Law Office of Peter Henner

Law Office of
Peter Henner

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Peter Henner

DEREGULATION OF ELECTRICITY (PRIVATIZATION)

Peter Henner has been an active and outspoken opponent of the deregulation of electric utilities, both as an attorney and as an academic. He believes that deregulation has and will continue to fail to provide any benefits for electric consumers. Furthermore, the push for "competition" in the electric industry arises from the same ideological stupidity as the potentially disastrous neoliberal policy of privatizing public utilities that the International Monetary Fund and the World Bank are attempting to force upon developing countries.

In 1998, Peter commenced a lawsuit on behalf of several upstate New York municipalities against the New York State Public Service Commission challenging the restructuring of Niagara Mohawk Power Corporation. The suit alleged that the Commission failed to consider the prospective environmental impacts of its deregulation plan. He has also represented the Town of Cortlandt, the host community for the Indian Point nuclear generating plants, in proceedings in New York State Supreme Court, the Nuclear Regulatory Commission, the Public Service Commission, and the Department of Environmental Conservation, with respect to issues posed by the sale of those plants.

In 2002 and 2003, Peter taught a graduate course in the environmental management program at the Lally School of Rensselaer Polytechnic Institute which focused upon the deregulation of the electric industry. He wrote an article in the Spring, 2002, New York Environmental Lawyer: "The Alarm Clock Didn't Ring: The Failure to Consider the Environmental Impacts of the "Deregulation" of the Electric Industry in New York".

The movement towards "deregulation", which is also referred to as establishing "competition", resulted from three unique factors that occurred in the 1970s: 1) the belief that oil prices would continue to rise indefinitely, 2) a temporary halt to increasing energy demand, and 3) rising interest rates. These factors placed a tremendous stress on both the traditionally regulated utilities and their customers. The policy decisions made in response to the energy crisis of the 1970s were ostensibly designed to encourage alternative, renewable energy. However, the only result of the new policies is to remove long-standing protections that prevented the public from being gouged by high electricity prices.

Prior to the 1970s, the regulatory structure encouraged utilities to build bigger and more capital intensive power plants, including nuclear plants. However, in the 1970s, rising interest rates made it more difficult for utilities to recover the cost of borrowing for construction costs for plants that would take years to come on line. Furthermore, by the time these plants came on line, they were not needed, because of falling energy demand. As a result, it became difficult for utilities to recover their costs without dramatic increases in electric rates.

At the same time, there was a growing perception that the United States could not continue to be dependent upon foreign oil, and that it would be necessary to develop renewable, non-fossil fuel sources of energy. Since oil prices were expected to continue to rise throughout the 1980s and 1990s, Congress, and many state legislatures, believed that it was necessary to encourage other sources of electricity. The Public Utilities Regulation Policies Act of 1978 (PURPA) encouraged the development of independent power producers by requiring utilities to purchase electricity from them. Although PURPA attempted to encourage renewable energy resources, most of the new power plants that were built to take advantage of PURPA were gas-fired cogeneration plants.

Non-utility power generation was further encouraged by the Energy Policy Act of 1992, which established a new class of power producers known as Exempt Wholesale Generators. The Federal Energy Regulatory Commission adopted Order 888 in 1996, which required electric utilities to grant access to transmission facilities to non-utility generators. This enabled the non-utility generators to compete with the utilities for customers, and enabled the theoretical possibility of competition. Since 1996, approximately half of the states have restructured their electric utilities, to establish "competition" for the sale of electricity over transmission and distribution facilities that are still owned by regulated utilities.

Deregulation was encouraged by large industrial users, who hoped to be able to purchase electrical power at lower prices than they could get from utilities. Utilities also tended to favor deregulation, especially when public utility commissions permitted them to recover their so-called "stranded costs". Utilities that owned power plants which were not economical, including nuclear power plants, were required to sell them. The plants were sold at significantly less than their book value, but the utilities were allowed to recover the lost investments through surcharges to electricity customers. Therefore, utilities were able to use “deregulation” to escape the consequences of bad investment decisions, and to pass the burden for such decisions to the public.

Initially, some advocates of renewable energy resources supported deregulation, in the belief that it would enable consumers to purchase electricity from renewable energy sources, rather than from electric utilities. However, because new renewable energy sources are still more expensive than fossil fuels, deregulation has not encouraged renewable energy.

Partly as a result of deregulation, energy suppliers have built a disproportionate number of “peaking” facilities, frequently using natural gas. These facilities have relatively low capital costs relative to operating costs. These plants also have a relatively high average cost for generating electricity. However, such plants can be turned on and off relatively quickly, and can go on-line during times of peak demand, when energy prices are highest. However, the emphasis on constructing these plants to maximize short-term profits has resulted in a shortage of “base-load” plants. Base-load plants, which are typically larger, more capital intensive, and have lower average costs, were favored in a regulated environment. The failure to construct new base-load plants under deregulation will result in a shortage of relatively inexpensive electricity during non-peak times, and will ultimately result in higher prices.

Deregulation has not reduced the price of electricity. Indeed, because of the requirement that customers pay the "stranded costs", electric rates initially rose under deregulation. Furthermore, energy suppliers have shown little interest in selling electricity directly to individual customers, especially residential customers, or in developing “base-load” energy facilities, which will ensure an adequate supply of relatively inexpensive electricity. The relatively few large corporations that now own power plants now sell their power directly to the utilities, at an unregulated price, which is then passed on to customers. In effect, a regulated monopoly has been replaced by an unregulated system, dominated by a few large energy suppliers. As Enron demonstrated in California in 2001, this can be a recipe for disaster.

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