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2005-06 Seminars


Electricity Deregulation - A Political Failure.

Peter Behr
The Washington Post

Abstract
The talk will trace the expansion of electricity deregulation in the 1990s, a process that would grow into "one of the largest single industrial reorganizations in the history of the world", according to the U.S. General Accounting Office. Despite the huge stakes for a $2 trillion dollar industry and its consumers, for elected state and federal officials across the nation, and for an essential linchpin of the economy, this great leap forward lacked anything resembling a political consensus.

There was no mandate from Congress to support vast changes in the grid's operation, which some industry heavyweights welcomed and others opposed. Nor was there any general public understanding of what was taking place. The advocates and agents of restructuring expected to fix their experimental craft in mid-air. They have not, or at least, not yet, and the prospects for success don't look hopeful.

The designers of deregulation failed to appreciate the consumer's view of reasonably priced electricity as a public entitlement, like potable water. As electric markets erupted in volatility, regulators given the legal responsibility to assure "just and reasonable" wholesale prices for power failed in that task. Now, public confusion and anger over rising electricity prices adds to the resistance that may obstruct essential investment.

The events of this decade of electricity deregulation echo two deep historical themes that figure in this talk: One is the influence of regional political power in national policy debates. The second is the ideological battle between the forces of regulation and competition that have struggled to control electric power and its bounty since the industry's birth.

There were several main drivers of deregulation. One was the plausible view that competition would foster innovation and better prices and values for consumers in electricity markets, as it had elsewhere An influential chorus of academic experts declared that the century-old system of utility monopolies providing cost-based electricity was inefficient and not worth saving. The self-interest of power companies and large industrial and business customers in states with high power costs was a potent force. A critical enabler of this movement was the Federal Energy Regulatory Commission, whose commissioners and staff had embraced deregulation ideology but were not willing to enlist in active oversight of the process.

Deregulation was brought up short by the California crisis in 2000-01. This debacle had many fathers -- a fatally flawed plan, weak and conflicted state elected leadership, and collusive, predatory behavior by a large segment of the power industry. But the refusal by FERC to fulfill its oversight role -- an ideological and political decision -- was a pivotal failure of duty.

FERC's focus was elsewhere: Its attempt to establish independent regional transmission organizations to fulfill its goal (dream) of open-access transmission. Here it was done in by regional political power. In 2003, FERC's chairman was rebuffed by an improbable alliance between senators from the Southeast and Northwest states whose politics were poles apart, but who shared access to cheaper power and refused to accept federal dictates over their electricity systems. Had FERC persisted, Congress was prepared explicitly to block the commission through a stunning exercise of legislative nullification.

The Northeast blackout of 2003 was about much more than vegetation management under Ohio transmission lines. It revealed weaknesses in industry self-regulation and a failure by federal and state regulators to closely examine the consequences of deregulation on a heavily-loaded transmission system

Although deregulation's expansion has halted, the industry's restructuring upheaval continues. More and larger mergers are anticipated. Policies are not yet set for the critical regulation of congestion and enforcement of reliability laws. FERC appears content to rely fundamentally on market pressure to create the competitive wholesale power system it seeks.

The debates about the merits of deregulation continue between theoretical advocates and disbelievers. But the argument now must contend with political protests from consumers in parts of the country who are getting a taste of the California price shock today. If tougher price controls are imposed, and if the industry's sense of direction is scrambled again, will there be adequate investment in grid reliability, security and the capacity needed for competition?

More than ever, the electricity markets need the reassuring hand of an independent regulator's rigorous oversight. The game needs honest referees. It is a central challenge to political leadership.