Deregulating Utilities Can Learn From Enron
With mergers among electric utilities occurring almost as fast as blackouts, and change running like a live wire through the electric power industry, it’s smart to look back 11 years to the freeing up of natural gas pipelines when Kenneth L. Lay combined four companies to form Enron Corp.
At the time, chaos ruled energy markets. Prices for natural gas that had been bid up in the 1970s plunged to levels at which producers were going bust. Privately owned and regulated pipelines that ran from Southwestern gas fields to major cities in the North, East and West were ordered by the federal government--intent on fostering competition--to grant access to anyone who wanted to ship gas.
Lay, then 43, saw that he could buy gas cheap in the fields and sell it at a profit in the cities. Further, he understood the government’s insight that more sellers offering to more buyers formed a more stable network than did regulation, which limited buyers’ and sellers’ freedom.
He built Enron into a worldwide company with $10 billion in revenue. And natural gas, once a scarce fuel, has become an abundant and environmentally valuable resource through a decade of competition.
Now Lay is out for bigger prizes in the electricity business. Enron is acquiring Portland General Corp., an Oregon electric utility, so it can have a supply of its own electricity to back its growing business as a wholesale marketer--literally a power broker, buying surplus power from one utility and selling it to another.
In a replay of the pattern that occurred in natural gas, the Federal Energy Regulatory Commission has opened access to electric power transmission lines. And state governments as well as Washington are pushing deregulation of the electric power industry itself, promising enormous turmoil in the next two to five years.
Lay sees opportunity. “We aim to be a nationwide marketer of electric and gas energy at the retail level,” he says. He envisions that by the year 2000, homeowners could be able to order electricity from any of dozens of suppliers as they now do long-distance telephone service.
He’s not alone. Louis Dreyfus Corp., a natural gas trading firm, is in partnership with Duke Power, a North Carolina power utility, to peddle energy nationwide; Lehman Bros., the investment firm, and Citizens Utilities of Stamford, Conn., are in a similar venture.
And utilities are merging in anticipation of deregulation--the votes Friday of Kansas City Power & Light shareholders as to whether their company will merge with Utilicorp United or Western Resources will be known early this week.
Deregulation of electric power will be big. The industry totals $300 billion in annual revenues, more than telephones and airlines combined. It contains roughly 3,200 companies, including 2,000 municipal power companies, 912 rural cooperatives and 101 investor-owned major utilities, according to Research Data International, a Boulder, Colo., company.
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Many of those municipal utilities, including the Los Angeles Department of Water and Power, are producing electricity at more than three times the cost of an efficient utility--10 cents per kilowatt-hour compared with 3 cents.
That’s why the potential savings being claimed for deregulation are enormous. Savings will mean a 43% reduction in consumers’ electric bills, an average $360 per year, says Rep. Dan Schaefer (R.-Colo.), who has introduced a bill calling for total consumer choice of electric suppliers by 2000.
The turmoil of deregulation has already begun. Glitches are appearing, such as last weekend’s blackout in 12 Western states. The technical reasons for the blackout--intense heat forcing power plants to cut back and overloaded transmission lines shutting down--seemed to say we are getting ahead of ourselves trying to share power.
But the blackout was a call for deregulation, not for continuing the present system of a transmission grid dependent on its weakest point, like Christmas tree lights that all go out when one does.
A decentralized system--with many generating companies bidding on contract and spot markets to supply power over common carrier transmission lines, as in natural gas--would be more stable, not less.
The industry will become intensely competitive, with high-cost power plants retired and the ranks of 3,200 electric companies sharply reduced. Difficult decisions remain to be made as to who pays off the remaining debts of retiring power plants, notes Barry Welch, senior investment officer of John Hancock & Co., the insurance company that finances power plants.
Also, an industry that has been regulated and comfortable for decades won’t reorganize without major reductions in employment.
What do we get for all this? Savings, flexibility and efficiency, which is what industrial and commercial customers are demanding even now. Wendy’s, the hamburger chain, now gets natural gas from the same company, Utilicorp, at all its restaurants nationwide. It hopes to the do the same with electricity when deregulation makes that legally possible.
The new U.S. industry will begin by separating, says Vikram Budhraja, vice president for system planning at Edison International. Generating plants will be spun off or sold, transmission lines will be separated as federally regulated companies, and Edison will become a marketer of electricity to consumers.
Roughly 30 such giant electricity marketers, each with 2 million to 10 million customers nationwide, will be a centerpiece of the new industry, says analyst Edward Tirello of NatWest Securities.
Edison and DWP, too, aim to be among those marketers offering customized services and prices to different types of customers. But the competition will be difficult against newcomers like Enron and out-of-state utilities such as PacifiCorp that are intent on gaining California customers.
Outside California, utilities that seem prepared for the new era include Duke Power, Southern Co. and Florida Power & Light, says Tirello. Analyst Kit Konolige of Morgan Stanley adds the name of Illinova Corp., the central Illinois utility that is already experimenting with a deregulated environment.
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Ultimately, 15 years from now, you’ll have fuel cells--your own power plant--in your backyard and electric power will be decentralized, as so many other industries are, says Chairman Richard Green of Utilicorp.
To succeed in the new world, all companies must broaden their horizons and seek customers in other markets, other countries. That’s what Enron did in natural gas, and what smart electric companies will do now as the biggest deregulation of all gathers steam.
