Why Some Utilities Are Getting Cold Feet After Pushing for Deregulation

In swearing in a new Chairman of the Public Utilities Commission of Ohio (PUCO), Governor John Kasich said that deregulating electricity may not have been such a good idea. The Columbus Dispatch covered Governor Kasich's comments:

“I will tell you it’s a challenging time in a state that has gone through this whole business of trying to figure out what deregulation actually means,” Kasich said, speaking to the audience in the PUCO chamber before the swearing-in.

Among the challenges, he said, is trying to keep electricity prices low when they are tied to market forces.

“The ideological effort to deregulate, I’m not so sure it’s the smartest thing we’ve done in the state of Ohio,” he said. “But we are where we are, and we can’t go backwards now. So it’s onward in a deregulated environment, and we’ve got to figure it out.”  Gearino, Dan. "Kasich Questions Electricity Deregulation at PUCO Chief's Swearing-in." The Columbus Dispatch. The Columbus Dispatch, 17 Apr. 2014. Web. 17 Apr. 2014.

In the 1990's and early 2000's, it was fashionable for many in the electric utility industry to push for electricity deregulation.  Their argument was that while the transmission and distribution of electricity remain natural monopolies, generation could be a competitive business.  By introducing customer electric choice for generation services, everyone would benefit as market forces would keep prices low and drive innovation.

To a large extent, consumers in many parts of the country have reaped considerable benefits from deregulation.  We recently did some research on whether electricity deregulation has benefitted consumer or not and concluded that the results are inconclusive.  We've started a draft post on the results of our survey of the the literature on the subject that we hope to publish one of these days, but in the meantime, our summary is that it all depends on the rules under which a particular state deregulated and the large macro-economic drivers of electricity economics that prevailed at the time the new policies were rolled-out.

One thing that is clear, however, is that many of the loudest advocates for deregulation in the electric utility industry have been bitten by their own creations. An excellent example of this is the Ohio-based utility FirstEnergy; take a look at their stock price from 2001 (when deregulation took effect in their home market of Ohio) to today:

As a vocal advocate of electric deregulation, First Energy was "all-in" in the deregulated energy markets.  They spun off their electric generation assets to an unregulated subsidiary in search of high growth opportunities for those assets. They aggressively pursued customers in "customer choice" markets, including the heretofore unheard of practice in the fraternal utility world of poaching large commercial and industrial customers from their neighboring utility service territories.  

What happened?  Well, to be honest, a lot of things contributed to the dramatic drop in their fortunes, but one thing that has definitely contributed is a double whammy of flat or declining electric demand in their core markets and the until recently declining prices of natural gas. These have led to weak electric generation markets in the PJM Interconnection has been slow since the beginning of the "Great Recession."

As a result of the drubbing that they've been taking in the electric generation markets, First Energy has had to retrench, seeking cover in their regulated businesses. They recently cut their dividend from $0.55/share to $0.36/share and announced their intention to invest in transmission upgrades.  According to Bloomberg:

FirstEnergy, the worst performer in the S&P’s 500 Utilities Index last year and so far this year, cut its dividend yesterday for the first time in the 17-year history of the company. Saving the funds will provide “additional financial flexibility to pursue regulated growth opportunities over the next several years,” FirstEnergy Chief Executive Officer Anthony Alexander said in the statement. (Source: Chediak, Mark. "Utility Dividend Promise Fades as Weak Prices Cut Profit."Bloomberg.com. Bloomberg, 22 Jan. 2014. Web. 17 Apr. 2014.)

So, back to Governor Kasich's ruminations on the deregulated utility model (which it is not hard to imagine at least partly reflects the input he's been getting from First Energy as one of the largest utilities in his state), he's right that the market has caused some problem that some large companies in Ohio are going to have to address.  However, it is at least partly a situation that those same companies helped to create.  The Governor hopefully will not support their efforts to to take their market frustrations out on the successful and burgeoning energy efficiency and renewable energy industries in Ohio. 

Bottom line is that the entire electric utility industry is facing new economic conditions.  Some of those new economic conditions are partly of the industry's own making (deregulated retail electric markets) and some of those conditions are beyond their control (macroeconomic conditions, distributed generation, improvements in energy efficiency etc).  Regardless of the origin of these challenges, it's clear that successful utilities need to be searching for a sustainable (both economically and environmentally) business model.