Deregulation Hits Montana

And not in a good way (LA Times–registration required).

When the old Montana Power Co. came to lawmakers in 1997 with a plan to offer customers a multitude of choices for cheap power, deregulation was seen as inevitable. But power today isn’t cheaper — it’s far more expensive — and the other promises made that year now ring hollow.

Montana Power sold off its dams and power plants, and then its utility business, to pursue an ill-timed pipe dream to become a fiber-optic company. It quickly filed for bankruptcy.

The company that bought the utility piece of Montana Power, NorthWestern Energy, filed for bankruptcy protection itself and reorganized.

Along the way, Montana went from having some of the lowest electricity prices in the country to having among the highest in the region.

Often times deregulation is promoted as some sort of utopian vision. “We’ll deregulate and prices will come down forever and ever!” The problem is that markets change over time and what was true at a given time can be untrue latter on. Right now natural gas is very expensive and one reason for this is that most of the power plants built in the past several decades have been combined cycle gas fired plants. The increase in demand pushed up prices.

Another problem is that a vertically integrated and regulated monopoly has not incentive to game things in terms of transmission to drive up prices. With deregulation this incentive is removed. On top of this, a vertical integrated and regulated monopoly has strong incentives to build a transmission system that does not have much redundancy built into it. If one transmission line at 250 KV is more than sufficient that is what will be built. Later that same path might not be sufficient for a deregulated market, but going in and building a second path is pretty difficult to do and will take years to finish even if it is approved.

When discussions of deregulation come up, people should realize that things could turn out good for awhile, but that things can also turn out bad. For example, the housing market has been red hot for the past several years. This increase in prices has also increased people’s housing expenses. A deregulated electricity market will behave like all other markets. Sometimes the price will be high, orther times low. In Montana’s case, part of the problem appears to be self inflicted. The company that runs the current power plants and system is prohibited from building power plants and it appears to not any power plants. Hence it may very well be at the mercy of whatever the going rates are for electricity on the market.

FILED UNDER: Economics and Business,
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. DC Loser says:

    That can’t be! Regulation is bad, free enterprise is good! Okay, enough tongue in cheek. I remember a few years back in California when they were saying how great electric utility deregulation was going to be, and how competition will bring the prices way down. We all know what happened, with Enron cheating the customers, etc. This just goes to show not everything the government does in regulating commerce is bad.

  2. Ron says:

    Lemme check again who wrote this post… Yep, it sure says Steve did it. What is this, brainwashing? Invasion of the body snatchers? Will the real Steve Verdon please stand up.

    Anyway, it seems you’re relying on the redundancy argument. Wasn’t that argument used opposing the breakup of the Bell System? Long distance calls are now dirt cheap, but local calls (still having local monopolies) are not.

    If your transmission line is economically feasible to build, won’t it be built?

  3. DC Loser says:

    If economic feasibility is the sole basis for building transmission lines, then they will all be built to serve the major metropolitan cities where all the people are. Nobody is going to invest anything to serve the 4 people in bumfuck Montana. I think that’s why there used to be things called Rural Electrical Co-ops.

  4. DC Loser says:

    If your transmission line is economically feasible to build, wonâ??t it be built?

    They will only be economically feasible for major metropolitan areas. The four people in bumfuck Montana is SOL. Maybe that’s why they used to have things called Rural Electrical Co-ops.

  5. legion says:

    So what’s the solution? Re-regulation? I’m not saying you’re wrong, Steve, but you’re going to have a hard time selling that kind of fix in an era where Big Gov’t is already too big for most peoples’ tastes (and shows too much incompetence at what it’s already doing).

    The simple fact is that whererever there is a system, there will be players who game that system, taking advantage of any loophole for their own benefit. No system can avoid this, it can only be built to make the abuses more apparent and easier to fix when detected. Unfortunately, I’m not enough of an economist to apply that philosophy to our current situation…

  6. Steve Verdon says:

    No Ron it is really me.

    As for the transmission system, part of the problem are things like NIMBYism, BANANAism, and so forth. Not sure if you’d count those as part of the economics or not, but they sure can kill a deal.

  7. Kent says:

    Can there be true deregulation in a market that remains so susceptible to NIMBYism, BANANAism, and the like? My experience is that a partially deregulated market can easily be worse than either a heavily regulated or a truly deregulated market. California is a case in point, if I correctly remember some very old posts by Steve in other forums.

  8. Ron says:

    BANANAism? I’ve never heard of BANANA. But this kind of talk has me hankering for a snack…

  9. Bill says:

    BANANA: Build Absolutely Nothing Anywhere Near Anything, or sometimes Anyone

  10. anjin-san says:

    We sure got screwed in California when we went down this road. Seemed like a good idea at the time. Sadly, in an unregulated environment, the sharks eat the minnows.

  11. Steve Verdon says:

    Actually Anjin-san, the problem was “deregulation” per se, but how it was done. There were a number of very dumb moves.