Saturday, March 01, 2008

Buying Power

Opponents of the Bluewater Wind project assert that the purchase of power is best left to the free market. But the purchase of generating capacity does not resemble a classical free market, which generally features large numbers of buyers and sellers haggling over terms. The wholesale electricity market is distinguished by a small number of buyers and sellers.
Delmarva Power is a natural monopoly; it wouldn't make economic sense for a rival to come in and build a parallel power grid in Delaware. Until a few years ago, Delmarva was structured and regulated as a vertically integrated utility; it generated the power, transmitted it over the grid, and delivered it to our homes and businesses. In the 1990s, Delmarva Power was deregulated, and power generation and delivery became separate businesses. The idea was that deregulation would introduce competition, leading to greater efficiency and lower prices. Electric power would become like long distance phone service; competition would work to our advantage as companies competed for our purchasing power.
Economics may be a dismal science, but evidence still matters, and the evidence has not confirmed the theory behind deregulation. Electric power generation is not a consumer driven business. The local market for electricity features one dominant buyer, several smaller buyers (large industrial users, one co-op and several municipalities) and the rest of us. Delmarva Power serves some hundreds of thousands of households, a small fraction of which have opted for alternate energy generation. The company's buying power is five orders of magnitude greater than mine. Delmarva Power can influence the market for power generation by using its buying power; I can't.
As a rational economic actor, Delmarva Power seeks to maximize its gains and minimize its losses on behalf of its shareholders. Delmarva Power doesn't work for me, and I shouldn't expect that the company is looking out for my interests. This is not a moral condemnation of the company, which is expected to make money for its investors.
While markets are mostly rational ways for buyers and sellers to meet their objectives, I'm not represented in the power generation marketplace in any meaningful way. Instead, I rely on the power of government to protect my interests in dealing with large natural monopolies like Delmarva Power.
Two years ago, the Delaware General Assembly passed House Bill 6 in response to the sharp 59 percent rate hike brought on by deregulation. HB 6 established a process for choosing a new, in-state electric generating facility. Bluewater Wind was picked in a competitive process. Six months of negotiations resulted in the Power Purchase Agreement now on the table.
Delmarva Power says it can get a better deal buying power in the marketplace. This may be true for the moment at least, but its most recent wholesale purchase is 15 percent higher than last year's. In the face of rising fuel prices, it is in my economic interest to secure the long term price stablity offered by Bluewater Wind. But for whatever reason, Delmarva Power has decided that it is not in its interest to lock into a long term PPA.
Now, I don't mind Delmarva Power working to maximize its profits; what I mind is the company claiming it's doing so on my behalf. I'd be more inclined to trust Delmarva Power if its executives admitted the company is in it for the money.

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