Degreenulation: The darker side of privatization

by Ari van Schilfgaarde

Sometimes in the debate over environmental improvement, we get so caught up in the details of the problems and theoretical problems with improving the environment that actual benefits to environmental conservation go unnoticed. One such example is the energy industry.

As a youngster, I remember the debates about the deregulation of the energy industry. The theoretical arguments were the same that we hear all the time: that government “intrusion” in pricing creates vast inefficiencies, that all the red tape surrounding the energy industry was creating a drag on the economy. My personal favorite is still that only by freeing benevolent industry from the shackles of regulation could we provide a sufficient supply to provide for a growing population.

Texas, following California’s lead, deregulated its energy industry on January 2002. In 2005, four investment banks (Texas Pacific Group, Blackstone Group KKR, and Hellman & Friedman) sold their Texas shares in several power plants for a 640 percent gain. The Texas regulatory agency is demanding that customers pay, on average, $4.75 monthly for 14 years to pay for the construction of the privately held plants. The utility company is suing to extract even higher payments from the customers.

Goldman Sachs, the New York investment powerhouse, bought power plants in deregulated Ohio and Pennsylvania in 1998, and sold them three years later for a billion dollar profit. Baltimore Gas and Electric, after it became a private company, sold the 12 power plants that it owned to an unregulated subsidiary. It then bought the power that they generated back from the utility—and went crying to the Maryland government to increase rates by 72 percent.

Robert McCullough, a consultant to the utility energy, scoffs at the actions of the new company. He is quoted in the New York Times as saying, “The same electricity is generated by the same plants, owned by the same owners, sold to the same customers, simply at a vastly higher price.”

Some states, including Arizona, Missouri, and Texas have, under public and corporate pressure, brought the power producers back into the public fold where the drive to raise rates to appease shareholders is not so strong.

Really, though, one cannot expect much different from an industry with few substitutes, few players, and dramatically high costs of entry. Another fact is the rise in energy prices from oil and natural gas (which is up about 150 percent since 2002). This has put a serious damper in the likelihood of new plants being profitable without some concessions from consumers.

In order to avoid the capriciousness of the utility markets, to dramatically cut down on cost, and to reduce the need for building new plants, the end consumer is still the best bet. Every unit of power that you consume at your home, whether to run your electric stove or power your iPod, means that about 10 units will be produced at the coal burning power plant down the street. Between ramping up the voltage to deliver it to the next state over, and then ramping it down to get it to your house without lighting a fire, to bringing the voltage down to iPod levels takes energy, and lots of it.

There’s not only a moral satisfaction in sticking it to the utility companies, there’s pecuniary rewards. This is where the environmental movement comes in. Rather than focus on how wonderful the idea of saving the planet is, wouldn’t you rather learn how you can save money, and in the process reduce the need for power plants that line the pockets of industry? The environmental movement has done a damned good job of appealing to human nature and moral sentiments, but it’s time appeal to the bill payer. Want to see your electricity bills go down 20 percent? Turn down the thermostat, unplug the TV, be careful about how much electricity your dryer uses.

These are small things, but they are everyday decisions, and they save us money, and hopefully teach the utilities what we really want: a comfortable life, not an over-the-top electricity bill.


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