Energy Markets
<p><a href="http://www.newdeal20.org/2010/07/19/the-stealthy-deregulation-of-energy-15306/">http://www.newdeal20.org/2010/07/19/the-stealthy-deregulation-of-energy-15306/</a></p>
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<strong>Electricity Deregulation</strong>
The power industry originated as a collection of local enterprises. Power was generated, transported and sold within state-franchised regions. This made sense because power plants could be built near the customers to minimize transmission. In contrast, fuels were extracted at places where they could be found and transported over long distances. Consumer prices (except for prices charged by non-profit state entities and rural co-ops) were regulated by state utilities commissions. Private utilities were allowed to price power sufficiently high to recover fuel costs, operating expenses and a fair return on invested capital, all subject to review and approval by the commissions.</p>
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As demand grew, utilities established interconnections between the franchised territories to serve customers more flexibly. The interconnected transmission evolved into the grid, owned separately by the utilities but operated under agreements governing cooperation. The FERC was given regulatory authority over the system to assure reliability.</p>
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The <a href="http://thomas.loc.gov/cgi-bin/query/z?c102:H.R.776.ENR:" target="_blank">Energy Policy Act of 1992</a> mandated that the grid be opened up to allow access to all qualified marketers of power. The utilities resisted the mandate by imposing restrictions that stifled access. The FERC issued a series of Open Access Orders in 1996 which brought an end to resistance.
A more subtle form of deregulation which arose from open access was “disaggregation.” Utilities could sell generating assets to unrelated parties or unregulated subsidiaries of utility holding companies. The new owners now had access to the grid. Returns on the invested capital would no longer be regulated by the state. Investment banks relentlessly marketed the idea to utilities and made enormous fees restructuring and recapitalizing the utilities and the independent generation companies, now known as “independent power producers” or “IPP’s.” On a worldwide basis, the most successful and aggressive IPP was a rather boring gas pipeline company which jumped into the business under a suitably modern name - Enron.</p>