Energy Deregulation Helps Power U.S. Productivity Gains
The stock market passes new milestones daily as government reports show rising productivity in an economy growing without inflation. Yet many people worry that the economy is too good to be true. Growth in productivity--another word for the economy’s efficiency--is not easily understood. And phrases like “new economy” have a snake-oil ring to them.
But the rise in productivity is real and can be seen in aspects of the constantly changing U.S. economy. To understand, don’t look only to the world of computers and the Internet. Look to the electric power industry.
The massive business of supplying electricity in the United States, an industry of some $300 billion in annual revenues, aroused a lot of excitement a year ago as deregulation of utility companies began in California and was contemplated in other states.
But the excitement has waned as the competitive, price-lowering effects of deregulation have been delayed by the need to amortize old power plants and other factors. And the broad public of residential customers won’t see benefits for a few years yet. So Wall Street has chilled on the industry, and electric utility stocks sell at relatively low prices.
Yet behind the scenes, rapid change is occurring. Competitive bidding for electricity is reducing costs for companies, universities, hospitals and other institutions in California, Pennsylvania and New York. Illinois and New Jersey will deregulate this fall; Massachusetts in January; and Ohio, Michigan and Texas in the next few years. Arizona is poised to deregulate once a legal tangle is resolved.
The main effect is on the industry itself. From a staid business of regulated monopolies that earned a rate of return allowed by state government, electricity has become a beehive of financially savvy companies trading contracts to supply power at different prices every hour.
More than $100 billion in electricity supply contracts were traded last year by companies such as Enron Corp., Southern Co., Duke Energy and Utilicorp United. Electricity users also, whether companies or municipalities, have been able to purchase power at wholesale rates by trading on a computerized exchange.
Trading means “we can guarantee a customer that rates won’t soar if weather makes demands on the electrical system. Electricity is becoming an information business,” says Richard Greene, chairman of Kansas City, Mo.-based Utilicorp.
Enron, for example, has just signed a seven-year agreement to supply electricity and gas to the 2,000 churches, schools and other facilities of the Catholic Archdiocese of Chicago. The Houston-based energy giant, with $35 billion in annual revenue, will upgrade boilers and lighting fixtures so that the Chicago diocese can use power more efficiently.
Such a process is the essence of rising productivity: Investments are made to improve facilities so that they function more efficiently, with the result that a basic service, electricity, is delivered at a lower cost. The Archdiocese of Chicago saves money, Enron makes money, the U.S. economy enjoys a net improvement.
Even bigger news is that new companies and technologies are coming to electric power. AlliedSignal, the $15-billion revenue aerospace and automotive company, has invested $100 million to develop a small turbine generator capable of providing power directly to stores and apartment buildings.
AlliedSignal Power Systems, a division based in Albuquerque, will launch the product in June, a 75-kilowatt $50,000 natural gas-fired generator that will power McDonald’s restaurants, Citibank branches and Walgreen’s stores among other customers.
Tony Prophet, president of Power Systems, sees such generators providing auxiliary electricity for small business.
“They’re an insurance policy against power failure,” says Prophet, who predicts that the worldwide market for “distributed generation” will grow to $10 billion in the next decade.
AlliedSignal is not alone in seeing possibilities. Solar Turbine of San Diego, Caterpillar Tractor of Peoria, Ill. and a small company named Capstone Turbine of Woodland Hills are also bringing out small generators.
Capstone represents the world of high tech coming to electricity. The company was founded by engineers from Hughes Aircraft and financed by venture capitalist Benjamin Rosen, co-founder of Compaq Computer, with backing from Microsoft co-founder Paul Allen, among others. Its generators, which were developed for electric vehicle use, have found a market among utilities. Capstone has sold 186 generators at about $40,000 apiece to electric companies, which use them to supply power at peak periods.
Capstone represents a new belief in research. “Utility companies never spent much on research and development,” says Michael Peevey, president of New Energy Ventures, a Los Angeles-based energy service provider.
New Energy is a child of deregulation. It owns no power plants but contracts to provide electricity that it acquires from the nationwide electric grid, trading to establish its price. In two years, New Energy has grown to $215 million in annual revenue, supplying large retail chains in California, New York and Pennsylvania, and all the Pentagon’s military bases in California.
Many other kinds of companies will arise as electricity changes. The pattern, analysts predict, will be like that in telecommunications, in which traditional phone companies now compete with newcomers from the Internet, cable television and other fields.
One reason deregulation was undertaken by federal and state regulators was to phase out inefficient, surplus generating plants. But that doesn’t mean new plants are not being built. In fact, Calpine, a San Jose-based company that began as a geothermal power producer, has grown rapidly to $528 million in sales by making new fuel and environmentally efficient generating plants.
Calpine’s plants are not built under regulated rates of return but must be able to make a profit for the electricity companies that buy them. They replace inefficient generators. Thus there are savings for the electric company, profit for Calpine and a gain in productivity for the economy. The latest government statistics showed a good 2.2% gain in U.S. productivity last year.
Traditional utilities can and will adapt to deregulation. Analyst Edward Tirello of BT Alex. Brown points to Sempra Energy, the company that combined San Diego Gas & Electric and Pacific Enterprises. Sempra announced in February that it has amortized the costs of old generating plants and now wants to give customers new rate reductions as a benefit of deregulation.
Ultimately, the effect of all the changes will be not only cheaper electricity but more options for business and residential customers. The new economy at its best means power to the people.
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James Flanigan can be reached by e-mail at jim.flanigan@latimes.com.
