Tuesday, August 15, 2006

Energy Industry Further Down the Rabbit-Hole

I used to tell a story to people about the energy industry. If you think about your energy bill, there are many components. There is energy supply, which is what you pay for the power plant. Then there is energy transmission, or what you pay for the lines that connect the power plant (far away) to your local grid. Then there is the local distribution company, or the wires that connect to your house. Finally, there is customer service, which consists of the people that answer phones, perform billing, and also dispatch trucks.

The story was that a company like Exelon with its Chicago subsidiary ComEd would gladly PAY someone else to take poor areas of the city of Chicago off its hands. Why? Because they constantly have to dispatch trucks to turn on / turn off electric meters and staff the customer service center with people to answer the phones mainly because poorer customers don't pay their bills on time and need to continually negotiate billing options to keep the lights on. If they could dump off their poor customers they would need far less in the way of billing / dispatch staff and they wouldn't need to send crews every year to turn off people who don't pay their bills.

Insanely enough, this scenario is coming true. From the latest Wall Street Journal, on Entergy, the utility that serves New Orleans:

NEW ORLEANS -- The perplexing issue of how to pay for expensive repairs to this city's damaged electric system is forcing city leaders and officials at utility Entergy Corp. into strange new roles. At issue: Entergy wants to hand over its assets in New Orleans to the city.

Entergy wants to give the assets back to the city because they don't make much money on distribution and it is expensive to build out a massive infrastructure for a bunch of customers that (historically) weren't great on paying their bills. Utilities make money on serving EXISTING customers; they certainly don't make money on low-income customers and ESPECIALLY not from building out infrastructure for low income customers.

I don't know where this is going to lead but it is a concrete manifestation of my theory that eventually the State of Illinois will seize back the generating assets of Exelon when Exelon starts punishing ComEd (their local distribution subsidiary) with high rates for power generation. I realize that these 2 events don't seem directly related but they are indicative of how desperate things have become in the industry.

And the sad part is that Wayne Leondard, the CEO of Entergy, is one of the brightest lights in the industry. If he can't fix this, we are doomed.

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