NorthBridge Study Says Past Regulation Failed to Solve Problems Similar to Today's Energy Choice Matters
NorthBridge Study Says Past Regulation Failed to Solve Problems Similar to Today's Energy Choice Matters
December 9, 2008
Electric regulation failed to meet the challenges of higher fuel costs, substantial capital cost escalation, serious environmental concerns, and unanticipated changes in customer demand in the 1970s, and there is no reason to believe similar command-and-control policies will meet today's similar challenges, the NorthBridge Group said in a new study released yesterday.
The analysis, Embrace Electric Competition Or Its Déjà Vu All Over Again, was first reported by Matters (11/25/08, 11/19/08), and was released at a Compete Coalition forum. NorthBridge concluded that the regulated response to the challenges of the 1970s amounted to a mistake on the order of $200 billion, or more, in today's dollars, from the "massive" overbuild of baseload generation.
The overbuild, as well as well huge cost overruns, resulted in excess supply and high rates that were felt for decades, NorthBridge said. Lower than expected load growth in the 1970s meant that the costs of power plants, which were more expensive than originally estimated, were spread over a smaller than expected customer base.
Nominal electric rates rose by over 300%from 1970 to their peak in 1985, while real rates rose by 60% in the same time period, due to the flaws inherent in regulation, NorthBridge said.
Among the problems inherent in regulation is a lack of clear price signals, which contributed to a slow regulatory response that failed to curb the over-building of baseload nuclear and coal capacity as costs spiraled and the need for capacity evaporated, NorthBridge reported. "As a result, the total U.S. reserve margin peaked at 42 percent in 1982, more than twice the 15 to 20 percent level generally deemed necessary tomaintain system reliability," NorthBridge found.
Regulatory "fixes" also tend to overcompensate, and in the 1970s led to administratively mandated qualifying facilities which burdened electric utilities and their customers with a $50 billion overhang of mandatory long-term contracts established at prices well above their actual avoided cost or any reasonable proxy of market prices, NorthBridge noted.
NorthBridge contrasted the 1970s overbuild, paid by ratepayers, with the glut of gas-fired generation in the early 2000s. When prices and over-building made gas-fired generation uneconomic, competitive builders cancelled 78% of capacity planned or under construction with a planned in-service date of 2003 or later, while regulated builders cancelled only 37% of capacity, NorthBridge found.
"Unlike in the 1970s and 1980s, these uneconomic investments did not adversely impact customers in non-regulated states since unregulated investors - not ratepayers - bore the risk of these investments," NorthBridge pointed out.
NorthBridge dismissed criticisms of competition, especially comparisons of rates in restructured and non-restructured states, such as those done by Power in the Public Interest.
NorthBridge concluded that had natural gas prices remained at the $3/MMBtu level as in the late 1990s, the rates in non-restructured states would have risen 18% from 1997 to 2007, compared to a 22% rise in restructured states.
The small difference is primarily caused by the variation in fuel inputs used to produce electricity combined with differences in how electricity is priced to end-use customers in regulated and restructured states, NorthBridge said. NorthBridge cautioned against returns to command-and-control regulation cloaked as portfolio management or long-term contracts procured under new forms of integrated resource planning.
"[T]hese actions are nothing more than a return to the central planning of the past – the same central planning that tried to select the right amount and the right mix of technologies in the 1970s and failed," NorthBridge argued.
Re-entry of regulated utilities into the generation business, whether through direct utility ownership or allowing utilities to enter into long-term contracts with new generators, is risky for customers, NorthBridge contended, since a centrally planned risk is transferred to retail customers. Furthermore, re-entry of utilities into the generation business is incompatible with wholesale competition and will deter – and perhaps even eliminate - market-based entry of new generation, NorthBridge argued. "It is not likely that rate based investments could coexist with competitive generation," NorthBridge said.
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