Electric Re-regulation?

As more states enthusiastically introduce competition into the electricity industry, some skeptics are asking: Can the free market ensure an adequate supply of power?

The question reemerges as California faces rolling power blackouts in the midst of a heat wave.

One thing that could be said about the old system is that tightly regulated power utilities provided fairly reliable electricity. In return for their monopoly, utilities had to invest in sufficient generating capacity to cover peaks in electricity use and provide for future growth in demand. Regulators set the price of electricity at levels that produced enough revenue to give the utilities a reasonable profit and dividends for their shareholders.

The system wasn't perfect. Hot summers sometimes brought power disruptions. Utilities built excessively expensive generating plants.

But competition also has its hitches. For one, when power shortages crop up, electricity retailers (now separate from power generators) bid up the price of wholesale power to fantastic levels to try to buy sufficient power to meet the needs of customers. So much so, in fact, that state regulators are putting caps on the price of wholesale power.

Last month, California regulators slashed a price cap on wholesale electricity to $250 a megawatt hour from $500. The cap in the Northeast and mid-Atlantic has been set at $1,000.

Deregulation is proving to be re-regulation. Moreover, power surpluses are fast morphing into power shortages. Entrepreneurial power-generating companies have put in bids with regulators for a huge number of new natural-gas fired plants, more than adequate to meet future needs.

But there are problems.

One is the old NIMBY factor. Even a relatively safe and clean natural-gas power plant brings a "not in my backyard" reaction. No new plants have been built in many states for years, including California, while demand for power continues to grow rapidly. Regulators may hope plants in other states will provide the power. Yet, who wants a new high-voltage transmission line in their backyard either?

If the new competitive system is to work, regulators and their governments are going to have to be courageous in approving more plants that can ease shortages and discourage price spikes.

Further, the federal government should insist on higher efficiency standards for power-consuming appliances. The appliance industry has resisted implementation of such standards for years.

A longer-term question is the adequacy of future natural-gas supplies.

So far, competition has produced no bargains for electricity consumers. In some cases, bills have gone up. As old contracts for power at a set price expire, electricity prices could soar.

Politicians beware. Fix the system or face unhappy householders.

(c) Copyright 2000. The Christian Science Publishing Society

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