Ignored in the scandal about Enron's off-the-books deals is the fact that Enron's core businesses--trading and selling energy--made little economic sense. Starting in the early 1990s, Enron claimed it could make electricity generation more efficient through a system to trade more electric power than regulated utilities. To that end, the company urged the Federal Energy Regulatory Commission (FERC) to promote the deregulation of wholesale electric markets.
But whenever there was an opportunity to reduce consumers' electric ratesby trading power at the wholesale level, the old regulated electric utilities hadalways done so. Indeed, most electric utilities had already grouped themselvesinto "power pools" or other voluntary energy-swapping systems set up to tradepower at its cost of production--the cheapest approach for consumers. If wecalculate the relative costs of producing and selling electricity, new wholesaletraders like Enron could have reduced our national average electric rates byperhaps 1 percent, if that.
So most of the supposed efficiencies of deregulation were already beingrealized by regulated utilities. To the extent that Enron could reap largeprofits, it was only by amassing market power, monopolizing transmission lines,and taking advantage of temporary scarcity--thus raising prices and frustratingthe whole supposed point of deregulation. Any efficiency gains were more thanwiped out by the cost of administering a new, complex trading system pursuing itsown quest for profit.
When it lobbied state legislatures and public-utility commissions toderegulate electric utilities, Enron promised to sell retail electricity to alltypes of customers. Instead, because it was too costly to compete withtraditional utilities for small customers, Enron wound up selling retailelectricity primarily to large industrial and commercial companies underlong-term contracts. Because government takes ultimate responsibility for thepower supply, even in states that have deregulated generation, utilities willremain providers of last resort for at least the next few years. Regulated retailrates, meanwhile, have always been a fallback option for large and smallconsumers. Enron and other similar companies could seldom beat the regulatedprice.
Ultimately, Enron never made a profit in its retail business. The costs ofgaining market share were just too high--and they were probably hidden by some ofEnron's now famous off-balance-sheet debt. In some cases, very large customerssaved a few percentage points on their electricity bills, but often only untilwholesale prices rose, forcing them to turn back to the regulated utilities forthe best rates.
The small savings that deregulation might deliver to some customers must beweighed against the higher costs to others--and against the huge risks ofovercharges like those seen during the California debacle, well before Enron'scollapse. Analysts who deny that Enron was a failure of deregulation, or whopaint Enron as just an isolated case of corporate mismanagement, forget that thefirm never realized its original promises--even though deregulated electricitysales, at both the wholesale and retail levels, were its primary reason forbeing.
How, then, should we regulate electricity? Contrary to the currentfashion, our old system--state regulation of vertically integrated electricutilities--makes sense. Regulators need to stress stateof-the-art, "least cost"planning for new investments in generation and transmission. Traditionalregulation means that utilities charge consumers their costs plus a reasonablylow regulated return on equity.
Utilities should be grouped into power pools--like those we've had in theNortheast--in order to make possible economically efficient sharing of theirgenerating plants. Under a regulated system, concentrated market power is astrength, not a threat, because utilities are prohibited from gouging consumers.
It turns out that it is not economically efficient to divide electric-utilityservices and create an unregulated market for each. We probably don't even need acompetitive wholesale power market. Ironically, by the early 1990s many stateregulatory commissions were getting quite good at keeping electric rates incheck, thanks in part to growing investments in energy conservation. It was thebig industrial customers who thought that they could get better deals in aderegulated market for electricity. On the whole, they didn't. Whileco-generation and other energy-saving technology surely make sense, deregulationdoesn't.
