November 30, 2005

An Electric Discussion, Part 2

Carroll Andrew Morse

Here's the seemingly semantic point about deregulation and electricity prices: how is a system where the lowest cost producer is forced by law to set prices at the level of the high cost producer considered "deregulated". This is more than semantics. Because the current system is considered "deregulated", a key Rhode Island official is arguing that tighter government contol of the power industry is self-evidently necessary. This is from a second Pawtucket Times article from Jim Baron...

Count Special Assistant Attorney General Paul Roberti, who specializes in regulatory issues in representing the Division of Public Utilities, among those who think deregulation is at least part of the problem....

Deregulation, Roberti said, "is jeopardizing our reliability because it is not promoting fuel diversity (coal, waterpower, nuclear, solar and wind generation as opposed to oil and natural gas-fired plants), it is not promoting conservation and worst of all it is not promoting sufficient (capacity) to meet the peak day in summer and the peak day in winter, which means we are facing rolling blackouts without an administrative surcharge. That all adds up to failure. They may not believe it, but the market has failed.

Mr. Roberti is arguing that the failure of the current set of pricing regulations can only be interpreted as evidence supporting the need for stronger price regulations, but he needs to do a bit more explaining to make his case.

A big part of the current problem, apparently, is that current regulations force all electricity to be priced the same, regardless of the cost of generation. Also, it is unclear how increased regulation limiting the price of electricity will promote conservation. Keeping prices artificially low promotes increased consumption, not conservation.

Mr. Roberti's case is based on the tragically flawed idea that good intentions guarantee good policy...

"The market has one thing on its mind, which is profits," Roberti said. "Regulation is the heart that wants to make sure that consumers get essential utility lifeline services at the lowest reasonable cost. That is the role of regulation."
But the legislators who wrote the current set of regulations presumably had good intentions. Why should we expect them to do any better this time around? As Justin just pointed out, RI legislators have a tendency to take their regulatory powers a step (at least) too far, ultimately doing more harm than good.

Making a case for stronger, weaker, or status-quo regulation depends upon explaining the role and the concerns of National Grid. I can't quite determine from what I've read so far what National Grid's market incentives are supposed to be. If the FedEX/UPS analogy that National Grid suggests is accurate, then they are collecting the same fixed rate no matter what they deliver. Is that the case? Or are they a true wholesalers, buying from producers and reselling at a markup to retail customers? In either case, what is their incentive to shop around for the lowest prices?

We're starting to ask the right questions. Eventually we'll get the right answers. And then turning the right answers into good policy? We'll cross that bridge when we come to it.

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The problem here as I see it is that our "market" is a monopolistic one. Deregulation was not meant to promote monopoly, however a weak PUC and short-sided Assembly allowed for it to happen.

As is emblazened outside of our Attorney General's office "with great power, also comes great responsibility" (Stan Lee, Spiderman)

Well it seems that the AG's office has not taken those words to heart. The PUC has the authority to issue policy "with the force and effect of law." However, in order for them to operate properly, commissioners need to be given a counter-argument for the utility companies' expert testimony. Only then will the law be applied as it is meant to be. That job is supposed to fall to the Attorney General. But his testimony has been weak, and his experts non- existent. He has been walked all over by the utilities and has left Rhode Island consumers to bear the burden. He simply is for all purposes, a lap dog for the utilities, General Assembly, and his former lobbying clients (CVS, Beacon, the liquor industry, BC/BS etc. etc.)

For example, the idea that National Grid is guaranteed a profit of 6% is correct. However, where National Grid is bilking Rhode Island consumers is in the idea that the utilities are entitled to a speculative profit; that is, on rates that are determined by the futures market, rather than the spot market as is intended. Think of it: in the wake of Katrina and Rita, National Grid says that their future costs have increased, and so too should their rates. Well, that might be all well and good if the energy (ie. oil, gas, coal) had NOT ALREADY BEEN PURCHASED at pre-Katrina levels.

Do you see? With effective representation from the Attorney General's office in front of the PUC and FERC, these rate hikes may never have happened, or as we see the price of oil and gas coming down to 5 month lows, at least the rate increases would not have been quite so outlandish. Instead, we get Lynch grandstanding - oh I mean - testifying before the PUC when it's too late to offer any substantive or expert testimony that could counter the utilities' team of lawyers and hired- guns.

