CHOOSE YOUR FUTURE:
A Primer On Electric Deregulation

As this issue of Citizens Power goes to press, California’s ill-conceived 1996 electric deregulation scheme is unraveling in full view of the nation, resulting in soaring prices, disgusted consumers, and red-faced politicians. Electric companies in Indiana and elsewhere are using threats of a pending power shortage to launch an unprecedented "merchant" power plant building boom, even though investments in energy efficiency and renewable power sources would provide more beneficial and longer-lasting results.

Many CAC supporters have followed the battle over electric deregulation for years, using resources such as the newsletter and CAC’s website. For others, this may be a fairly new issue. More than any time in a generation, millions of Americans are recognizing we must pay attention to the sort of utility and energy issues on which CAC has focused for over a quarter-century.

For all CAC supporters, this primer may help explain the political and economic forces behind many of the issues associated with electric deregulation.

Don Engle, President CINERGY Energy Services

How We Got Here

Since the early part of this century, each electric utility has been granted a monopoly over a defined region. In exchange for being protected from competition, that utility agreed to be regulated by the state. When a utility wants to raise rates or build a new power plant, it must make it’s case before state regulators.

This was the case because it was more cost-efficient to have one utility serving an area than to have many utilities, each with it’s own power plants, transmission and distribution lines, and billing infrastructure. It was also more cost efficient to build large coal burning power plants and hydroelectric dams than it was to build several smaller generating plants.

In some states, regulation didn’t work as well as it has here in Indiana. Many states’ regulators allowed electric utilities to build expensive nuclear power plants and then pass these costs onto consumers; and, to otherwise take advantage of their monopoly status.

In Indiana, citizen groups such as CAC closely monitored the regulatory process. As a result, Indiana now has some of the lowest electric rates in the United States.

A "Right" To Choose - But For Whom?

Industries in areas with high electric costs now want to get laws passed through state legislatures to break up the regulated monopoly system so those industrial customers can buy electricity for less. To do this, they usually lobby for the proposed changes by telling voters,

"You should have the ‘right’
to choose your electric company!!!"

In theory, this "Choice" would be much like the way telephone customers choose a long distance company. There would still be one monopoly which owns and operates the lines and wires to our houses, but consumers would be able to choose from several different power generators.

But there’s a problem: Just because some law gets passed that says you have the "Right" to choose your electric company does not mean that choice will actually be offered to you.

Indiana Must Choose Wisely

In a deregulated environment, a big steel mill which uses millions of dollars worth of electricity can expect to have other power suppliers eagerly competing for its business. An average citizen simply isn’t as attractive to a profit-driven utility, however. Cinergy Energy Services president Don Engle said as much when he commented, "After deregulation is a reality and we no longer have an obligation to serve, we can’t afford to hang onto loss customers and even marginally profitable ones. As any company in a competitive environment we’ll focus our resources on those customers who will give us the targeted rate of return expected by our shareholders."

The stakes are especially high in a low-cost state such as Indiana. If Indiana deregulates it’s electric market, it’s not likely electric utilities will rush into the Indiana market when they can earn much more money selling electricity in other states.

There’s more at stake here than just money. When big electric companies want to offer cheap electricity to factories, they cut costs. They don’t do it by slashing CEO salaries. They do it by laying off workers and cutting corners on maintenance. Deregulation could throw thousands of utility workers and their families into turmoil and leave residential consumers paying more for less reliable service.

The environmental impacts of deregulation are also significant. While most of the electricity produced in the U.S. comes from coal-burning power plants, only half of these plants comply with current clean air rules. If this loophole is not closed, deregulation would create an atmosphere of "smoke ‘em if you got ‘em" competition in which utilities would emphasize their oldest, cheapest, and most-polluting power plants.

Perhaps most disturbing, however, is the effect deregulation could have on the political landscape. The policies of electric utilities and their largest industrial customers affect every Hoosier alive, as well as those who will walk our state after we have passed on. Since the early 1900’s, state and federal regulators have managed to strike a balance between the interests of utilities, their large industrial customers, and residential ratepayers. Poorly constructed deregulation legislation would deny average citizens a voice in Indiana’s energy policies, weaken our democratic institutions, and hand control of our state’s energy policies to a small handful of transnational energy corporations.

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