5/11/98

KUFM/KGPR

T. M. Power

A Series of Unintended Consequences: Electric Utility Restructuring

Most of us assume that there is some logic or rationality to public policy development. Liberals like to believe that government policy is aimed at rationally solving important social problems that private individuals, businesses, and markets cannot handle well. Conservatives see most government action as driven by special interest groups trying to use the police powers of the state to gain an advantage that voluntary negotiation would deny them. Radicals on both the left and right see a conspiracy of dark and shadowy forces crafting policy to serve the interests of the power elite. Even when we strongly disagree with a public policy, we tend to believe that we understand the rationality that brought that policy into existence.

This, however, may be largely an illusion. A lot of public policy is just the result of a craps shoot that has gone hay wire. That appears to be the case with electric utility restructuring.

When the Montana Power Company wrote the electric restructuring bill that the Montana legislature finally passed with some modification, Montana Power intended to remain an integrated energy utility that kept the assets and businesses it had but positioned itself to take advantage of new emerging opportunities. The electric industry restructuring bill was intended to help the utility protect itself while it embraced the changes it was certain could not be stopped in any case. In addition, by being proactive, Montana Power expected to avoid being a victim of the merger mania that seemed to sweeping the electric industry. It did not intend to be the small regional utility swallowed by one of the west coast giants. Instead, with its core assets protected by legislation, it would aggressively enter the new markets emerging in California and elsewhere in the West.

Well, that, of course, is not the way things have turned out. First, the protection that MPC thought it had written into its Montana legislation to protect the value of its assets proved to be somewhat illusory. Faced with a potentially hostile Public Service Commission, egged on by two dozen well-funded MPC critics, making an administrative decision about the worth of MPC’s assets, Montana Power decided that it would be better off letting the national market make that determination. So it put all of its generating assets up for sale to the highest bidder, something it originally never intended to do. Of course, most of the legislators who voted for MPC’s restructuring bill and the citizens who testified at legislative committee meetings never intended this outcome either. But that’s what we all got.

But the unraveling of original expectations did not end there. One thing that the legislature forced on MPC was a four year rate freeze for residential customers. MPC was willing to go along with that since it knew its generating equipment and figured that it could control their operating costs well enough to meet the rate freeze. Now that MPC is going to sell off its generating facilities, it is going to have to buy power from someone to serve it residential and small commercial customers. But now MPC will not control the cost of obtaining electricity for those customers. If regional electric markets tighten, as they appear to be doing, the cost of obtaining electricity will rise and MPC will be caught by the rate freeze it agreed to. It could lose tens of millions of dollar a year buying expensive electricity and selling it at a loss to its customers.

This makes these residential and small commercial customers look anything but attractive to Montana Power. It would like to get rid of those customers if it could. This, again, is the opposite of what MPC originally intended. It intended to fight tooth and nail to retain as many of its current customers as it could within the new "competitive" context. It had no intention of losing most of its customer base. It saw itself as better positioned than any other electric supplier to win these customers’ loyalty. Potential competitors and the state government were aware of MPC’s intention to remain the dominant electric supplier in the state and were fighting to keep the incumbent monopoly from re-establishing itself in what was supposed to be a new competitive world.

Now, however, MPC is seriously exploring how it might pass all of these small customers over to someone else. Given that it sees only the potential for financial loss and no potential for financial gain from serving these customers through market purchases and sales under a price cap, it wants to get completely out of that market. Unintended consequence number two.

MPC is on its way to becoming simply a wires company, owning and maintaining the wires that bring electricity to your house, but little more. No generation of electricity, no sale of electricity to customers, no billing and metering, no customer service, just hard-hats keeping the wires up. The parallel would be to a municipal sewer company: a nearly invisible bureau quietly maintaining a piece of basic infrastructure.

One might ask who it was who articulated this as the objective when the legislation was submitted to the legislature by Montana Power, debated, passed, and signed into law? Actually, there were those who had the demise of the Montana Power Company in mind, but they did not articulate that for fear of undermining the passage of the restructuring legislation. Clearly, however, Montana Power and the legislature had no idea what this legislation would spawn. The legislation has been spinning out of control ever since it was passed and the series of unintended consequences it has generated is not any where near at an end. The irrational adventure continues. For those who enjoy uncertainty and surprise in public policy, this is great. For those who thought we were crafting rational public policy on the basis of good information and a well understood process, it is a disaster.