Power Deregulation Draws Critics

INDEPENDENT power producers, which last year added more to the nation's electric generating capacity than public utilities did, are hoping to win from Congress the right to expand more easily. The IPPs say this will enhance competition and put downward pressure on electricity rates. But opponents say ratepayers and utility shareholders may get zapped by "partial deregulation" that would simply favor one class of power producers over another.

IPPs sell electricity wholesale. They do not control transmission lines, but sell power by contract to the regulated utilities, which pass it along to consumers.

The proposed changes would allow wholesale generators to expand nationwide, exempting them from the geographic confines that regulated utilities face under the Public Utility Holding Company Act (PUHCA) of 1935.

The Bush administration's proposed National Energy Strategy supports the changes, as does the Senate Energy Committee. Many utilities already own unregulated subsidiaries in the IPP business, and would like the freedom to muscle in on the turf of neighboring utilities.

Despite this support, the chances that Congress will alter PUHCA "are dimming by the day," says Chip Bupp, managing director of Cambridge Energy Research Associates.

Opponents, including many utilities and environmental and consumer groups, are comparing the issue to past efforts at deregulation that went awry - notably the savings and loan debacle.

"There is an analogy to the S&L crisis," says David Raboy, chief economic consultant with Patton, Boggs & Blow in Washington, D.C.

With the thrifts, the government shouldered risks for speculative financiers through federal insurance of deposits. In the power business, IPPs are building plants with higher debt loads than a truly free market would allow, and passing the risk of the projects along to utilities - and ultimately to their shareholders and ratepayers, Dr. Raboy argues in a recent study for the Electric Reliability Coalition (ERC), a group of utilities opposed to changing PUHCA.

"Those who take on the debt should bear the risks," he says.

Proponents say changing PUHCA will allow more-efficient power suppliers to win business from less-efficient ones.

But Raboy says this new playing field will not be level. IPPs can underbid utilities on new projects, he says, because they rely mostly on debt, with its tax advantages, to finance their projects. Utilities by law must have no more than a 65-35 debt/equity ratio, and in practice investor concern often holds them to a 50-50 ratio, he says.

Because the investment community views the purchasing utility and its ratepayers as the ultimate guarantors behind an IPP project, lenders to an IPP offer better terms (debt levels and interest rates) than they otherwise would, Raboy argues. Utilities typically pay IPPs not only for the power they purchase, but also for access to the generating capacity - thus assuring IPPs of relatively stable revenues, while those of the utility vary more widely.

IPPs have "only a contract obligation," whereas the utility has a "statutory obligation" to provide power to ratepayers, says ERC spokesman Nick Laird.

Raboy says state regulators should factor in risk and cost-of-capital when comparing bids from an IPP and a utility.

If the PUHCA changes do not pass, the future for IPPs could be limited. Independent power projects boomed during the past decade because of incentives for cogeneration projects that produce steam for industrial use as well as electricity.

In these projects, IPPs were exempt from the geographic limitations of PUHCA. The law says that any company that owns more than 10 percent of a power station is a utility holding company. As such, the company is limited to a contiguous geographical area, like those of regulated utilities.

Now, with opportunities for new cogeneration plants dwindling, the IPPs want broader exemption from PUHCA.

Mr. Bupp says the consequences of PUHCA reform for power consumers would be neither as advantageous as supporters say nor as dire as opponents suggest. "It's a matter of winners and losers" in the industry.

About these ads
Sponsored Content by LockerDome

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...

Save for later

Save
Cancel

Saved ( of items)

This item has been saved to read later from any device.
Access saved items through your user name at the top of the page.

View Saved Items

OK

Failed to save

You reached the limit of 20 saved items.
Please visit following link to manage you saved items.

View Saved Items

OK

Failed to save

You have already saved this item.

View Saved Items

OK