Utility Business Models - Part #10

Deregulation and IOUs (deregulation - reregulation started in the late 1990s)

In most states the IOUs were the 800-pound gorilla, and the customers were ambivalent about their future. With the Coops, Munis, and other power providers out of the prevue of the state regulators, IOUs took the brunt of the changes in the process of reregulating the industry with the creation of the ISOs [if you are having trouble with acronyms, they are explained in prior pieces of this series].

The first issue was market power, the IOUs owned most of the generation, so states chose to force the IOUs to sell some or all their generation to third parties. In some cases, it was a subsidiary of another utility, some were bought by multinational corporations, some by firms that were going to participate in retailing power. In a second round of sales in the 2005-2010 period hedge funds and asset trusts purchased from the first buyer. This ended the cost-of-service models and forced fuel riders or energy cost rides into the rates for most customers. IOUs across the US sold almost 60% of the total generation to others (including subsidiaries of their parent company). For residential customers within 3-5 years depending on the state energy costs jumped by 5-15% and there was nothing the state regulator could do, it was market pricing (and then came ENRON).

From a customer perspective some states limited the percentage of customers who could shop for power and others told utilities that everyone could shop with a retailer and they were the provider of last resort and they were required to provide power to any customer who could not afford it (raising rates for people who paid their bill on time to cover the non-payments). In still others the IOUs remained the billing and collection agency, and they had to fully pay the retailer for all the invoices they were sent, and deal with the collections of non-payers. In some states, the retailer of record was allowed to change each month, adding to record keeping and payments.

With the generation gone, and the customers gone, that left transmission and distribution under the IOU’s care. Some states went further and allowed transmission to be sold and merchant (third party) transmission.
To keep the rates down, capital investment was deferred in most states starting in 1992 and the investment rates dropped from 1.4% on average from 1960 to 1980 [FERC} to under 1 percent in 1995, meaning our 40-year distribution, was replaced on average every 140 years.

IOUs changed leadership to find people who could figure out how to maintain the stock prices and dividends, rather than people focused on better reliability, because so much was out of their control (and the state commissions).