Time for New Direction on Energy Rules

The energy industry appears scared. And it should be. Thanks to the collapse of the industry's poster child, Enron Corp., deregulation has gotten a black eye. Government officials in New York, California and elsewhere are beginning to rethink whether taking regulators out of the energy business was such a good idea.

That has energy firms working with a former chairman of the Federal Energy Regulatory Commission to create "a coalition of deregulation proponents that will lobby Congress, testify at forthcoming hearings, file comments on proposed rules and, if necessary, take legal action to block efforts to re-regulate the industry," according to a recent story in the Los Angeles Times.

Before the Enron collapse and the rolling blackouts that have plagued California in recent years, the conventional wisdom went like this: The limited monopolies that controlled the energy business, with oversight from state governments, were inefficient, resulted in higher prices and stymied innovation. Removing government regulators from the mix and allowing competition to replace monopoly would result in lower energy prices and better service.

So the federal government encouraged states to deregulate, to open up their energy markets to competition, which most have done.

What's happened, however, is that prices have not come down. In many cases, energy costs increased more than they did under the old system and, out West, rolling blackouts have become the summer norm.

Citizen Action, a national coalition of labor union, consumer and religious groups, tells the story of deregulation's failure in a December 2001 report, "Blind Faith: How Deregulation and Enron's Influence Over Government Looted Billions from Americans":

"The combination of unregulated state wholesale electricity markets and federal deregulation of commodity exchanges has removed accountability and transparency from the energy sector, allowing corporations to manipulate price and supply of electricity and natural gas through the exercise of significant market power. California's recent energy crisis and Enron's bankruptcy would have been impossible under a regulated system."

The report says "deregulation of both energy markets and commodity trading allowed Enron to escape price regulations" and turn "electricity into a speculative commodity." Basically, according to the report, deregulation as it transpired encouraged companies to abandon the generation of power.

"Enron's business model was built entirely on the premise that it could make more money speculating on electricity contracts than it could by actually producing electricity at a power plant," the report says. "Central to Enron's strategy of turning was removing government oversight of its trading practices and exploiting market deficiencies to allow it to manipulate prices and supply. So when federal regulators finally reregulated the California market in June 2001, Enron's business model was soon invalid and the company bankrupt."

This has some --including some of deregulation's biggest supporters --questioning whether we've gone too far.

"We need to figure out how to prevent future energy collapses like Enron," Rep. Henry Waxman, D-Calif., said in the LA Times. "The answer will require more regulation and oversight and oversight of energy marketers --not more deregulation."

Rep. Waxman, according to the Times, said the Enron collapse disproves the notion, advanced by deregulation proponents, that large energy companies will always bet right in the energy market.

David Moulton, a spokesman for Rep. Edward J. Markey, D-Mass., a member of the House Energy and Commerce Committee, also quoted in the Times, agreed.

"We're opposed to taking the government out of the business of overseeing the electricity markets," he told the Times. "You can't just take the government out of the business and expect to get a good result."

While California looms as a worst-case-scenario, New Jersey energy consumers have a right to be concerned, as well. The state has moved forward with its Energy Choice plan and modest rate cuts, but we are about to enter some difficult times.

The legislation, approved in 1997, did several things: It mandated cuts in electric rates, offered consumers a shopping credit if they chose to seek a cheaper energy supplier, created a universal service fund to guarantee electric and gas service at affordable prices, and opened the way for towns and other groups to band together to buy energy.

However, the legislation included language prohibiting utilities from sharing the names and addresses of their customers with government agencies. This has complicated the creation of municipally run energy-buying pools because it makes it difficult to reach all residential consumers, which the act requires. And without the energy pools --known as municipal aggregation --most New Jersey residents will be very small fish in the very large energy marketplace.

Without this ability, New Jersey consumers have what the American Local Power Project calls "weak aggregation."

What's worse, Enron was the largest of the three energy companies to enter the fledgling market (so far, only 2% of New Jersey consumers have left their traditional energy suppliers) and its collapse makes what had been a barely competitive market even less so.

NJ Citizen Action has warned that New Jersey consumers could face rate hikes beginning in 2004, after the state-imposed rate reduction expires and the transition phase of the state's restructuring plan will come to an end. That's when the full effect of deregulation --and the flaws in the current aggregation rules --will become apparent.

We shouldn't wait. We need to view the Enron collapse for what it is: A warning signal that we should end the ruse that we can provide lifeline services through the free market.

Reregulating the electric and gas markets may not be politically possible, but we need to strengthen government oversight over those industries and make sure that consumers have as many tools as possible so they can fight for lower rates and cleaner and better service in the deregulated market.

Hank Kalet is a poet and managing editor of the Cranbury Press and the South Brunswick Post. He can be reached via e-mail at

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