Message-ID: <15331588.1075843076963.JavaMail.evans@thyme> Date: Thu, 7 Sep 2000 02:12:00 -0700 (PDT) From: gavin.dillingham@enron.com To: filuntz@aol.com, liz@luntz.com, nicholas.o'day@enron.com, mike.dahlke@enron.com Subject: DON'T BLAME DEREGULATION FOR SUMMER'S `BROWNOUTS' Mime-Version: 1.0 Content-Type: text/plain; charset=ANSI_X3.4-1968 Content-Transfer-Encoding: 7bit X-From: Gavin Dillingham X-To: joe Hartsoe@ENRON, Sandra McCubbin@EES, Susan Mara@EES, Paul Kaufman@ECT, Karen Denne@ENRON, Jeff Dasovich@EES, Mark Palmer@ENRON, James D Steffes@EES, Richard Shapiro@EES, Elizabeth Linnell@EES, Jeannie Mandelker@ECT, filuntz@aol.com, Mark Schroeder@ECT, Peter Styles@ECT, Liz@luntz.com, Mona L Petrochko@EES, Peggy Mahoney@EES, Nicholas O'Day, Mike Dahlke, Rob Bradley@ENRON X-cc: X-bcc: X-Folder: \Jeff_Dasovich_Dec2000\Notes Folders\California crisis--press X-Origin: DASOVICH-J X-FileName: jdasovic.nsf Editorial DON'T BLAME DEREGULATION FOR SUMMER'S `BROWNOUTS' THE ECONOMIST\ ? 09/05/2000 Seattle Post-Intelligencer FINAL B7 (Copyright 2000) ? ? This has been a miserable summer in California. Thanks to a surge in electricity consumption, Californians and other Americans have endured several power failures. Since brownouts were rare in the past, some wonder if recent steps to liberalize the power market are to blame. Politicians are meddling, arbitrarily imposing rate freezes and price caps. This week President Bill Clinton offered federal subsidies to poor people and small firms hit by higher power prices in California. ? A growing chorus is arguing that electricity deregulation has gone too far and too fast. The problem is just the opposite. The real culprits behind this summer's power failures are the muddle and hesitation surrounding the introduction of competition in much of America. In places such as Britain, Scandinavia and Australia, which began liberalizing long ago, the transition to competitive power has been orderly and free of mishap; consumers there enjoy reliable power, lower prices and better service. California's deregulation has failed to yield such gains largely because it neglected a variety of market realities. Companies will invest in generation only if the rules of the game are clear. In America, they seldom are. That is partly because of the country's federal structure, which has left the states to take the initiative in electricity deregulation. About half have opened up their markets, but each has its own peculiarities. This patchwork, plus changing environmental regulation, explains why so many utilities have avoided building new plants for years. State governments should base reforms on clear and consistent rules. The federal government also needs to bring order to interstate power trading. Regulators must break the monopoly of the aging and overloaded distribution system. Merely generating more power at big central plants far from markets means little unless it can reach consumers - and bottlenecks on the grid mean that not enough of it does. Expanding distribution capacity is often impossible in crowded urban areas, and elsewhere people dislike new power lines. Dramatic advances in technologies such as fuel cells and microturbines, which generate power efficiently and cleanly on a smaller scale, may make up the shortfall. But regulators still tend to imagine that power will flow in one direction only: from big plants to small consumers. To ease the bottlenecks, they should follow the recent move by New York state to facilitate access to the grid for small micropower plants. The other area of reform is the hardest but also the most crucial: the consumer market. In the long run, liberalization and competition will deliver lower electricity prices for companies and households alike. However, in many places, retail prices remain fixed by government fiat. There is a case for protecting domestic households from price volatility until a genuinely competitive retail market emerges. However, the zeal with which politicians have introduced arbitrary price "rollbacks" suggests that they may turn any exception into the rule. This would be a mistake, for unless consumers see fluctuations in prices (especially at peak times), they have no incentive to conserve power or shift their use off-peak. The right way forward is to allow retail prices to fluctuate with market conditions. This will encourage consumers to use power more judiciously and speed the arrival of such innovations as fixed-price "energy service" contracts, which promise outcomes such as certain levels of heating, rather than merely delivery of a set amount of electricity. Price transparency will also allow micropower plants to buy and sell power on the grid as demand dictates, so improving the grid's reliability. In fits and starts, America is heading toward the promise of competitive energy markets. Consumers in Pennsylvania, for example, now pay $3 billion a year less for their electricity than they did before 1999. The populism and shortsightedness of its regulators and politicians must not stop California from getting there, too. Copyright 2000 Economist Newspaper Ltd. Distributed by the New York Times Special Features. Drawing