has spoken, the real benefits of competition, job creation, and environmental protection can come to Massachusetts.

John O’Connor is President of Greenworks, Inc., a technology start-up company, and is co-author with Daniel Berman of Who Owns the Sun?