A blackout casts spotlight on power deregulation

When conservatives trumpeted deregulation of the electricity industry in the United States a decade ago, they argued that competition and customer choice would save consumers piles of money.

About $80 billion a year, said a study by Citizens for a Sound Economy.

It hasn't happened. And many factors, including higher fuel prices and waning legislative enthusiasm for deregulation, are melting away any projected savings faster than ice cream during a summer power failure.

"We have seen exactly the opposite" of savings, says Wenonah Hauter, director of energy and environment programs at Public Citizen, a Washington, D.C., advocacy group.

"The jury is still out," adds James Owen, spokesman for the Edison Electric Institute, a bit more generously. His institution, representing shareholder-owned power companies, cautioned in 1996, at the time of the Citizens for a Sound Economy report, against "over-promising" the benefits of deregulation.

Indeed, last month's record blackout in the Northeast and Canada will end up costing the industry billions of dollars between lost revenues and new spending to improve reliability of the nation's power-transmission system.

And while that blackout has forced a new look at the transmission grid, the more important discussion revolves around a couple of questions:

Has deregulation reduced the reliability of the system? And if it has, should the nation stop trying to make the electric-power industry competitive and move instead to a "natural" monopoly, where state regulators set reliability requirements and prices that give power companies a reasonable return on their investments?

The beginnings of a return to tighter regulation may already be under way.

Encouraged by the surge in popularity of free-market theories and facilitated by the political power of Republicans and New Democrats, about a third of states have tried to deregulate (actually, restructure) their power industries.

As an incentive, the state legislatures involved insisted that retail rates for households be cut for a few years.

But those incentive prices will soon expire. And with fuel costs rising, consumers can expect higher electricity costs, not lower. At the wholesale level, power prices are already up in California and New England, two parts of the nation that are trying deregulation, notes Ms. Hauter of Public Citizen.

California is widely seen as a special case involving poorly designed regulatory rules and $8.9 billion in gouging by Enron and other power providers who have taken advantage of a state power shortage.

But Mark Cooper, research director for the Consumer Federation of America, suspects that nationwide, electricity deregulation is "an idea whose time has come and gone."

It's not likely that other states will move toward restructuring in the short term. New Jersey, and perhaps other states, may retreat toward a regulated-monopoly power system.

One reason is that the price of natural gas has gone through the roof. Proponents of deregulation assumed competition would be promoted by a multiplication of combined-cycle natural gas-generation plants that can be built for far, far less than, say, coal-fired or nuclear-powered plants.

In the past five years, about 400 natural-gas plants came online, providing nearly all the nation's new capacity. But the high price and shortage of natural gas makes it unlikely new gas-fired plants can provide the boost in supply to make energy markets really competitive and less manipulable.

Today, natural-gas plants are far less competitive.

Another element is the confusion, uncertainty, and complexity of the existing, mostly regulated, partly competitive power system. Both the states and Washington are involved in regulation. The House of Representatives held hearings on the big blackout last week.

Also, the power industry is reluctant to invest in transmission lines if it doesn't know what the rules of the game will be.

Enver Masud, who managed two major Department of Energy studies of the power grid and its reliability in the early 1980s, sees a basic flaw in the current proposals for a national competitive wholesale market for electric power.

Under the traditional regulatory system, a regional independent system operator tries to minimize power costs for its member utilities. If a utility needs extra power to meet a surge in demand, it draws first on its own or another utility's plant with a surplus of the cheapest power, then from the plant with the second cheapest power, and so on.

Computerized programs using detailed cost information and past demand patterns make this traditional system economically competitive, Mr. Masud says.

Under a deregulated (or restructured) system, competitive suppliers are interested in selling power, period, whether it is the cheapest to make or not. They want to make profits. Sharing cost information may hinder that.

"They are fighting each other," says Masud. A "tried-and-true system that favored cost minimization was replaced with an untested system that favored profit maximization.

"It also fractured responsibility for the overall reliability of the system," he says. And it produced numerous new executive jobs with fat salaries.

Free-market enthusiasts haven't yet figured out how to assure a 10 to 20 percent surplus in power capacity in a competitive system. What generating company will build a $100 million plant if it is going to be used only for a few weeks in summer power peaks?

Last month, a report by the Electric Power Research Institute (EPRI), a Palo Alto, Calif., research group financed by more than 1,000 power firms, urged spending an extra $100 billion over the next decade to upgrade the nation's power grids to make them more suitable for a computerized economy.

Power surges and failures today cost the United States about $100 billion a year, says Mark Gabriel, EPRI's vice president. The system, he says, needs "a fundamental rethink."