The war for your electric bill

Stock analyst Jim Jubak, focusing on the effects of private-equity buyout funds, explains, "the last time Wall Street applied its best minds to the electric power industry, they brought us Enron, brownouts and wholesale-price-gouging in California, not to mention higher electric bills." Jubak points out that Wall Street investors raised $189 billion in 2006, and are headed for more than $250 billion this year, and with these funds, are buying out and privatizing public companies which supply energy to local communities. Companies like First Data, HCA, TXU Corp have all been privatized with this trend. Mirant, owner of 24 U.S. power generating plants is currently for sale and being targeted by the privatizers.

Jubak points to some likely results of this process.

And buyout funds are kicking the tires on other utilities. The buyout funds have lots of money to put to work, and utilities have the kind of big predictable cash flow that these funds like to see. This is bad, bad news for your utility bill in the short run. In the long run, it's even worse.

In the short run, making a profit on one of these buyout deals depends, first, on "restructuring" the company so that it's more profitable than it was before the buyout. Most of the time, restructuring involves spinning off money-losing operations and outsourcing some part of operations -- and it always involves cutting jobs.

That would be bad enough in the case of a utility, since job cuts are likely to mean a decline in utility service.

But you'll wind up paying more for less service because, second, turning those small gains in corporate profits into big profits for buyout investors rests on building the buyout deal so that borrowed money, known as leverage, multiplies those relatively modest improvements in corporate earnings.

In funding such privatizing investments, investors put up some cash, but borrow the rest by issuing debt backed by the assets of the acquired company. Jubak explains that, "in essence, the purchased company buys itself, but the buyout fund (and its investors) gets 100% of all future profits when the company is eventually sold back to the public." This is a shell game on a grand scale, but with an unwitting public as the dupes.

The debt load of these purchases also results in a reduced investment in new power lines and new power plants, all of which could benefit the consumer.

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Electricity consumers deserve better system

AP reporter Ryan Keith pointed out in his story that deregulation has not been successful in any of the 16 states, plus the District of Columbia, that have put it into place since the late 1990s. In fact, consumers in deregulated states pay more for electricity than those who stayed with regulating their power industries - about 30 percent more in 2006. And the gap continues to grow.

Consumers in all states are paying considerably more for electricity than a decade ago, primarily because of increases in the cost of fuel, primarily natural gas.

But that doesn't explain why deregulated states pay more for electricity than those in regulated states. What does seem to explain the situation is the lack of a competitive market.

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One thing is clear, however: Deregulation of electric utilities isn't working, and consumers are paying for it. That's a problem which needs a solution.