Meanwhile, National Grid is going to have a surplus at the end of the quarter while many Rhode Islanders are forced to carry debt for lighting and heating their homes. And do you think that consumers will be refunded in full? Or do you think that some creative accounting by our British-owned friends might just leave some of the money owed back to Rhode Islanders unaccounted for.

And then there's our friends at NE Gas, BCBS, and Cox who also jumped on the rate-hike band-wagon. Why all of a sudden the increase in prices? Because they know our representation is WEAK.

So long as Rhode Island allows monopolies to operate in the state (National Grid, NE Gas, Cox, BC/BS) we need a strong, experienced, and competent consumer advocate in the Attorney General's office. We don't have that now. But we did.

There was a time when Rhode Island was seen as the national standard for consumer protection against utility rate increases. What was then called the Narragansett Standard has since been adopted throughout the country and renamed the "Prudency Test." Look it up. It is THE standard that utilities are regulated against. And it was created because Rhode Island had been targeted by utility companies for years as a favorable place to start their rate increases. We are beginning to see this same thing happen here again. Our runaway utlities should be evidence of that enough. Not to mention the lead paint trial, which also is being held in RI b/c we were seen as a weak state, favorable to trial lawyers and having a political judiciary.

And the one person that stands at the center of all of these cases: National Grid, NE Gas, BCBS, the lead paint trial - is the Attorney General. He is weak. He is ineffective, and he needs to go. Absent an expert PUC, he is our only line of defense, and he has put up virtually no fight.

Please forgive the length of this posting, but the complexity of the situation has been used for too long as an excuse for inaction. We DO have alternatives. We don't have to throw up our hands in defeat.

Posted by: John B at November 30, 2005 12:52 PM

John, AR has no problem with the length of quality comments like the above.

However, I'm still missing a piece of the puzzle. Electricity transmission is a natural monopoly, but electricity generation is not. What rational purpose is served by making nuclear-fueled and coal-fueled electric producers charge the same rates as gas and oil producers?

In a perfect (market-based) world, it seems like the electric transmitters should buy everything they can from the cheapest producer. When that producer is tapped out, they should then move to the next-least expensive producer, etc.

I realize that there are probably technical considerations that make the process more complex. But I can't believe they're so complex that aritifically inflated prices are really the best solution.

Posted by: Andrew at December 1, 2005 5:33 PM


You are right on your consideration re: the free market of energy suppliers.

In concept, it is in fact a rather straight-forward system. The problem that we run into is that National Grid (in particular) has entered into its rate negotiations with two standards upon which its rates are based: oil and natural gas.

This is where the first red flag should be raised.

Under the current system of supposed deregulation, consumers should have the CHOICE to determine where their power comes from. What about hydro? nuclear? concrete burners in Maine? or even coal, trash, and wind? All of these energy producers cost only pennies to output, and would save consumers untold amounts of money.

So I go back to my original point: that faced with an ineffective PUC, an able and determined AG must step in to fill the role of consumer advocate.

The fact is our tax dollars go to pay for expert testimony in rate cases on behalf of consumers through the AG's office. However, as I am sure you are aware, when the AG has hired experts, they have sided on the behalf of the companies he is supposed to be regulating (see BCBS). And when other rate cases have been brought, he has left his staff uttlerly unprepared and able to offer only elementary arguments compared with the hired guns of the utilities.

I cannot stress enough, that with an effective Attorney General and a fair-minded PUC, Rhode Islanders would not have to face these unchecked rate increases.

From utility rates to drunk driving and sexual predator registration, the Attorney General is THE pivotal post for protecting the interests of the public.

Patrick Lynch has neither the experience, nor the political will to see that our government operates in the manner that it should. And there is no other position in this state more powerful in bringing about real change than the Attorney General's office.

I suggest making it known that the public will not stand for the AG's continued inaction on the interest of utilities. There ARE alternatives to increased subsidization and federal assistance. Unfortunately, we are left to the questionable efforts of Patrick "Spiderman" Lynch

Posted by: john b at December 1, 2005 8:14 PM