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STORY ZAPPED It may not be broke, but we're going to fix it anyway. Last week it became clear that Oregon's system of cheap, reliable electricity will be scrapped for Enron's free-market version. Here's what it means for you. BY JOSH FEIT |
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CEO Ken Lay won big last week. The chairman of Enron--the $20.6 billion Texas energy company that swallowed Portland General Electric in 1997--learned this week that his company's efforts to deregulate the Oregon electric industry survived an important test. For four days in Salem, industry representatives, consumer advocates, utility experts and PGE employees tried to agree on a model for energy deregulation. At week's end, Enron came out on top. Initially, the meetings, which were held in the offices of the Oregon Public Utilities Commission, did not bode well for Enron. Early testimony issued by Oregon's Public Utility Commission staff was critical of Enron's plan for deregulation. And it wasn't only bureaucratic regulators who seemed to be foiling Enron's plans. Earlier this year, Enron conducted a free-market test run in four Oregon cities to show how much support its proposal would have among consumers. But the test run wasn't profitable, and Enron quit the plan. At the hearings last week, however, things turned out fine for Enron when no one could agree about the future of energy deregulation in Oregon. This lack of direction gave the OPUC little choice but to send the debate to the 1999 Legislature. "We had hoped for a settlement on the fundamentals so we could give the Legislature some direction," says OPUC staffer Lee Sparling. "That really didn't happen." Lay couldn't have asked for better news. Lobbying has been Enron's forte since the 1980s, when it forced the federal government to deregulate the natural-gas market. For Oregon, electricity is next on Enron's deregulation list. At a time when everything from the banking industry to the pharmaceutical industry is turning from regulation to laissez-faire economics, and government services such as welfare and social security are fair game for privatization, the deregulation of an essential service like electricity is another signpost on the road to the economics of the 21st century. If you want to understand exactly why and how the debate over energy deregulation directly affects you and the future of Oregon, the following guide should help. THERE'S NO AVOIDING IT Like death and taxes, it's guaranteed. This shouldn't come as much of a surprise to consumers. True, historically the electricity business has been one of the most regulated industries in America. For the last 100 years, electric companies had monopolies and guaranteed profits while consumers were given assurances that the juice would flow. But now, when everything from banking to telecommunications is being deregulated, Oregonians have only two questions about energy deregulation. How soon will it happen? And what's it going to look like? BROUGHT TO YOU BY ENRON It would be hard to overstate the role Enron has had in initiating energy deregulation in the United States. In the 1980s Enron's aggressive marketing of wholesale gas helped speed the deregulation of the industry. Similarly, in 1994 the company helped convince the Federal Energy Regulatory Commission to deregulate the market for wholesale electricity. This allowed utilities to buy power from other utilities and from a host of new wholesalers--something they had never been able to do before. Enron is commonly credited for bringing about these radical changes. "Enron...has been a pioneer in turning natural gas and electricity into global businesses," The New York Times reported last week in an article about Enron's recent entry into the European water market. Back in the United States, Enron is trying to finish the job it started in the electricity market, pushing to deregulate the retail side. In 1997 Enron CEO Ken Lay pledged that his company would spend up to $200 million on advertising to promote the transition to free-market electricity. Enron did more than take its case to the public. The company also bought access to lawmakers. Since 1995, when Enron's push for retail deregulation began, Lay has contributed $200,000 out of his own pocket in federal soft money. Enron's PAC has kicked in $2 million on the federal level since 1992. The company has also greased the wheels in every statehouse in the union, spending $30,000 in California--the first state to deregulate--in 1996. So far this year, Enron's subsidiary PGE has contributed $27,750 to candidates in Oregon, according to data from the secretary of state. In Oregon, the idea of deregulating the retail market had been percolating among industrial customers before Enron pushed the issue. But Enron hotwired the process in 1997, when it bought PGE for $3.2 billion. Traditional utilities such as PGE and Pacificorp have been resistant to deregulation because it topples their monopolies. As a subsidiary of Enron, however, PGE is now Oregon's leading advocate for deregulation. Last year, the company filed a plan with the Oregon Public Utilities Commission--the state regulatory agency-- to allow customers to choose from energy competitors. In every other state, Enron has had to convince local utilities to give up their monopolies. In Oregon, Enron simply bought the local monopoly and set the wheels in motion. As Ken Cannon, executive director of Industrial Customers of Northwest Utilities, says, "Enron bought [PGE] to do exactly what they're doing now. They're trying to prove out their model of deregulation." OREGON MAY BE THE TOUGHEST SALE And it's a big reason deregulation will be a tougher sell in Oregon than anywhere else. "No wonder you guys haven't deregulated yet," says Guy Mazza, a public advocate in Connecticut. Connecticut is one of 18 states in which deregulation is now the rule. It was easy to make the case for going free-market in Connecticut, where residential rates are 12 cents a Kilowatt hour. With nothing to lose, consumers wagered that competition would drag prices down. "But what's the benefit for you guys?" Mazza asks. "Before I jump into the free market, you have to show me that I'm going to benefit with lower rates," adds Bob Jenks, executive director of Oregon's Citizens' Utility Board. "Right now we really have the lowest rates in the country." TWO GUYS WHO ARE MAKING A DIFFERENCE The two are the bearded (and often barefoot) Bob Jenks and his clean-cut cohort Jason Eisdorfer. Both are full-time staffers at the Citizens' Utility Board, a watchdog group that fights its battles on an annual beans-and-rice budget of $110,000, all of which comes from donations. With a deft combination of Jenks' mind-boggling capacity to understand rate schedules, amortization and the physics of electrons and Eisdorfer's ability to translate Jenks' brainy analysis