- The Washington Times - Wednesday, March 13, 2002

While Enron is dead, the grip of its cold, dead hand on the nation's economy is not. The Federal Energy Regulatory Commission (FERC) is busily implementing a new scheme of increased regulatory intervention that was long sought by the now defunct company because it would benefit the company's business operations.

However, that poorly thought out plan, so typical of Enron's scheming, would seriously undermine the nation's electricity transmission system over time. Indeed, it has the potential of spreading the energy crisis suffered by California last summer across the country.

The regulation involves the interstate transmission lines that now transmit newly produced electrical energy across the country. That transmission grid enables producers to sell electricity in a national market.

In fact, about half of the nation's electrical output is sold on the wholesale market today, before it is ultimately sold to individual residential or business consumers. Power marketers that specialize only in buying and selling electricity in this market trade about 23 percent of the nation's power production.

The grid also enables nonutility producers to arise that can provide additional power for the national network. These sources now account for 20 percent of the nation's electrical power.

This national transmission grid increases the supply of electricity, which reduces prices. It also creates a very flexible energy supply system, where excess electricity in one part of the country can be transmitted quickly to cover a shortage elswhere.

But FERC is now intervening in this market with the idea of forcing all the current owners of these transmission lines to transfer them to four, nonprofit, regional transmission organizations (RTOs). The only business of these RTOs would be to operate the transmission lines in their respective regions.

FERC is seeking to completely separate the transmission lines from control by any electricity producer, so that the lines would be open to all producers on equal terms. FERC also wants to consolidate the grid into just four large regional organizations to avoid difficulties of getting many smaller transmission line owners to cooperate in a national network.

But this government created, centrally planned market has a fatal flaw. The RTOs do not have the proper market incentives to provide high-quality, efficient services.

First, the RTOs would each be a monopoly in their own geographic area. If they do not provide the best, most efficient services, there is no where else to turn, at least in the short run.

Moreover, since the RTOs would be nonprofits, why would they be concerned to provide the best and most efficient services? They would not gain higher profits and higher stock prices from doing so.

Most concretely, there would be no incentive for anyone to invest in transmission lines controlled by nonprofit RTOs. The RTOs themselves would not have equity capital and would not have incentives to take the risks of additional investment by borrowing.

Investment in transmission lines has already been declining. Just maintaining the current transmission will require a fourfold increase in investment this decade. This is just not going to happen under FERC's new regulatory initiative.

If the nation's utility grid deteriorates for lack of investment, the supply of power will decrease and prices will rise. Shortages and bottlenecks will appear around the country. In short, last summer's California energy crisis will begin to reappear nationally.

A thorough and insightful new study by Thomas Lenard of the Progress and Freedom Foundation proposes a better policy. Power producers that also owned transmission lines would be required to sell use of their lines to all producers at a uniform price. Companies that owned transmission lines but did not produce power would be free of these requirements, since they would have no incentive to favor one producer over another.

Under these rules, market participants would cooperate to maintain a workable grid for all, as everyone would have an incentive to do so. Companies focusing on the transmission grid exclusively would prosper in particular and provide the needed investment

Enron is gone. It's half-baked, self-serving regulatory scheme should be dumped as well.


Peter Ferrara served in the Reagan White House Office of Policy Development.


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