Study: Deregulated Generators Continue Reaping Profits Despite Economic Downturn

Owners of unregulated power generation in the Mid-Atlantic continued to enjoy high profits in 2008, despite the economic downturn, according to a study of financial data released on Monday by the American Public Power Association (APPA).

The analysis examined a range of measures of profits and shareholder earnings for nine of the largest sellers of unregulated generation in the PJM Interconnection, a regional transmission organization (RTO) operating the wholesale electric market. The study, “The Deregulation Penalty: Losses for Consumers and Gains for Sellers” (PDF), compares the earnings and shareholder benefits of these companies with those of regulated, vertically integrated utilities to estimate the cost penalty to consumers under deregulation.

The greatest profits continue to be earned by those companies that owned generation largely paid for by ratepayers under cost-of-service regulation, it found. Just three of these companies report financial data separately for their generation segments, which show even higher profits when analyzed. In 2007 and 2008, the generating segments of Exelon, Public Service Enterprise Group (PSEG), and PPL Energy (PPL) realized annual returns on equity of 30%, three times the 10% returns for regulated companies.

“These RTO wholesale power markets were created to assure competition and lower electric rates and have done neither,” said Mark Crisson, CEO of APPA. “Instead they produce power costs that unfairly reward a few generators and punish consumers.”

Prior studies conducted for APPA have documented extensive problems in RTO-run wholesale power markets and led APPA to the conclusion that these markets are not producing “just and reasonable” prices, as required under federal law. An analysis of data from the U.S. Department of Energy’s Energy Information Administration, for instance, revealed that increases in retail electric prices were significantly greater in states with deregulated electric markets than in regulated states over the past decade.

The study found that all the profits of these companies increased or held steady in 2008. Specific findings include:

• Profits for the generating segments of just three of the companies were $10 billion greater than for a sample of regulated utility companies in 2007 and 2008 combined, and $20 billion higher over the past seven years.
• In 2008 alone, the contribution to profits from the sale of electricity increased by $4.4 billion for all the companies.
• Shareholders in the PJM companies earned $47 billion more than if they had invested in the S&P 500 over the past 10 years, and $26 billion above investments in regulated utility companies over the same time period.

Source: APPA