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Friday, April 18, 2008

Are Electric Utility Issues Too Complex For You?

Chew on this little quote from The Washington Post:
More than 1 million residents of the Washington-Baltimore area paid $920 million to take the Calvert Cliffs nuclear plant -- now owned by shareholders of Constellation Energy Group -- off-line in 2034 before state lawmakers agreed to a deal this month requiring the company to take over the federally mandated decommissioning costs.
Do you understand it? We bet you probably just locked onto that almost $1 billion. Well let's dissect the article because it was very illuminating. Although utility issues were complex before deregulation, they have become down right Rubic's Cube since then. Now electric utilities are about to be reregulated. Deregulation was supposed to stimulate competition and led to reduced prices, but it was botched by politicians trying to deregulate the industry while artificially trying to protect ratepayers from price increases. The result was deregulating at the wholesale level but not at the retail consumer level and now those chickens are coming home to roost.

Here is another interesting item:

Utility companies used to own the generation plants and the wires that deliver power to homes and businesses. In the deregulated system, outside buyers or unregulated affiliates of the utilities took the plants over. Power companies said competition would cost them customers and the steady stream of revenue needed to recover their investments in plants. In response, lawmakers and utility regulators allowed power companies to charge ratepayers for those "stranded costs." In Maryland, Constellation, the parent of BGE, billed customers $975 million from 2000 to 2006, even though BGE had merely transferred its 11 plants to Constellation.

So BGE basically paid itself for plants it already owned with customer money as though they were selling the plants to someone else? There are some brilliant people over there in Baltimore. A similar situation happened in Virginia where Dominion customers, including 700,000 in the Washington suburbs have paid $1.5 billion since 1998. Of course the utilities say they are paying billions on plant improvements, including expensive scrubbers to meet new environmental mandates. PEPCO actually sold its plants to Mirant, which ultimately filed for bankruptcy protection.

Wholesale electricity prices are auctioned in agreements for years, months, the next day, the same day and by the hour. Before deregulation prices were based on what it cost a coal, nuclear or natural gas plant to produce electricity. After deregulation, the price was set by the last, most expensive plant that is needed to supply power, which right now is expensive natural gas. Unfortunately congestion in natural gas pipelines and electricity pipelines are significantly increasing that price. Not in my backyard (NIMBY) activists are also successfully preventing new pipelines and transmission lines from being constructed and so the problem will get worse.

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