By John W. Schoen Senior producer
updated 10/20/2006 3:52:56 PM ET 2006-10-20T19:52:56

A report that the nation faces more frequent power outages comes just as a decades-long debate over industry deregulation heats up — and shows no signs of resolution.

With roughly half the states stuck midway in a long-term experiment in rate deregulation, consumers in many of those states now face big rate increases next year as rate caps expire. And with billions of dollars of additional investment needed to keep the power grid humming, it’s not at all clear where that money is going to come from.

Until new power plants and transmission lines can be deployed, the reliability of the nation’s power grid will likely get worse before it gets better, according to the North American Electric Reliability Council, which oversees North America's power grid. In a report issued Monday, the group said that a looming power supply crunch will likely worsen over the next decade as power demand outstrips new capacity.

The impact will be felt unevenly but will be widespread, the report said. In the next two to three years, surplus capacity needed to keep the lights on in Texas, New England, the mid-Atlantic, the Midwest and the Rocky Mountain regions will drop to levels that make brownouts and blackouts more likely.

And with power demand seen rising 19 percent by 2015, and generation capacity expected to rise just 6 percent, "the adequacy of North America's electricity system will decline unless changes are made soon," the council's president, Rick Sergel said in the report.

In addition to building more power plants, companies need to upgrade transmission systems, improve energy efficiency programs for businesses and consumers and prepare to replace an aging work force, the council said.

It wasn’t supposed to work this way. Under the old, state-regulated business model, electric utilities controlled both the plants that generated power and the lines used to move it to customers. When more capacity was needed, state regulators oversaw those utilities' expansion plans and decided how much of the cost could be passed along to power customers.

Buoyed by the '80s-era deregulation success stories of the natural gas, telecom, airline and trucking industries, the electric power industry, with the help of Congress, embarked on a similar path. The hope was that by breaking up the ownership of power generation and transmission, competition would spur new, investor-funded capacity, drive the development and deployment of new technology and — over the long run — drive down prices for consumers.

But it hasn't worked out that way. After decades of change that included the near-collapse of California's power industry and the power trading scandal at Enron, the industry is stuck halfway between a market-driven future and a state-regulated past.

“We have one foot planted firmly in traditional regulation, one foot planted in competition,” said Ken Malloy, founder of the Center for the Advancement of Energy Markets. “And (we have) very little enthusiasm for going further from regulation to the competition side and very little from the competitive side to back to regulation.”

Much of the savings to date has come from state-mandated caps and rate freezes that will soon expire — leaving power customers facing potential big increases in their monthly bills. If those caps are extended, utilities say they face big losses because competition hasn’t yet driven down the market price of the power they need to buy on behalf of their customers.

Case in point: Last week top executives of the two big Illinois utilities told a committee of the state legislature that their companies will go bankrupt if lawmakers extend a cap on electric rates.

With elections just weeks away, Exelon’s Commonwealth Edison and Ameren Illinois are fighting a move by Illinois lawmakers to block a rate increase set to kick in when a 10-year-old law deregulating rates expires at year's end. ComEd Chairman Frank Clark said the state’s rate freeze would make life worse — not better — for consumers.

"They'll pay more all around and have less-reliable service," Clark said.

The move toward market pricing — which was supposed to lower rates over the long term —would mean rate increases over the short term, according to the companies. Starting in January, Illinois consumers face an average increase of between 22 and 55 percent compared with what they’ve been paying for the past decade. But ComEd has said it expects lose $1.4 billion if those increases are blocked. The company also faces cuts in its debt ratings if the freeze is extended.

And Clark said “partial deregulation” was a big part of the current problem. Not enough new power generation players have entered the state to drive down prices — and rate caps are one of the reasons why.

"Competition has not developed, and the reason it has not developed is that rates are so artificially low no competitors can come in here and beat them," he said.

But Illinois Lt. Gov. Pat Quinn, who said the utility’s executives got pay packages of $2.7 million to $7 million last year, blamed the rate increases on "inflated egos with inflated salaries."

The same scenario is playing out in many of the two dozen other states that have moved toward deregulation. Even where deregulation is beginning to take hold, looming rate increases are creating a backlash.

“Even the states that have moved (to deregulate) are being pummeled with lots of concerns about where this is all going,” said Malloy.

All of which has discouraged the kind of heavy, long-term investment needed to add more power generation and upgrade the reliability of the national grid. Power generators now face rising natural gas costs; ironically, one reason for the jump in gas prices is the surge in popularity of the fuel after 1980s-era natural gas deregulation spurred a construction boom of gas-fired power plants. Now, as the industry relies more heavily on natural gas, supplies of that fuel are stained and prices are rising.

That has power companies looking for alternative sources, but the options aren’t cheap. Wind and solar are gaining on fossil fuels, but the amount of power generated by these sources is tiny. They are also only available in limited parts of the country — and then only when the sun is shining or the wind is blowing.

Coal-fired plants are still in widespread used, but eliminating carbon emissions adds to the cost of new plants. And nuclear power, though increasingly attractive to the U.S. utility industry, still faces significant hurdles. Even under the most optimistic timetables, new nuclear capacity won’t be available 2015 at the earliest.

“There’s a finite amount of fossil fuel, and the environmental regulations are getting more and more restrictive,” said Dan Keuter, head of nuclear business development for Entergy, one of the largest operators of nuclear power generators. “But there’s huge demand for energy.”

Associated Press contributed to this report.


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