A Giant Step Backward for Deregulation

Clinton's deregulation plan is long on principle but short on common sense.
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President Clinton knows how to exercise power. Take this morning when he, Energy Secretary Bill Richardson and others unveiled the administration's latest proposal to bring competition to the once-monopolistic electric utility industry.

The populist policy calls for broader powers for the

Federal Energy Regulatory Commission

in policing the electric markets to protect against the rapid price increases like those of last

June. The creation of a special panel to prevent major power outages was another provision.

The proposal also calls for investor-owned utilities to raise their use of renewable energy sources in the production of electricity to 7.5% of total generation. The president claims the plan will reduce the average electric bill by $232 annually, although it isn't clear just how. Finally, the plan promises every American can choose his or her electricity provider by 2003.

The Wrong Prescription

While it's good to have a clear picture of the president's policy on deregulation, the proposal isn't the solution to the growing politicization of electric power deregulation. It contains far too much bureaucracy and too few incentives for states and utilities to embrace the new competitive order.

While deregulation is beginning to experience success in small pockets of the country, the real issue is the lack of uniformity in policy necessary to allow free markets to work their magic. Said one southeastern utility executive, referring to the state-by-state patchwork of deregulation legislation: "This isn't the way to deregulate an industry. It's become purely a political issue, not an issue of economics."

Unfortunately, the administration's proposal ignores the real economic arguments for deregulation. Sure, it's great to promise a rate cut, what Secretary Richardson called "an effective tax cut" in an interview on

CNBC

this morning. However, suggesting legislation can guarantee a rate cut in a free market is tantamount to saying the markets won't really be free, just regulated in a different way.

Any proposal that seeks real competition in the power markets must address the future of government utilities and the different rules for cooperatives, municipal utilities and investor-owned utilities. The Clinton proposal appears to allow government-sponsored power agencies like the

Tennessee Valley Authority

to enter the competitive marketplace while retaining their government subsidies. And it seeks to preserve the unique standards under which the nation's electric cooperative and municipal utilities operate, thus preserving a severely tilted playing field. As Thomas Kuhn, president of the

Edison Electric Institute

, the trade association representing investor-owned utilities, puts it (only somewhat self-servingly): "All customers won't reap the full benefits of deregulation unless all utilities play by the same set of rules in competitive markets."

The bill does seek to streamline the FERC's authority over the transmission grid. But less clear is whether the proposal to reform access to the grid is truly market neutral -- and thus promoting competition -- or if it simply adds another layer of bureaucracy to already overburdened utilities.

Other parts of Clinton's proposal make good sense, and the administration should be praised for suggesting antiquated restrictions on utility mergers and investments be repealed, especially some particularly cumbersome requirements in the

Public Utility Holding Company Act

.

Increasing the use of renewable energy sources is also admirable -- less than 1% of all power generated currently comes from wind, water and solar power. Yet imposing the requirement only on investor-owned utilities is unfair, and this aspect will increase the cost to consumers, not reduce them. Rather, Congress should consider the use of incentives rather than regulation, which history suggests only adds to the costs of both the producer and the consumer. And such incentives should be available to all utilities: cooperative, municipals and IOUs alike.

A Cop-Out

Finally, while many parts of the Clinton plan are untenable, the most disappointing aspect is the provision allowing states to opt out of the federal program if they have already restructured, or if they feel consumers would be hurt by joining. "It's the states that are the real stumbling block," said one utility executive. "What we really need is uniformity and guidance from the federal level." The real challenge of any federal legislation at this point is to prevent differing state and local regulation from holding up reform.

As for investors, the latest proposal from the administration is a big yawn. "At first glance it doesn't really appear to do anything," said one utility hedge fund manager. "Since states appear to have the power to opt out for just about any reason, it's likely to be business as usual."

Given the complexities of the industry and existing regulations, Clinton's timeline appears realistic. Unfortunately, his proposal doesn't shed light on an industry longing for certainty in a very uncertain world. Rather, it's just another dim bulb.

Clinton Sold:

No, not the president, the power plant. As suggested in a January

Power Lines,

Illinova

(ILN)

did indeed sell its

Clinton Nuclear Power Plant

to

AmerGen

, a partnership of

Peco Energy

(PE) - Get Report

and

British Energy

, for $20 million. That is well below the most recent book value of the plant, estimated at $1.6 billion. Illinova indicated it wanted out of the nuclear business and would either sell or decommission the plant this year.

Now that the plant is sold, Illinova is focused on its future. While the company says it intends to remain independent, investors have their doubts. "The Clinton sale was as expected, although the price tag may have been a bit less than people expected," said one utility investor on the buy side. "A partner for the rest of the business may be next."

Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, neither Edmonds nor his firm held any position in the stocks mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback at

invest@cjnetworks.com.