6/4/2001

KUFM / KGPR

T. M. Power

Is Electric Utility Deregulation Blameless in the Current Energy Crisis?

The Governor, the leaders of the Montana Legislature, and the president of the Montana Power Company all insist that the electric energy problems that are currently crippling the state’s economy and that will take a big bite out of most Montana household’s purchasing power next year have nothing at all to do with the electric utility deregulation laws passed over the last five years in Montana. Instead, they insist, these problems were caused by shortages of supply brought on by overly restrictive government regulation of energy development.

Let me ignore the latter assertion for now since it is easy enough to show that it was low market energy prices that discouraged development of new supply in the recent past, not restrictive environmental regulation. The more interesting question is what the world would have been like if we had not changed the way we regulate the electric industry.

First, of course, Montana Power would not have sold off its electric generation facilities to a Pennsylvania company. Those inexpensive hydroelectric facilities and the very efficient coal-fired generators at Colstrip, all of which we had been paying for for decades, would still be owned by the Montana Power Company and the output from those facilities would be sold to us and to industrial and commercial customers at a price that was tied to the cost of production, an average of about 2.5 cents per kwh. The price that we paid would be frozen, tied to those costs, not allowed to skyrocket because of shortages in California.

Second, under regulation, Montana Power was required to maintain adequate reserves so that it could still meet loads during “critical water” years, that is, during years of drought when hydroelectric generation declined. Montana Power used to either build facilities to be able to serve customers during drought years or sign long term contracts with other electric utilities so that when river flows slowed, its customers did not have to pay astronomically high prices.

An interesting consequence of planning for drought conditions was that in average water years Montana Power had extra electric energy and capacity to sell. It sold that into the regional market and, under regulation, rebated the proceeds to its customers, not its stockholders. If that had been the case over the last year or so, Montana Power would have been raking in the same excess profits from sales to California or other customers that Pennsylvania Power and Light has been enjoying this year. The difference is that Montana Power, under regulation, would have been required to pass those windfall gains on to its customers, lowering their electric bills rather than raising them.

Third, under regulation, Montana Power had an obligation to serve its customers’ loads and was required to plan for and acquire the needed resources in a least cost manner. Partially protected by regulation and the fact that we were its captive customers, Montana Power would have expanded its sources of supply to meet growing loads. It would not have simply relied on the spot market and its astronomically high prices. It would have signed long term contracts with other utilities or built new generation here in Montana, so that it could meet new loads.

Fourth, if we had not deregulated, many of our industries would not have been encouraged to gamble their workers’ paychecks on the electric spot market; most of them would still be obtaining very low cost electricity from the Montana Power Company and our industrial base would not be crippled by high electric prices.

In short, if we had not deregulated the electric industry, much of the damage that has occurred in the Montana Power service territory and the even larger damage to come when the price freeze is lifted next summer would not threaten our economic well-being. We would be comfortably and smugly enjoying the lowest electric prices in the nation while smiling in amusement at the antics going on in that weird, wacko state of California. Instead, we are in the embarrassing position of being the only other Western state to have been crazy enough to have followed California’s lead. That is a strange, not to say weird, feather for so-called conservatives to proudly put in their caps.

What is most bothersome about the current situation is not the damage done but the refusal of those responsible for that damage to admit that they, in our names, made serious mistakes. Mistakes are understandable. We all make mistakes. In this case, some of our best business and political minds thought they saw a productive opportunity and vigorously pursued it. As it turned out, their assumptions were wrong, and those opportunities got transformed into disasters. Fine. They did their best. Maybe they were more than a little reckless with our interests, but they thought they were doing the right thing.

What is most distressing now is that the very authors of our predicament insist that they did nothing wrong, that the problem lies with either Mother Nature or misguided environmentalists, and that what we need is more deregulation not less. At the very least, we are supposed to learn from our mistakes both so that we stand some chance of correcting the problems that currently threaten us and so that we can avoid making them again. Denial is dysfunctional as well as unseemly.