Cooling to electricity deregulation

For a few years, the politically correct position in the United States has been to cheer deregulation of the electricity industry. Many politicians, economists, and industry executives held that competitive power providers in a free market would bring more efficiency and cheaper electricity to consumers.

Now the energy crisis in California, the state furthest along in deregulation, has brought that view into question. Indeed, a growing number of states are postponing plans to deregulate their electric utilities.

To free-market enthusiasts, the California mess stems merely from a bad deregulation design by politicians and regulators there.

"Flawed," says Vice President Dick Cheney.

In some of the 24 states undergoing or planning deregulation, such as Texas and Pennsylvania, officials agree. They haven't had much trouble - at least so far.

But in the long run, deregulation is likely to be simply impractical.

"I don't think one can have a deregulated electricity system if one wants reliable power," says Thomas Stauffer, an energy consultant in Washington. "Electricity deregulation is great as long as you don't care whether the lights stay on. The market can't guarantee that power is available."

In California, a major design flaw was that it fixed the price of electricity as a sop for voting consumers, but allowed wholesale prices to be set by the market. That was a recipe for disaster for the utilities. When the supply of electricity became short, because of the state's rapid growth and long delays in approving sites for new power plants, wholesale prices jumped. The utilities got caught in the middle. They piled up billions in debts paying for expensive power from generating companies and came close to bankruptcy.

The problem with a competitive power market is deeper than this mistake, though.

It stems from the nature of electricity itself. It is an essential commodity in a modern economy. Imagine the impact of an extended power failure in your home or workplace. Unlike other commodities, say wheat, it cannot be stored in any volume. Once power is produced, it must be consumed or wasted.

In a regulated system, utilities are required to provide a reliable system with a surplus capacity of about 25 percent to meet peaks in demand or unexpected generation failures. Regulators gave utilities a "reasonable return" for their investment as a quid pro quo for a regional monopoly.

Under a deregulated system, the financial incentive for a large amount of permanent surplus capacity fades. There is less incentive for regional planning. There is no incentive for creating power connections between regions or for building transmission lines.

Moreover, it takes time to get a site approved and build a new generating plant. Maybe four or five years. "It's a long time to be in the dark," Mr. Stauffer says.

New plants now under construction may bring California a power surplus in a couple of years or so. Then electricity prices will plunge in a competitive market. And the industry will not get financing for new plants.

The state may face a cycle of alternating power abundance and shortage. That's not a pleasant prospect for the California economy.

There's a joke taking a poke at free-market ideologues: "How many of them does it take to change a light bulb?" The answer: "None. If it needs to be done, the free market will do it."

(c) Copyright 2001. The Christian Science Publishing Society