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?