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About Electric & Natural Gas Deregulation Regulation of public utilities by federal and state governing bodies dates back to the 1930s and was instrumental in forming the vast infrastructure we have today. Without the oversight and a guarantee of financial return on investment, we would not have had the money or rules needed to build the reliable systems that now span the continental U.S. Through the years, there have been a number of regulations (Federal Power Act of 1935, Public Utilities Holding Company Act of 1935, Natural Gas Act of 1938, Public Utilities Regulatory Policy Act of 1978, Energy Policy Act of 2005, et. al.) that have helped shape the relationship between utilities and their customers. Though the rules have changed over time, allowing deregulation of the natural gas and electric industries, two things remain constant. Federal regulation of interstate commerce is performed by the Federal Energy Regulatory Commission (FERC), and regulation of intrastate affairs is handled by the respective state Public Utilities Commissions. The electric and natural gas industries are very similar in their structure and operation. Each has three distinct components (i) the commodity SUPPLY portion (ii) the long-distance TRANSMISSION of the commodity and finally (iii) the local DISTRIBUTION of the commodity to our homes and businesses. For many years, your local utility handled all three phases of the business in a "vertically integrated" manner. After decades of growth, construction, and addition of market participants, it was determined that competition could safely be introduced via deregulation of the natural gas and electric industries. To address the needs of a competitive environment, those three phases of utility operations were separated, rearranged and in some cases sold off to other companies or regional transmission organizations.
Deregulation of the electric and natural gas markets came on the heels of deregulation in the airline, trucking and telephone industries. Those industries underwent drastic changes during periods of expansion and contraction. Today, airfare and phone rates adjusted-for-inflation, are considerably less than they were in the 1980s and many new products and services exist. In deregulation of the natural gas and electric industries, only the price of the commodity supply has been opened to competition. This means consumers in many states, who are served by investor-owned utilities, are now able to choose who supplies their natural gas and/or electricity. The transmission and distribution of natural gas and electricity is not open to choice, and the price for those services continues to be set by state and federally approved tariffs. The push for deregulation of natural gas and electric came when the FERC decided it should limit its authority to wholesale transactions. This move cleared the way for individual states to determine if and how they should allow retail price competition. Electricity deregulation doesn't work in the real worldProposal could increase rates, cut reliability More than a decade ago, the Arizona Corporation Commission abandoned a plan to impose electric “deregulation” on Arizona’s citizens and public utilities in recognition of the great risks and problems it posed. Now the ACC is revisiting that decision, at the urging of those who wish to market electricity directly to large users and some of those large users themselves. Then, as now, there were significant problems with this proposal. The aspiring sellers in a deregulation scenario certainly wish to profit by selling electricity, and profit honestly earned is a good thing. But in states that have tried this system, those sellers have targeted the large customers from whom profit is easily gained. They bear no responsibility for delivering affordable power to all customers — such as residents or small businesses — or for ensuring adequate generation and reliable transmission to meet future needs. In light of California’s disastrous experience with electric deregulation — rolling blackouts and roiling price spikes — the ACC wisely abandoned its efforts to create a similar system here. Other states pressed on despite the risks and structural deficiencies. They have reaped volatile rates, increased customer complaints and dwindling energy reserves. Texas, which once enjoyed a healthy surplus of energy resources, is now struggling to maintain enough capacity to avoid outages. And while rates are presently reasonable, recent analysis concluded residential customers in deregulated areas of Texas likely would have saved more than $10 billion had rates remained regulated. Combined with the legacy of California’s rolling blackouts and the Enron price-manipulation scandal, such results prove the slogan-driven theory of electric deregulation a dismal failure. It may therefore surprise Arizona consumers to learn that this idea has resurfaced before the ACC. While anything hyped as “market competition” might hold appeal, the scheme proposed does not amount to competition; far from it. In the end, it will simply mean higher electric bills and a less-reliable grid for homeowners and small businesses. The current longstanding structure — regulated electric utilities earning a limited rate of return for serving everyone in a safe and reliable system — is not perfect. In fact, an actual competitive market, with differentiated energy sources (and not merely differentiated vendors) from which consumers could choose, might deliver some efficiency and pricing benefit over time without putting grid reliability at risk. But source and storage technology have not yet advanced to the point where such a market is possible. Years after the ACC recognized the failings of electric deregulation, proponents are counting on faded memories and inattention to broad-based experience to win support for their flawed proposal. I have more faith in our current commissioners. The interests seeking to resuscitate this dead policy in Arizona have just suffered an unfortunate bit of timing; on July 18, the Wall Street Journal reported that banking giant JP Morgan faces a record fine for manipulation of power “markets” in California and the Midwest. The fine is expected to approach or exceed the $435 million fine imposed on another banking giant for its alleged manipulation of California power prices from 2006 to 2008. We need only look beyond self-serving slogans and consider real-world results from so-called deregulated electricity markets to see that this is an idea best left in the past. In Arizona, the current system is delivering more stable and lower rates than those in the surrounding region, and it has continued to join with our ingenious system of water storage to make our beautiful but sometimes harsh desert home inhabitable.
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