HEADLINE:
POWER PLAYS; THE WORKING OF DEREGULATED ENERGY MARKETS SHOULD
PRECLUDE THE NEED FOR GOVERNMENT INTERVENTION
BODY: To many, Enron has become a symbol not only of
corporate and executive greed and chicanery, but also of failed electricity and
natural gas deregulation efforts and flawed energy markets. Though the courts
will ultimately establish the validity of the former assertions, the marketplace
will ultimately determine the validity of the latter -- that is, if the
marketplace is allowed to function without political interference. We may have
such a test here in Pittsburgh in a couple of years because of the recent
cessation of Duquesne Light Co.'s competitive transition charge.
It is ironic that we Americans, who very much value our
ability to "make a deal" in everything we buy and sell from stock to houses,
from paper towels to coffee, continually mistrust the workings of markets and
look to government intervention and protection whenever the market unexpectedly
moves against us. Despite the ability of all of markets to provide us with a
standard of living that is the envy of the world, some would shackle markets
with government-imposed price controls and other regulatory devices at the drop
of a hat. Perhaps we do so because markets do ebb and flow. Prices go down and
prices go up often with little apparent justification. Nobody wants to pay too
much, and everyone wants to sell at the top of the market. Nonetheless, lest we
be tempted to follow a political road (as opposed to an economic one) with
regard to the relatively new electricity and natural gas markets because of
recent publicity arising from California and Enron, it is important to put such
events in perspective.
Though Enron has been at the
forefront in advocating electricity and natural gas deregulation over the past
five or six years, it should be appreciated that the forces that have been
stimulating competition and customer choice in gas and electricity are similar
to those forces that brought us cell phones, ATM machines and $200 airline
flights to Paris (and $500 flights to Harrisburg!). The growth of markets has
been enhanced by developments in both the government and economic realms. The
Supreme Court and the Congress were really the original drivers of electricity
deregulation when they issued decisions (the Ottertail Power Case) and passed
legislation (PURPA) as long ago as the 1970s.
More recently, the information revolution has been the primary engine
of deregulation in a number of industries including electricity and natural gas.
As more and more information is instantly available to more and more people,
incumbent monopolies become increasingly irrelevant. When technology
improvements are added to the grist (because competitors that are striving for
an advantage introduce new products), the notion of receiving telecommunication
service from a black telephone tied to an outlet with a wire appears to be
notably old-fashioned. Enron understood these developments and created a
business model designed to exploit these newly created markets.
Despite this reliance on and relative comfort with markets, there has
long been a divide between those who trust markets and those who prefer to trust
government. Throughout this country's history, our "pursuit of happiness" has
led us to allow the creativity of markets primarily to fulfill our needs and
wants. Yet, when excesses or abuses occur, and markets are deemed to be
"failing," we have resorted to government interventions and regulations to check
and control markets. It has been an economic war of sorts, with markets winning
battles (the deregulation of motor carriers, financial institutions,
telecommunications and airline industries) here, and the government winning
battles (consumer protection legislation) there.
The
current events in California, and that state's aggressive entrance into the
electric power business, are stark examples of the latest battle in the ongoing
economic war. Certainly, those who equate the fall of Enron and the flaws of
electricity and natural gas deregulation would have us believe that government
control of our energy industries is the appropriate public policy for the 21st
century. The fear of "powerful interests" and "free marketeers" is as old as
Main Street's distrust of Wall Street. But, what that perspective ignores is
that the democratization of information has empowered people to make choices,
and that markets are more endemic than ever. Some want to have the ability to
choose among electricity providers in order to save money. Others want to choose
providers that will provide them "cleaner" electricity, even if it costs more.
Markets provide those options; governments don't.
At
one time, electric utilities were self-sufficient with respect to power
generation. They owned and operated generation plants that provided power equal
to the demands for electricity on their system. The court rulings and
congressional acts mentioned above, as well as the events at the Three Mile
Island nuclear plant, changed all that. Now, utilities rely increasingly on the
market, and buy power from fellow utilities or from independent generators.
These budding wholesale markets are the platforms for not only retail markets
but also power generation adequacy. Concern about the latter is what drove
California's governor to insist that the state become involved in the power
generation business. Regardless, the traditional integrated utility is likely to
become a network of distribution lines with independent companies owning the
power generation plants and large multistate entities owning and controlling
transmission lines. Retail power marketing companies will be selling us
power.
Duquesne Light is arguably further down this
track than any other utility in the country. The recent phaseout of its
competitive transition charge has provided instant and not insignificant
reductions to Pittsburgh area Duquesne Light customers. This was a direct result
of Pennsylvania's 1996 Electricity Generation Customer Choice and Competition
Act, and the decision of Duquesne Light to sell its generation facilities.
Though prices are to be capped for yet another couple of years (the end of
2004), the real significance of this event is that we Duquesne Light customers
are now dependent on the workings of both the wholesale and retail electricity
markets.
On the wholesale level, we have but those
couple of years to get those wholesale markets efficiently operating. One aspect
of those markets is the pricing of capacity that will ensure power generation
adequacy. On the retail level, we have to figure out how to make the new
Provider of Last Resort concept work so that there will always be a merchant
entity to sell power in the last resort. And we have to attract marketers.
Without marketers competing for consumer business, there is no market. The
current electricity market in Pennsylvania is devoid of competing marketers,
with the partial exception of those providing green products.
In San Diego back in 2000, after the removal of a similar competitive
transition charge, a dysfunctional wholesale market caused the price of power to
consumers to double, until the government stepped in. While it is true that
wholesale markets in Pennsylvania seem to be working far better than was the
case in California, those of us who believe in competition and customer choice
still have our work cut out for us. We must continue working at market
development in order to assure the benefits of competition are made available to
those of us who are (or soon will be) exposed to these new markets.
Everyone likes lower electricity prices (except those who
know about the higher cost of green electricity), but lower prices are but one
of many fruits of competition.
The real benefits of
electricity (and natural gas) deregulation and the subsequent arrival of
competition are the new and unexpected products that we will see. The end of
monopolies will unshackle technology and allow for the provision of things
unimaginable today. Did you ever think that banks would put money in boxes on
almost every street corner?
NOTES: Tim Merrill of Sewickley is president of Competitive Energy Strategies
Co. in Green Tree, a consulting firm that advises clients about developments in
competitive energy markets, and has contributed articles to magazines,
newspapers and public policy forums.
