Power deregulation: Positive surge, or short circuit?

So far, the decade-long effort to create a workable, competitive
market for electricity in the United States has been mostly a flop.

By David R. Francis | Staff writer of The Christian Science Monitor

In about 16 states, generating a third of the nation’s power supply,
retail customers have a choice of power providers, though not a
meaningful one in many of these states.

Relatively few households have switched to
new providers. And though regulators have
stacked the decks in favor of new
competitors, the dollar savings of switchers
have been tiny.

Further, the electricity crisis in California, the
bankruptcy of Pacific Gas & Electric Co.,
and the failure of Enron – once the world’s
largest energy trader – have stalled moves
by other states toward a competitive
system.

So where does the nation go now? Back to
the old franchise-monopoly system? Or do
the states move forward toward competitive
power markets that actually work?

A controversial new study by Cambridge
Energy Research Associates in Cambridge,
Mass., warns: "If the power sector continues
to muddle along its current path of
inconsistent and uncoordinated deregulation,
then a slip back to regulation is almost
inevitable."

In fact, any competitive system will be highly
regulated by necessity.

"The rules will be much more complex," says Sharon Reishus, one of
the researchers for the CERA report.

In the old system, which still prevails in most states, a public-utility
commission regulates power companies, most of which not only
generate much of their own power, but also handle its distribution to
consumers.

They also have a role in looking after regional transmission
organizations that swap power between utilities in a given region to
meet shifting demand.

In states that have switched to competitive systems, the utilities had
to sell off their power-generating plants to separate companies. So
state regulators must deal with more entities, including additional
generating companies and a host of independent distributors.

The CERA report makes multiple suggestions for standardizing state
regulations in coordination with the Federal Energy Regulatory
Commission (FERC), which regulates interstate transmission of
power.

"Power markets are complex, unlikely to evolve on their own accord,
and need structure to work properly," says the report.

One basic problem is providing incentives to power generators to
maintain surplus capacity that may be used only on a few hot days
in the year. Under the old system, a surplus power capacity of 15 to
18 percent was part of the franchise-monopoly system.

With a competitive system, it’s uncertain whether expensive new
power plants will be built to serve infrequent demand. With the
economic slowdown, 18 percent of announced power projects were
cancelled in 2001. So regulators may require generating companies
to maintain surplus capacity as part of their license to play in the
market. That’s regulation again.

There’s a similar problem with building new transmission lines for
sending power between cities in a region. How do you make it
profitable?

The quality of transmission systems has declined in the past
decade, reckons Ms. Reishus.

That adds to the risk of serious power failures somewhere in the
nation.

Again, FERC may have to step in to set service fees that assure
transmission firms a profit after they have covered the high cost of
new long-distance lines.

That’s reminiscent of the price controls for electricity set by public
utility commissions.

FERC this month proposed a standardized transmission service and
wholesale electric-market design to deal with this problem. The goal,
says Pat Wood III, chairman of the commission, is "reliable
electricity at lower prices for all Americans."

Free-market enthusiasts have great faith that competition will do just
that. The say free markets will help to establish a reasonable price
for electricity, that markets will always self-correct if problems arise,
and that regulators can deregulate by trial and error.

But the CERA study calls such key "laissez-faire" assumptions
incorrect. The power business is "too important economically and
socially to restructure on a trial-and-error basis," notes the report.

Thomas Stauffer, a veteran energy consultant in Washington,
complains that the Bush Republicans are "as ideological" as the
"Clintonites" were in pushing for restructuring of the electricity
business.

It is not clear that a competitive power system will come up with
sufficient savings in power generation or distribution to offset the
extra marketing costs involved. "Hopefully this is not just wishful
thinking," says Reishus. "It’s not the slam dunk people expected."

Meanwhile, five states that have passed laws to begin the process of
deregulation – New Mexico, Montana, Oklahoma, Arkansas, and
Nevada – have halted implementation, worried that a new system
won’t work. Legislators in 25 states without a law are not likely to
pass one. Eyes are on Texas, where a competitive system got going
this year.

http://www.csmonitor.com/2002/0325/p21s01-wmgn.html