Wisconsin: Second thoughts about state deregulation of electricity

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Wisconsin: Second thoughts about state deregulation of electricity

Source: The Journal Record

Publication date: 2000-09-18

Over a few sultry days in the summer of 1997, the state of Wisconsin got an early taste of the electricity shortages that now threaten several other regions of the country. An unusually large number of nuclear plants that supply the northern Midwest were closed for maintenance just as an unexpected heat wave drifted into the area. Wisconsin Electric, which serves Milwaukee, shut off electricity to 80 businesses; every few hours, it beseeched consumers to limit their energy use.

Wisconsin Electric averted blackouts, but the scare profoundly changed the state's approach to deregulating the power industry, a process it had begun to explore only a year earlier.

Like many other utilities, Wisconsin Electric initially pushed for what it and others called the Big Bang: state regulators should give up control over the production and pricing of electricity almost immediately. But after the 1997 power shortage, Wisconsin Electric, along with most local businesses and consumer advocacy groups, began to support a go-slow approach to deregulation, first building in an extra margin of reliable power before encouraging the state to remove its decades- old grip on the electricity industry. Lately, the rest of the country has been drawing the same conclusion. Just like Wisconsin, several other states have lost their early faith in the instantaneous, smooth creation of a free and fair electricity market.

Deregulation has faltered as surging consumer demand outstripped the supply of electricity, and regulators and utilities scrambled to cope with successive summers of price volatility and power failures.

More than a year ago, the wholesale price of electricity charged by power plants in the Midwest surged to $6,000 a megawatt-hour, compared with average costs of $21 to $22 for the same amount of power. Consolidated Edison customers in New York paid 43 percent more for electricity this June than last year. Prices have spiked elsewhere as well.

When rolling blackouts rippled through Silicon Valley and electricity bills doubled in San Diego over several weeks this summer, California's pioneering approach to deregulation came to embody what many see as the failings of the process.

Despite the second thoughts about deregulation, few experts expect a return to the days of strict government control. A world in which various power generators compete openly to provide electricity at market prices still offers the prospect of both lower costs for business and consumers and higher profits for utilities than is possible under the traditional, more inefficient system in which monopoly suppliers are supervised by government regulators.

"California is an indication to the rest of us that we need to do our homework to make deregulation work," said Dick Olson, legal counsel with the Wisconsin Industrial Energy Group, an association of large companies.

"Some people want to stop the process, but the genie is out of the bottle."

But getting from here to there is proving far more difficult than expected. Lacking a clear federal approach, states are finding their own way and, in the process, casting doubt on some early promises.

"Deregulation was definitely oversold to consumers by many people," said Severin Borenstein, director of the Energy Institute at the University of California at Berkeley. "To economists and a few others, deregulation was a calculated experiment, and we knew it would have its costs."

Historically, a regional electric utility, which was owned by investors and regulated by the state, generated power, transmitted it over high-voltage lines and then distributed it in low-voltage form into homes and businesses. In broad terms, deregulation calls for separating generation, transmission and distribution into distinct businesses.

Deregulation advocates argued that if power plants were sold to private owners, they would compete among themselves to sell power to transmission and distribution companies at cheaper prices, driving down the cost of electricity. But that outcome was predicated on the realities of the mid-1990s, when power plants had spare capacity.

But with few power plants coming online recently, particularly in California and the Northeast, deregulation was introduced in the late 1990s at the worst possible time. In the thriving economy, businesses demanded more electricity, people built bigger homes and bought more gadgets, sharply narrowing the gap between available supplies of electricity and peak demand.

Fuel for generation has also become more expensive, especially natural gas, whose price has doubled even as it has grown increasingly popular because it is cleaner than other fuels.

"I think that the expectation that deregulation will always give you lower prices is unrealistic," said John B. Ramil, president of Tampa Electric, a unit of TECO Energy. "Consumers think that competition will lead to lower prices automatically, when actually they will be paying market prices for power."

Advocates rallied support for electricity deregulation by asserting that it would deliver the choice and the low prices that deregulation of telecommunications has brought. But they forgot that the restructuring of the telephone industry, like power deregulation now, angered consumers early on, when local calling rates rose and the proliferation of choices baffled many people.

Lawmakers and regulators took years to iron out the process, which is still going on.

And because electricity is even more vital than telephones, there is far less tolerance for interruptions in service and volatile prices.

"You can't assume that you can deregulate in one year and sit back and watch how things work," said Barry Abramson, senior utility analyst with PaineWebber. "Regulators and utility officials have to come back frequently and correct problems they never expected until the system gets it right."

http://cnniw.yellowbrix.com/pages/cnniw/Story.nsp?story_id=13977227&ID=cnniw&scategory=Utilities

-- Carl Jenkins (Somewherepress@aol.com), September 19, 2000


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