Choices? What Choices? Reviewing The Energy Deregulation "Mess"

"We charge you for the forest, not the tree".
(Wordcount: 1,671; Pages: 4) Besides paying taxes, few things make me more irate than having to pay the electric bill. During these last few winter months, heating my home and cooking my food has become such a spiraling expense, I'm ready to put on a badge and go bust some trusts. Not surprisingly, it's because of other irate voters like me that the industry had already been busted up by politicians in the 1990s.

But our collective enthusiasm to compel the industry to send us lower electric bills came with an unexpected side effect, as all government controls do - the industry ended up only able to make money by treating us even more poorly than it did before! This revelation and many other fascinating aspects of the industry's move towards true customer choice were the answers I got from one of the country's foremost authorities on the industry, Ray Niles of RCNiles Capital, an energy fund. The following is my question to Mr. Niles, and proceeding that, his (slightly edited) thorough explanation. (I must confess to actually feeling less frustrated after reading what's going on):

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Hi Ray,

I hope this email finds you well. I've lately become consumed with what I pay PSE&G, so I requested alternative electric energy supplier options (they pretty much have a monopoly on distribution). Of the list of 19, just 2 offer residential service to my zip code, and one of those is just to make my electricity green, no savings. (The other is DTE out in Michigan.)

My question to you is: does the residential customer really have any choices? It seems all of the options are for businesses.

To their credit, PSEG does offer many comprehensive programs, tips, and arrangements to "help pay", lower, and generally help make paying them less of a burden, however, I can't [help] feeling like I'm just not getting the choices I'm supposed to get in a dereg'd marketplace.

Any thoughts you can share with me on this will help alleviate my frustrations... thanks!

Al Berrios

Hi Al,

Your question is applicable for anyone who has a "choice" in any of the states that "deregulated" their electric utilities in the 1990s. These include California, Connecticut, Illinois, Massachusetts, Michigan, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island and Texas. The details of the deregulation plans vary by state, but all of them, to varying degrees, offer or did offer customers a choice of electricity supplier. Most of these states also mandated that utilities in their state had to divest all or a portion of their power plants. My answer is applicable to all of these states and, in important respects, to the entire country. PSEG is Public Service Enterprise Group, which provides electricity to parts of New Jersey.

Residential customers don't really get much of a choice much of the time. I suspect that any deal you are offered probably doesn't present much savings over PSEG.

As for why, it is quite complicated to answer. The simplest answer is that the electric industry was never really deregulated, so deregulation can't be blamed for what you are observing with regard to residential customer choice.

Consider that "deregulation" in the case of utilities involved something good (allowing entities other than utilities to build more power plants) and quite a lot that was not good and "re-regulatory" in nature. The good thing, allowing others to build power plants, should lower prices over time because newer and more efficient plants will get built.

However, that is true only if non-utilities are truly free to build plants. Being truly free would mean that they can: (a) charge whatever they want for power produced from those plants, (b) locate them wherever they can buy land, and (c) build the plants using whatever they think is the best technology. None of those things are true today. I'll address each of them:

a) Price Maximums = Expensive Power. Price maximums are set by federal and regional regulators in the wholesale power market. Capped prices mean capped profits and a reduced desire for companies to build power plants. If fewer new power plants get built, prices will remain high because electricity continues to be made with old, inefficient plants.

b) You Can't Build It Here. Local zoning rules, land use restrictions, environmental rules, and the "NIMBY" reaction of local politicians to a power plant in their local area makes it extremely difficult to locate new plants, especially where they are often needed, near urban areas where the customers are. "NIMBY" stands for "Not In My Back Yard."

c) Using the Best Technology Is Forbidden. The cheapest technology for a new "base-load" power plant, i.e., one that is designed to run 24/7, 365 days a year, is nuclear. However, nuclear energy in America has been made prohibitively expensive through unnecessary safety rules imposed after Three Mile Island (1). No one has died from exposure to nuclear radiation in an accident anywhere in the modern, Western industrialized world (which the Communist government responsible for Chernobyl [2] was not; no Western engineer would have built a nuclear power plant without a containment vessel, which the Soviets did). Nevertheless, in America arbitrary regulations have made nuclear energy almost prohibitively expensive.

