Has the deregulation of the energy industry gone into reverse?

Energy deregulation was a central theme of the 1990s, a trend that swept the developed world as ways to liberate markets were sought out in the wake of seemingly-successful deregulation efforts elsewhere in the economy in the preceding decade. No longer would customers pay out regulated, regular rates to monopoly corporations with lengthy planning timelines and no incentive to cut costs or employees. Creative destruction was the name of the game, and politicians and power regulators got roughly half-way through rewriting the rules of power markets before the implosion of Enron put the brakes on efforts at further deregulation, which have been halting and piecemeal.

The era of regulation appears to be back, but having broken open the model of hub-and-spoke regulated power systems twenty years ago, the genie has proved impossible to put back in its bottle. Companies restructured to grow in scale or broke up to focus on specialty areas of operation their strategists saw as higher-return; power companies now sprawl across multiple operating regions and multiple market structures and without a program of nationalizing energy assets regulators faced with the dual priorities of ensuring reliability and encouraging investment have adopted a scattershot approach to re-regulating the power sector.

Standards And Principles, Not Commands

The new regulations have been “Christmas for lawyers,” one analyst said this week discussing the outlook for the power sector.

Unable to issue stark but simple command-and-control regulations in the current environment, and faced with a hobbled and deadlocked Capitol Hill, utilities are faced with amorphous regulations that are “principle-based” or rely on “standards” that they need to interpret and implement in an atmosphere of uncertainty. Operators complain of being cited for minor infractions with huge penalties, only to settle months or even years later without any indication of what could be done to fix the original problem.

New trading regulations that stem from the Commodity Futures Trading Commission’s interpretation of Dodd-Frank financial legislation has tied up billions of dollars in assets as trading collateral for hedging programs encouraged by the structure of partially-deregulated power markets. Utility CEOs have been warned that overcompliance by pledging the maximum amount of potentially required collateral is the only way to avoid investigations or accusations of speculative activity.

In Through The Smokestack

Unable to force investment through traditional central planning processes abolished in many regions by deregulation, ever-stricter emissions standards are compelling retirements of generating units instead, but even in pollution regulations uncertainty remains paramount.

The Obama administration’s decision to delay a slew of new environmental regulations earlier this year was attributed to concerns about employment and economic impacts, but the decision unintentionally punished early investment by some utilities attempting to comply with the rules ahead of time.

Deciding Not To Decide

Uncertainty has also spread further up the delivery chain for energy, confounding even straight “yes or no” permitting decisions the Administration had announced support for in the past. This week’s decision to delay the Keystone XL pipeline project decision pending extensive further research pushes further into the future not only a decision, but the time when new energy resources already under development could serve US markets.

Despite widespread support among presidential candidates, business leaders and regulators for infrastructure spending and investment, new regulatory uncertainty has left much of the energy sector hobbled just as the strains on existing infrastructure become increasingly apparent.