Emboldened States Take Charge of Energy Issues [WSJ]
Officials Are Intervening In Proposed Utility Deals, Challenging Deregulation
By REBECCA SMITH
October 12, 2006; Page A6
State officials are asserting more control over their energy destinies, intervening to block or delay utility mergers that don't promise enough consumer benefit and challenging the electricity deregulation that has been fostered by the federal government in recent years.
In some states, these efforts could result in smaller electricity bill increases, at least in the short run. Some costs simply would be deferred to future years. The efforts also could prolong supply-and-demand imbalances and burden the nation's electricity system with different rules and market practices, making it more complicated and less efficient.
Touching on parts of the energy business once seen as beyond state reach, the heightened state activism is especially pronounced where important pocketbook or environmental issues are at stake. State officials are especially fearful of political fallout stemming from high electricity rates and disenchantment over the unmet promises of electric-industry deregulation.
"The states are the ones in charge of the process now," says Richard Kelly, chairman and chief executive of Xcel Energy Inc., a Minneapolis energy company. Mr. Kelly says his company, which owns utilities in eight states, doesn't expect to grow through utility acquisitions in part because "it's hard to conceive of a merger we can get through all eight states."
In New Jersey, state officials last month effectively blocked Chicago-based Exelon Corp.'s proposed $17.7 billion purchase of Public Service Enterprise Group Inc. amid fears the combination could increase Exelon's market power and harm New Jersey consumers. In Maryland, public opposition to a pending rate increase at Baltimore Gas & Electric has threatened to unhinge the $11 billion purchase of parent company Constellation Energy Group Inc. by FPL Group Inc. Speaking to investors recently, FPL Chairman Lewis Hay III said he has "limited patience" left and implied he may walk away from the deal.
Duke Energy Corp. acquired Cinergy Corp. after garnering approvals from five states in about five months. But "people have to earn the right to do deals," says James E. Rogers, chief executive of Duke Energy. He cautions that if a utility already is facing rising rates, "it's probably a bad time" to propose a transaction.
California, meanwhile, has methodically regained control of its energy destiny. It permits utilities to build new plants and it drastically has reduced the volume of business conducted through federally administered electricity markets. Gov. Arnold Schwarzenegger signed a law in late September to cut carbon-dioxide emissions to 1990 levels by 2010, a reaction to federal inaction on that front.
Sensing the states' increased activism, federal energy officials are expressing more sensitivity to states' rights than in the past. Joseph Kelliher, chairman of the Federal Energy Regulatory Commission, says working with states "isn't just a matter of good manners but is necessary" since authority is divided between federal and state bodies. Still, he argues that there always have been federal-state dustups.
Much of the current commotion is caused by the fact wholesale electricity markets haven't developed the way people expected. Deep, liquid wholesale markets -- overseen by federal regulators -- were expected to give big suppliers good places to shop by attracting numerous power providers. Retail customers, it was thought, would buy juice from those big suppliers, bypassing their local utilities. Instead, wholesale markets contracted after 2001 and millions of consumers remained customers of their local utilities because they didn't have good alternatives.
More than 99% of residential and small-business consumers in the Boston area, for example, still get their electricity from Nstar -- the utility formerly known as Boston Edison -- because they have no other choice. Prices have risen 78% since 2002, to 11.4 cents a kilowatt hour from 6.4 cents, but the increase hasn't caused political fallout because it has been gradual.
States are left to create new ways for utilities to obtain power since many have sold their plants or transferred them to affiliates. Illinois state officials conducted their own electricity auction in early September that will result in rate increases of 22% to 55% early next year at its biggest utilities, unless increases are postponed. Elected officials now are talking about freezing electricity rates for three years at Ameren Corp.'s three utilities and Exelon's Commonwealth Edison unit in Chicago. In a reference to the 1773 Boston Tea Party, Lt. Gov. Pat Quinn, who is up for re-election with Gov. Rod Blagojevich, is urging consumers to send tea bags or email look-alikes, in effect blaming them for higher prices. The utilities have their own proposals, which would allow small increases and protect their creditworthiness.
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