- The Washington Times - Wednesday, September 27, 2000

Do not judge 'electricity choice'by California

Those opposed to giving electricity consumers more choices have found a new target: California's power shortages and high prices. The state guaranteed the problems at liftoff when it opened its markets to competition amid a supply shortage exacerbated by a flawed restructuring plan. No power facility of any consequence has been built in California in 10 years, although demand has soared.
But don't blame the free market for what happened there. California's plan was dead on arrival, thanks to a combination of bad timing and unwieldy, meddlesome and sometimes contradictory regulation. The state's track record should not be used to obscure a fundamental fact of economic life, demonstrated time and again by industries that successfully deregulated: Competition promotes lower prices and better services.
And here's a suggestion for the other states implementing retail electric competition: Don't turn back. It's unfair and premature to brand retail choice a failure, based on the California experience. Instead, study and learn from the West Coast pitfalls.
Lesson one: Market meddling virtually guarantees higher prices.
California severely constrained the ways utilities there could supply their customers. First, the state pressured the companies to sell their own power-generating units. Next, the state required utilities to buy power through two pools run by quasi-governmental agencies. Finally, until very recently the plan prohibited utilities from signing long-term contracts directly with generators, eliminating a critical hedge against high prices and tight supplies.
The result: a hand-to-mouth situation that sent utilities searching for power on a daily basis this summer. During extreme heat, the search, predictably, became a high-priced scramble.
Lesson two: Price caps on generation don't work.
Caps imposed by California's power pools on wholesale electricity prices were supposed to help control costs for consumers. But the controls actually contributed to power shortages. The price caps discouraged badly needed new generation investments at a critical time. Developers will not spend their money to build new supply projects if they cannot be assured of a fair profit in a truly competitive market.
The caps may also have sent counterproductive price signals; they probably diverted power into higher-priced markets where generators could get better returns. This situation forced utilities to depend on high-priced spot markets, with the costs ultimately passed along to customers.
Lesson three: Bad governmental timing hurts.
Legislators and regulators simply did not give the Golden State's competitive market enough time to develop. The transition period was too short. When the transition phase and the price protections that went along with it ended in the San Diego area, customers were shocked to find themselves this summer in a volatile, supply-constrained market.
Competitive markets work for all consumers by keeping prices down, but only with adequate supplies. Nationwide, deregulation has prompted a building boom that may add as many as 177,000 megawatts of new capacity, more than triple the amount planned just two years ago. In Texas alone, developers in recent years have built units that can produce up to 10,000 megawatts. In all likelihood, the boom will eventually reach California, especially if price caps are relaxed and investment made more attractive. An encouraging sign was the California legislature's recent passage of a bill designed to accelerate plant construction.
Unfortunately, most plants in California and elsewhere, are still on the drawing boards. Longer transition periods would provide valuable additional time for the development of new generation and healthy competition. For example, we fully expect that the seven-year transition period planned in Virginia, where Dominion has 2 million retail electric customers, will give the market the time it needs to add new capacity and mature.
Although no one can be certain what will happen in a newly competitive arena, the experience of other industries is quite encouraging. A 1997 study co-authored by a senior Brookings Institution researcher found regulatory change in long-distance telecommunications, airlines, trucking and railroads produced annual benefits for consumers of $53 billion.
I have no illusions that promises of such future savings will silence competition's critics. I also realize the problems associated with the transition to choice make a tempting election-year target "political grandstanding," as New York Public Service Commission Chairman Maureen Helmer recently put it.
But if the market is allowed to operate with proper timing and a minimum of bureaucratic interference consumers have a real chance for lower overall energy bills. That's not part of a dangerous economic experiment. It's free enterprise at its best.

Thomas Capps is chairman, president and chief executive officer of Richmond, Va.-based Dominion, a natural gas and electric power company.

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