Wall Street Journal - August 29, 2000
Deregulation Answers the Charges
Some people call me Dandy. Some people call me Damn. But my real name is Deregulation. I know you have been hearing a lot of gossip about me lately -- especially in California -- so I'm here to tell you that I'm just doing my job. A really good job, in fact.
Electric power is a huge deal -- worth about $218 billion a year -- involving generation and transmission and distribution. I've been called in to change the structure of the industry from a network of monopolies with fixed rates and guaranteed profits to a competitive market in which prices are determined by my best friend, Ms. Supplyanddemand. So my job ain't easy.
I started working on this project about eight years ago. It's been slow going. My best progress has been in the generating market on the wholesale side; it has been deregulated at the national level for five years. As for the retail market, right now, about 24 states are in the process of deregulating electric power.
This summer, I finally started to have a major impact. And, whaddya know, prices went up. In some places, like California, New York and New England, prices went up smartly. Well, that was no surprise to me given that during the past decade demand for electricity surged 30%, while supply inched up 5-6% and transmission capacity increased only 18%.
First of all, even a dim bulb could see that a long period of economic growth would propel demand up like gangbusters, especially when you factor in the fact that the economy has become more dependent on electricity. Just think of the Internet, computers and recharging cell phones buzzing away on electricity.
Meanwhile, supply failed to grow apace. Utilities that wanted to expand capacity were thwarted by the site police -- people who fight against new power plants -- the old NIMBY (Not in My Back Yard) routine. Plus, investors weren't willing to put out the big bucks to build generating plants given all the uncertainty I caused once I came on the scene in 1992. There were already tons and tons of plants that would not be profitable under my regime and investors wanted to wait to get a clearer idea of what the new cost structure of the industry was going to look like before they committed themselves.
Finally, rising prices are not only the textbook result of steamy demand and chilly supply, but of one other factor as well -- a lousy transmission network. Power grids were built to handle crises when one region had to borrow energy from another region. With the development of the wholesale market, however, grids are now being used to transport power as an everyday business event. That causes bottlenecks. (But don't get me started on that sorry excuse for a transmission network . . . we'll be here all day.)
I revel in rising prices because they lead to the true fruits of my labors. They promote energy conservation, they cue producers to add more production capacity and they spur innovation. Which is exactly what's been happening.
All over the country, businesses have started to act like stingy housewives by turning down air conditioners, dimming lights and turning off idle computers. Some are working with equipment suppliers to develop factory gizmos that need less energy. Producers have announced they will add 20% to capacity over the next 10 years; some observers are even forecasting surplus capacity in three to five years. And techo-brains are coming up with energy-saving or enhancing solutions that range from the development of smart meters that offer hourly displays on how much energy is being consumed and how much it costs to the infant distributed power industry where generation is local and based on really clean fuels like natural gas or fuel-cell technology.
Now, let me tell you what I am doing in California. Prices there are really zooming, especially in San Diego, which is the first place to face deregulation in the retail as well as wholesale market.
Again, rising prices are due to Ms. Supplyanddemand. Electricity use in California is going double-gangbusters -- fueled by all those Internet and high-tech companies -- so that demand is growing 4-6% a year, which is double the national rate. And the capacity situation is grim. There has been no new plant construction in the past 10 years. Remember, this is a state where NIMBY has become BANANA (Build Absolutely Nothing Anywhere Near Anyone). Demand for electric power is also strong in neighboring states, making it hard for California to plump up its supply by borrowing power from them.
But even in California I see my virtues at work. For example, Governor Gray Davis has ordered state offices to turn up their thermostats and gave state officials speeded-up timetables to process applications for 14 new power plants. Currently, independent power producers have four plants in construction with two of them set to come online next year.
Of course my enemies have been at work too. Two weeks ago, state regulators imposed partial rate caps on electricity bills for people in San Diego. (Rather silly of them, since this kind of hysterical political response messes up a perfectly sound economic response.)
It's like I told you -- I'm doing a good job. Sure, I admit that my transition period is rocky and even unpleasant. But the electric power industry and consumers are responding to higher prices by conserving energy, increasing capacity and finding new ways to produce electricity. The result will be not only a more efficient, responsive industry with lower prices, but one in which investors -- not ratepayers -- bear risks. So, I ask you: what's not to like?