into English, the two are Oregon's most outspoken and effective critics of Enron's deregulation plan. The staff of the OPUC, for example, recently embraced the "Portfolio Model," the deregulation alternative that Jenks and Eisdorfer introduced months ago. The portfolio model allows consumers to choose an energy company other than PGE by using a "portfolio manager" to screen companies through a bidding process. Like a menu with a blue-plate special, the portfolio plan allows consumers to stick with a regulated, cheaper wholesale rate. CALIFORNIA IS DOING SOMETHING RIGHT According to Meek, legislators in California recognized that deregulation is great for large industrial customers who command a big share of the market but doesn't necessarily benefit small consumers. "So," Meek says, "legislators in California mandated some benefits," including a "default" rate for consumers who don't want to run the risks of the free market. Enron/PGE does not support such an option, advocating for a default rate that is determined by the market rather than by the state. PGE says an artificially cheap rate--California's default option was set 10 percent below current rates--will make the market unprofitable and scare off competitors. Michael Shames, a consumer advocate in California, says lower prices for consumers are more important than a range of choices. "Energy marketers complain that consumers are missing out on choice. Well, electrons are electrons, and in our plan customers are getting them cheaper. Am I missing something?" IF WE'RE NOT CAREFUL, THE BIG LOSER WILL BE OREGON'S ENVIRONMENT In the traditional regulated energy market, public utilities commissions such as the OPUC give incentives to companies like PGE to invest in renewable resources and conservation. In the free market, the incentive for providing environmentally friendly power isn't clear. "There's no incentive in the [deregulation] plans for companies to invest in conservation programs," Lovins says. "They are only rewarded for selling as much electricity as they can. The money comes from volume times profit margin. Where's the incentive to conserve there?" This concern is being addressed by some of the parties hammering out Oregon's deregulation plan. Every organization, from Associated Oregon Industries--the lobbying group for Oregon business--to CUB and PGE itself, agrees that energy companies should be assessed a 3 percent "public purposes" tax. Such a tax would raise $69 million for conservation programs and the use of renewable resources--which are expected to lose their footing in the free market, where big customers just want the cheapest (and, generally, the dirtiest) energy possible. Not everyone was happy with such a levy. Last week, Ed Finklea, who represents industrial customers such as Oregon Steel, argued that the free market itself would determine the viability of things such as renewable resources. IT MAY BE BOTH INEVITABLE AND INEQUITABLE A look at the deregulation of other industries raises some concerns about the prospects of energy dereg. The 1996 deregulation of the telecommunications industry, for example, has not lowered rates. Nor has it spurred competition. In fact, the industry has been consolidated into a few players. We are down to four Baby Bells from seven.The emergence of companies offering local service to compete with that of the Baby Bells just hasn't happened. A July 1998 report by Consumers Union, the publishers of Consumer Reports, states that "competitors for local services have taken less than one percent of the business. Competition is virtually nonexistent in the residential sector." The lack of competition is even more dramatic in the cable industry. Out of 8,000-plus cable systems nationwide, head-to-head competition exists in fewer than 100. Of course, competition has emerged in both the local phone and cable businesses. Wireless phones and satellite dishes are each, in their own way, providing helpful options to consumers. Yet these are technological breakthroughs that would have occurred without deregulation, though they have certainly benefited from the new climate created by the Telecom Act. The fundamental concern with deregulation is that it changes the "politics" of distributing a service, be it phones, cable TV or electricity. In a regulated environment, wealthier and bigger customers sometimes subsidize poorer or smaller users. In the phone business, for example, long-distance calls once subsidized local calls because of a political belief that everyone ought to be able to afford local phone service. That type of subsidy has ended with phone deregulation. Now, with electricity deregulation, there is fear that the current system, in which all residential customers receive the same level of service, would change to a system in which the most attractive customers--those who use great quantities of electricity consistently running luxuries such as hot tubs--would be offered special services. These may include sophisticated and cost-efficient billing, Internet access and even cheaper rates. As Lovins says, "The big dogs eat first. For nearly 100 years the government has mandated that electricity be distributed fairly. Now, electricity will go to whoever has the biggest market power. Those with the least market power get the dregs." THE GOOD THING ABOUT DEREGULATION IS... ULTIMATELY, The meetings, however, ended a day early--with no agreement in sight. PGE and the industrial customers held firm on the idea of creating a pure free market, while OPUC staff, Jenks' CUB and Pacificorp stuck to the notion of the quasi-regulated portfolio model. Without a compromise in sight, the future of deregulation is now in the hands of the Legislature. This is lamentable for two reasons. First, legislators, most of whom are newly elected, simply don't have a comprehensive understanding of the issues. A recommendation from the OPUC, with a stamp of approval from the key players, would have provided clear direction. Second, self-interested lobbying will carry the day, just as it did in the '97 session when PGE killed the lights on a dereg plan backed by everyone from AOI to CUB. Lobbying is precisely where Enron's power, backed by revenues of over $20 billion, is likely to outlast the low-budget folks from CUB. Hopefully, the machinations of Salem politics will not short-circuit all the work that has been done in the last year to create an equitable model. The Consumers Union report on energy deregulation published in July of 1998, "The Residential Ratepayer Economics of Electricity Utility Restructuring," is a valuable and comprehensive review of the issues at stake. Particularly useful is the the report's look at other industries, like airlines and elecommunications, that have already gone through deregulation:www.consunion.org/other/elecreportdc798.htm
originally published August 5, 1998 |
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