Power's Surge

Like most consumers, Mike Hawkins took electricity for granted. He paid predictable, state-regulated rates, and in return the local utility kept the juice flowing. But when Hawkins got his bill in June from San Diego Gas & Electric (SDG&E;), he was in a state of shock--$135, nearly twice the previous amount.

The culprit was deregulation, which, students of the telephone and airline industries will tell you, doesn't always go according to plan. When states started breaking up one of the last subsidized monopolies a few years back, they hoped to usher in a wave of competition that would lower prices, improve service and increase the system's reliability. Newly liberated customers would be able to choose from a host of suppliers, some of whom generated the power while others just delivered it.

But so far, the radical shake-up of the $220 billion electricity industry has been short-circuiting. "This is a dysfunctional market masquerading as a competitive market," charges Michael Shames, executive director of the San Diego-based Utility Consumers' Action Network. Prices for electricity have been spiking up in some regions; capacity is lagging demand, threatening customers across the nation with brownouts and blackouts this summer. "The cookie jar is open, and everyone wants to get what they can," Hawkins says. "They've got it, we need it, and we're going to pay through the nose to get it."

That became clear last week on the other coast, when officials from New York City's utility Con Ed disclosed that bills in the Big Apple will probably be 30% higher than last year's, thanks to rising fuel costs and an increasingly tight energy supply in the region. Coming a week after a brief blackout knocked out 140 customers on Manhattan's tony Upper East Side--and a year after a major one crippled an entire Washington Heights neighborhood for 19 hours--the admission further sullied Con Ed's bad reputation. John Dyson, chairman of Mayor Rudy Giuliani's council of economic advisers, expressed the official outrage: "It's hard to believe a rate increase is justified [in light of] the energy outages."

In other deregulated parts of the nation, where retail electricity rates are frozen for a few more years, price isn't the problem yet. Instead, providers are having a tough time just supplying enough juice, as air-conditioners and other appliances consume electricity at an alarming pace. Silicon Valley, home to the energy-hungry new economy, has already experienced rolling blackouts. The situation across California has got so precarious that state officials are offering cash payments to big corporate users that conserve energy during a crunch; database power Oracle has spent millions to build its own generators. New England and the Southwest are also potential trouble spots.

How can power companies be short of power? Under deregulation, vertically integrated utilities like SDG&E; and Con Ed (as in Edison, as in Thomas Edison, the man who electrified Manhattan) were allowed to sell their power-generation businesses and become middlemen that buy electricity on the open market from new generator operators and distribute it to their customers. "We work hard to find the best deal for our customers," says Steve Bram, Con Ed's senior vice president of central operations. "But we're at the mercy of the sellers." Those sellers, on the other hand, are at the mercy of--wow!--no one, and with capacity shortages driving up unregulated wholesale prices as much as 50 to 100 times the normal rate, they're doing quite well. "Owners of power plants can extract monopoly rents," notes Edward Smeloff, executive director of the Pace University Law School Energy Project.

The flurry of construction that was supposed to relieve the electric bottleneck has yet to arrive. Old-line utilities--which used to count on a guaranteed 5% to 7% profit--have been reluctant to invest in billion-dollar plants without understanding the vagaries of the free market, and upstart energy providers are still trying to figure out which markets are worth the hefty investments required. At the same time, the industry is plagued by an antiquated, balkanized transmission grid that wasn't built to wheel power from one region to another. "America is a superpower, but it's got the grid of a Third World nation," Energy Secretary Bill Richardson has warned. "If we don't work together and fix the problem, we'll all end up sitting in the dark."

As computers and high-tech equipment suck up more power--they now account for close to 10% of all consumption--electricity providers can barely keep up. Summer electricity demand in the U.S. has jumped 23% since 1992, while capacity has risen only 6%, so the industry's emergency-reserve capacity has slipped. With communities fighting new construction, very few major power plants have been built in the past 20 years. Yet by one Energy Department estimate, the country needs 1,000 new plants in the next two decades. As Steve Fleishman, an analyst at Merrill Lynch, notes, "The country underinvested in the energy sector in the last decade, and it's coming back to haunt us."