Rest of nation starting to feel pain of power deregulation

By Bill Ainsworth

September 10, 2001

SACRAMENTO -- Electricity supplies plummeted. Regulators ignored transmission problems.

Utilities had to sell their power plants to merchant generators. Electricity prices rose dramatically, but federal officials were slow to intervene.

Sound like a short history of the California energy crisis?

Actually, it's a description of the problems in the deregulated market in New York, where customers of that state's largest utility have experienced a nearly 40 percent increase in summer rates.

The account is contained in a new report by the Consumer Federation of America, a consumer group, that details widespread problems with deregulation throughout the United States.

The report should provide at least a small degree of comfort for California residents and lawmakers. Its conclusion: We are not alone in suffering.

Competition in the electricity market has led to double-digit price increases in Massachusetts, while residents of Montana face a 50 percent rate hike. Texas has also experienced price spikes.

Meanwhile, Pennsylvania, the state that's been held up as the shining example of deregulation's success, is now experiencing higher prices due to the end of regulated cuts and to higher natural-gas prices, the report states.

California, as it turns out, is not the great exception. It merely provides a more dramatic example of the fundamental flaws of the deregulation scheme promoted by the Federal Energy Regulatory Commission.

First, the report points out, electricity isn't a good candidate for deregulation. It's an essential commodity that's impossible to store. It has to be transported on complex networks.

Under the old system of regulated monopolies, the same entity that generated the electricity also delivered it to businesses and homes.

The FERC, however, demanded that utilities sell off their power plants to other companies so the utilities wouldn't have an unfair advantage in the new competitive market.

This plan, however, eliminated the efficiencies of an integrated system. California created the Independent System Operator to oversee the power grid and gave it the complicated task of matching supply with demand throughout California. Previously, each of the state's three major utilities handled that function in its service area.

On top of that, under regulation, utilities were responsible for making sure there was adequate supply to cover peak periods of demand. They could buy or build power plants for those purposes.

Under deregulation, no one really has that responsibility. Private companies are encouraged to build more power plants, but they are often reluctant to risk reducing their profits by increasing supply.

Deregulation has led to a huge growth in the buying and selling of energy, the report states. Each time electricity is bought or sold, someone makes a commission and tries to make a profit that is then added on to the price of that electricity.

These new markets for buying and selling electricity require extensive and expensive government monitoring to make sure that generators are not price-gouging, the report states.

State Sen. Steve Peace, D-El Cajon, who pushed deregulation legislation in California, said the report shows that federal rules requiring separating transmission from generation have hurt deregulation in California and throughout the nation.

"This model is irrational," he said. "In order for it to work, it requires more government intervention and knowledge than a classic regulatory structure."

Sophisticated market regulation is expensive. But Californians know that insufficient regulation is even more expensive. The rest of the nation is just starting to learn that.

Bill Ainsworth covers Sacramento for the Union-Tribune.

http://www.uniontrib.com/news/uniontrib/mon/news/news_1n10inpolba.html

-- Martin Thompson (mthom1927@aol.com), September 10, 2001

Answers

Hate to admit it, but he's right. A product which cannot be stored is best served up and completely controlled near the source of use. Like it was under the old system of regulated monopolies. Electricity is one of the very few products served to the public that will not benefit from deregulation. Almost everything else--if it can be stored--will.

-- Billiver (billiver@aol.com), September 11, 2001.

The best "hybrid" between the old regulated system and "deregulation" is the old system, but with end user pricing that varies at least roughly with the marginal cost of electricity production. This "free market" oriented reform would be implemented to a precision dictated by available and (in the future) cost-effective metering infrastructures. Short-term implementation for small users would likely be in the form of time of day (varying by season) pricing; with true real-time pricing only for large users. In the future, real time pricing could possibly be extended to smaller users, if infrastructure investment cost can justify the increased market efficiency that results. It may not be: the price of postage for a small mailpiece being the same whether mailed cross-town or cross- country, is a case in point. But, aside from these end user cost reforms, the "old" regulated system worked just fine. Re-regulation would also take load off the grid, increasing its margin against overload. This improves system reliability, reduces the probability and VERY high cost of cascading blackouts, and increases critical infrastructure margin against cyberterrorism effects. (And this is the "never-ending Y2K" type threat.)

One other caveat: No customer can get an "interruptible" discount without truly being interruptible. This means proper "backup" power capability, or the ability to endure interruption in service without damage. Past "interruptible" customers, such as refineries that cannot in fact tolerate interruption, should be back-billed for the discounts received in the past; and the money collected be applied towards the costs of the failed deregulation experiment. Yes, this may mean higher prices for some goods, such as gasoline --- but someone somewhere must Pay for this failure. And, it it best that the necessary economic pain be distributed widely, evenly, and equitably.

-- Robert Riggs (rxr.999@worldnet.att.net), September 11, 2001.

Yo gang, I guess I'm biased, since I work on the trading side of this industry.

But, in reality, the problem here has little to do with the production or the location of the production. In market terms, the problem is the DISTRIBUTION system. Power de-regulation is based on the concept of distributing excess power using the emergency backup system designed to provide power remotely when distant utilities suffer power problems. The NERC system was never designed for power distribution in the way it is being used now. It is an old-technology distribution system for emergencies. Unfortunately, it became used routinely for seasonal shortages - thus allowing locals to avoid the difficult choices of local power production.

What would fix the problem is a national capital improvement, along the lines of the Interstate Highway System, or the National Rail Network, which provide high capacity, redundent delivery systems for their particular commodities. The question is, "Is providing such an infrastructure a proper function of government or of private enterprise?"

Meanwhile, because of severe NIMBY issues, I'm expecting in the long term to see far better results with local power delivery based on new technologies like MicroTurbines and space-generated Solar Power. For more details see http://www.techreview.com/magazine/may01/fairley.asp and see http://science.nasa.gov/headlines/y2001/ast23mar%5F1.htm

Enjoy!

-- Rich Marsh (marshr@airmail.net), September 11, 2001.