So, with rules & regulations embodied in points 1-3, the electric industry remains very highly regulated in a manner that results in high electricity prices.

The other part of the answer is the re-regulation that was part of "deregulation". Sound confusing? What makes it confusing is that when the "deregulators" thought they were deregulating, they were actually re-regulating the industry by imposing an artificial industrial structure on the utilities.

The "deregulators" developed the belief that they knew better than the utilities what business structure they should have. So, they broke apart the utilities, much in the same way AT&T was broken up by deregulators in 1984 (that action was also a mixed bag of "re-regulation" and partial deregulation, but that is another discussion).

They forced the utilities to sell their power plants, and then they forced the utilities to allow others to use their distribution wires to deliver electricity to customers. That is why someone other than PSEG can "sell" you power even though they do not own the wire that delivers it to your house. Instead, PSEG owns the wire and you pay PSEG to have that other company's power delivered over PSEG's wire to your house. It is similar to how competing long distance companies would use Verizon's local phone lines to provide you with long distance service.

The result of the artificial manipulation of the utilities' corporate structures and business practices is that they operate in a manner less friendly to customers. Until the pseudo-deregulation in the 1990s, utilities were vertically integrated. They owned their power plants. That enabled them to offer power at predictable prices. However, by artificially separating utilities from their power plants, they were forced to buy power solely in the wholesale power markets. In itself, that might have worked out okay, but regulators also forced the utilities to buy power under relatively short-term contracts. As a result, short-term price fluctuations get transmitted to customers.

To summarize the point about re-regulation, the artificially broken-up structure of utilities makes them less economically efficient, with the result that power prices are both higher and more volatile to customers.

Sound complicated? It is. Is it deregulation? No. Is it a mess? Indeed, it is.

Fixing the Mess

I will give a hint of what a proper government policy toward utilities should be: hands-off or laissez faire. In particular, utilities should get no legal monopoly protection. Anyone should be free to start up a business selling electricity to customers. If this were permitted, we would likely see a lot of technological and business structural innovation, such that utilities would look a lot different than they do today.

For example, developers may build "mini-utilities" with small power plants to provide power to residential sub-divisions. Large commercial buildings may find it is economical to self-generate using gas-fired generators in their basement. It is even conceivable that individual homes may be powered by micro-generators the size of air conditioners (3).

Large utilities are likely to still exist, but they may actually compete with each other, with the customer benefiting from lower rates. Or, large utilities may function largely as back-up sources of power to whom electricity customers would pay a fee for that service.

All of this innovation could happen if utilities were truly deregulated and politicians stayed away from the business of providing electricity. None of it will happen under the current structure, which mixes a few, tentative measures of market freedom with a whole lot of contradictory government control.

Utilities today are arguably the most regulated private industry in the country, with a welter of overlapping local, state (4) and federal (5) authorities all having a hand in how they are run. With that many cooks in the kitchen, is it any wonder that the pies they make taste so awful and cost so much?

Bottom line for you personally: without knowing the details of the offers from other electricity suppliers, I suspect you are better off, in terms of hassle and probably even money, by staying with PSEG!

Bottom line for the country: we all pay too much for power and will continue to do so until true deregulation occurs. But, before that can happen, people need to draw true conclusions about the ersatz-deregulation that has been attempted already.

Sincerely Yours,


P.S. - There are other aspects to this complicated problem. One of them (to be discussed) is the price and profit controls on electric transmission lines that prevent enough new transmission lines from being built. The result is that the electric grid is ossified and subject to blackouts, and power is too expensive.

Note: © 2007 Raymond C. Niles. Content published with permission from author. For more information, please contact Mr. Niles at

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(1) Three Mile Island from

(2) Chernobyl from

(3) Example of micro-generator:

(4) National Association of Regulatory Utility Commissioners,

(5) Federal Energy Regulatory Commission,

Al Berrios is Managing Director of al berrios & co., a pure strategy consulting firm, specializing in advising organizations + entrepreneurs on managing their enterprises in a service economy. Write or Subscribe to Consumer Strategies Report.


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