Arbitraging Regulatory Uncertainty

I am pleasantly surprised to see James, Rogers, CEO of Cinergy, being frank in stating explicitly what we know: the regulatory uncertainty currently plaguing the electricity industry provides participants with arbitrage opportunities that they would not otherwise have. This uncertainty creates the opportunity for vertically integrated utilities to move assets around to where they will get the best return, shifting ownership between their unregulated and regulated subsidiaries.

The apparent freedom of diversified utilities to move underperforming merchant-power plants into their regulated utility assets, where all costs are assured recovery, is seen by many as a big advantage over pure merchant-power companies. Such companies as Calpine Corp. must suffer through low prices until markets recover.

“Some people are calling it a hybrid, or a fault line. I call it a dual universe for generation, and it’s a hugely uneven playing field,” said Standard & Poor’s utilities analyst, Peter Rigby, in an interview at the CERA Week conference in Houston.

I think Cinergy and other companies like them are doing their fiduciary duty to their shareholders by profiting from this regulatory minefield, and Rogers agrees:

Cinergy, Rogers said, is simply “playing the hand it was dealt” by state legislators and regulators.

“I’ve advocated competition my entire career, but if I’m in a state that hasn’t deregulated or changed its mind about deregulation and wants me to build new plants, I’m going to build new plants. That’s where we found ourselves. We don’t have control over the market rules,” Rogers said.

So the question to ask regulators is this: do you really think it’s in the public interest to create these perverse incentives for utilities? Wouldn’t it be more in the public interest to have regulatory transparency that would lead to dynamic efficiency through the optimization of investment incentives according to what consumers want, as opposed to what regulatory commissions tell firms they have to do based on what they think consumers want?


2 thoughts on “Arbitraging Regulatory Uncertainty

  1. I like this quote:

    What’s more, said Rogers, if states make such a determination, the pro-competition Federal Energy Regulatory Commission shouldn’t try to stop it.

    “If the state’s decision is to put plants into the rate base, I believe the courts will say that the state commission’s responsibility to consumers trumps whatever objective the FERC has for deregulated markets,” he said.

    The only problem arises when the state commission’s responsibility to consumers trumps the consumers’ interests. With integrated firms juggling generation assets back and forth between its regulated utilities and its unregulated merchant, I see many opportunities to serve stockholders and little real value created for consumers.

  2. Lynne, you really need to do better in terms of phrasing your argument than “…regulatory transparency that would lead to dynamic efficiency through the optimization of investment incentives…”

    I’ve noticed economists have a tendency to take the jargon they use with each other, present it in public, and then assume their uncomprehending audience is stupid or ignorant because they tune out within a couple of minutes. Part of their audience may be. But there are still a lot of people who can understand basic English. Some economists just don’t speak that language, but you don’t have that excuse.

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