One Difference Between Regulated and Unregulated Utility Companies

Michael Giberson

One difference between regulated and unregulated utility companies is, apparently, that unregulated power suppliers use more sophisticated fuel purchasing strategies than their regulated counterparts. At least that is the message I get from this Platt’s Coal Trader article, “Deregulated utilities may use stocks as bargaining chips“, reporting on a statement made by Arch Coal CEO Steve Leer:

Leer drew a distinction in the way regulated and deregulated utilities may be approaching their coal inventories. He said that the deregulated power generators may be seeking to take advantage of their presently high inventories to force coal producers to lower prices. But he added that he would not expect regulated utilities to be taking such risks; instead, he expects them to follow closely their inventory targets.

“In regulated utilities, when you set the inventory target at 60 days, that becomes the target and you wouldn’t use the inventory numbers to play the market, but the deregulated utility would,” he said, calling the distinction a “subtlety unique to regulated utilities.” Leer spoke at the JP Morgan’s Basics and Industrials conference in New York on June 12.


4 thoughts on “One Difference Between Regulated and Unregulated Utility Companies

  1. Regulated generators pass their “reasonable and prudent” fuel costs through to “ratepayers”. Therefore, if they take risks to reduce their fuel costs, the savings pass through directly to their customers. However, if their fuel costs increase as a result, or they must buy power in the market at higher costs because their fuel stocks are low, they will be “dinged” by their regulators, perhaps through disallowance of the higher costs. In that environment, risk-taking has only a downside and is generally avoided.

    Unregulated generators can increase their margins by taking reasonable risks; and, therefore they will do so. That should come as no surprise to anyone familiar with the industry.

  2. Well Ed, you know it and I know it, and anyone familiar with the industry knows it. But even if it is not surprising, I think it is useful to point out the obvious every so often.

    Particularly when third-party people are responsible for deciding after the fact whether risks taken were reasonable and prudent or not, and make those decisions in ways that cause the generators to take the expensive safe route over the cheaper-but-risky route, well … even if the basic point is obvious, there are issues worth exploring.

  3. Mike,

    No argument. I see references to utilities’ “guaranteed returns” often enough to understand that many of us “know” things that are wrong.

    To paraphrase Robert Townsend (Up The Organization): “What you measure is what you get.” There are few industries where this is more true than in regulated industries.

    One interesting example is the clash between regulators’ and legislators’ calls for aggressive RPS and their insistence on improved reliability. I am not convinced regulators and legislators realize the inherent conflict, which is scary.

  4. Mike,

    No argument. I see references to utilities’ “guaranteed returns” often enough to understand that many of us “know” things that are wrong.

    To paraphrase Robert Townsend (Up The Organization): “What you measure is what you get.” There are few industries where this is more true than in regulated industries.

    One interesting example is the clash between regulators’ and legislators’ calls for aggressive RPS and their insistence on improved reliability. I am not convinced regulators and legislators realize the inherent conflict, which is scary.

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