Tuesday, September 28, 2004

If there’s any lesson that policy makers should have learned from the electricity blackouts throughout California in 2002 and then on the East Coast earlier this year, it is that the wrong sort of electric power deregulation can cause soaring prices and leave consumers literally in the dark.

In California, homeowners and businesses had to ration their electricity use, dim the lights, and turn off their air conditioners. A basic service we as Americans take for granted — cheap and uninterrupted access to electric power for light, heat, running computers, poweringhair dryers and dishwashers, and accessing the internet — was suddenly scarce.

Given that our electric power network is the U.S. economy’s central nervous system, we better make sure Congress and regulators get it right as they restructure regulation of electric utilities. Disruptions in electricity supply and rising prices could bring our economic expansion to a screeching halt.

Unfortunately, federal regulators seem incapable of deregulating in ways that will benefit consumers and maintain a dependable electric power supply. Last year, the Federal Energy Regulatory Commission (FERC) proposed a plan to restructure the national electricity market that would have placed private power-generating companies across the country under the authority of new mega-Regional Transmission Organizations.

This plan would have essentially federalized electricity markets. The plan provoked outrage from governors, state utility commissioners, consumer groups and free-market conservatives. FERC was forced to retreat.

FERC now is grabbing for power through a series of rulemaking proposals, court filings, and other means of regulatory fiat. FERC wants to force local power utilities to join regional transmission organizations (RTOs), which would effectively prevent them providing a first right of service to the very customers who paid for the power plants and transmissions lines in the first place.

FERC maintains this intervention will foster competition in electricity markets, which will in turn, lower utility bills. That’s certainly a laudable goal. But it’s hard to argue the current system, warts and all, hasn’t kept prices low. Adjusted for inflation, electricity prices are lower now than throughout most of history. Electricity prices haven’t risen at nearly the rate of oil and other energy prices. So why does FERC insist on “fixing” a system that seems to be working?

Deregulation is supposed to mean fewer rules and less red tape. When Ronald Reagan lifted price controls on oil and natural gas in the early 1980s, all that was needed was a stroke of his pen on a one-page executive order. FERC needs 603 pages just to explain SMD.In some ways, the FERC scheme more closely resembles the multi-layered bureaucracy in the failed Hillary Clinton health care plan of the mid-1990s than a deregulation manifesto.

FERC’s plan is hugely expensive. In a recent report, the Public Power Council (PPC) found the costs of FERC’s regional transmission organizations has quaprupled from $250 million to $1 billion from 1998 to 2004. The number of employees at the Midwest organization jumped more than 500 percent from 80 in 2000 to 465 in 2004. In Texas, the numbers exploded from 50 bureaucrats in 2000 to 530 in 2004, according to the PPC study.

FERC’s meddling in state and local rate setting threatens to drive utilitiy bills up, not down. In Florida, Georgia and Oklahoma regulatory proceedings, FERC has second-guessed state public utility commission decisions aimed at ensuring ratepayers in those states have low prices and reliable supplies of electricity.

It appears FERC’s primary goal is not to serve consumers, but rather to serve as a life raft to the merchant generating industry at the very time Wall Street and credit-rating agencies are fully prepared to bury the industry because of poor business decisionmaking. Standard & Poor’s energy analyst Peter Rigby notes “independent power producers gambled on a business model based on rapid and debt-funded growth.” Now these indebted power-generating companies face a perfect storm of rising interest rates, soaring natural gas prices and declining electricity demand and want a de facto bailout from Uncle Sam.

Bailouts of bad business practices aren’t consistent with a free market model of survival of the fittest. Airline deregulation forced some inefficient airlines like Pan Am and Eastern Airlines out of business, but others like JetBlue rose from the ashes. In the telecom deregulatory environment, overinvestment in the crazed late 1990s led to tens of billions of dollars in overinvestment, shareholder losses and eventual bankruptcies. Uncle Sam never rushed in to use taxpayer dollars to keep these companies afloat.

Everyone wants to ensure that captive local customers aren’t price-gouged by local electric utilities, which in many areas still operate as legal regulated monopolies. The goal is to eventually allow the power markets to evolve so homeowners and businesses can purchase electricity on the national power grid from any number of competing utilities. The genuine deregulation model in electricity should work very much like deregulated phone service now operates, where consumers can choose from many phone companies on the basis of reliability and cost. Under that model, long-distance prices have plummeted.

FERC talks the talk of deregulation, but it intervenes in the market place to transform losers into winners. If FERC continues with this model, it may not be long before its phony “deregulation” scam brings the California crisis to the rest of the nation. Congress should turn out the lights at FERC before these bungling regulators turn the lights out on the rest of us.

Stephen Moore is president of the Club for Growth and a senior economics fellow at the Cato Institute.

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