Keep CA Energy Crisis in Perspective

Unless Enron’s latest indiscretion is grabbing headlines or we’re actually suffering through blackouts, most of us don’t think about electricity. We simply flip a switch and expect the lights to come on.

Despite our inattention to an industry vital to our everyday lives and economy, this is a crucial time in the future of the energy business – and not just for California or a few energy companies. Issues surrounding how electricity will be used, how it will be moved and how consumers will benefit are now being decided.

The Federal Energy Regulatory Commission (FERC) is pursuing a highly needed plan to standardize U.S. energy markets and make them work more efficiently. FERC is in charge of “deregulated” wholesale power markets; in truth, markets are still regulated. In spite of some criticisms, mostly stemming from California’s electricity fiasco, there are many safeguards in place for consumers because of FERC oversight.

FERC Chairman Pat H. Wood III wasn’t in charge of the commission during Enron’s heyday, but he has recently taken immense steps to prevent another “Enron” by increasing scrutiny of market manipulation. Energy companies and traders obviously took advantage of California’s poorly designed attempt at deregulation and FERC has acknowledged it could have done more to help the state. But consumers need to understand that deregulation is not synonymous with crime and most energy companies aren’t evil villains.

FERC’s goal in its proposed “Standard Market Design” is to make our regional electricity systems more efficient and reliable – and better able to move electricity from power plants to homes and businesses. It’s about time. The delivery of electricity to end-users is trapped in archaic technology and surrounded by unrealized gains in technology, energy efficiency and reduced environmental emissions.

Those who say the old ways of operating utilities were not so bad – lumping costs into regulated rates and making consumers pay for bad decisions and waste – don’t have facts on their side.

An analysis by Washington, D.C.-based Boston Pacific Co. indicates electricity prices have steadily declined since the emergence of competitive power markets. It found that all customer categories paid an average of 35 percent less in real prices for electricity during 1985-2000 than under old forms of regulation.

In Pennsylvania and Texas, retail consumers are the beneficiaries of successful competition among retail energy providers. Now in its sixth year of electric deregulation, Pennsylvania cites $4 billion in cumulative residential savings.

Texas, completing its first full year of residential deregulation, expects an initial savings of nearly $1 billion this year alone under its “price-to-beat” system.

Texas and Pennsylvania deregulated and managed to avoid California’s problems – further proof that the Golden State’s problems had more to do with its poorly designed plan than with deregulation.

FERC’s push for standardized markets would encourage energy companies to build new plants and utilize the latest technologies that will make it possible to distribute electricity over greater distances at cheaper prices.

Right now, the U.S. has an aging inventory of high-cost, nuclear and traditional base-load power plants, which are gradually being retired. We also have a transmission grid that is not suited to the kind of electricity sales that are now technically possible and can benefit consumers by reducing costs.

As several Western states experienced firsthand, the supply “bubble” will eventually burst, and we, as a nation, will be playing catch-up. When that occurs, our policymakers will want, and need, healthy wholesale energy markets with competitive providers able to build new power plants. Most states are experiencing budget problems and can’t afford to foot the bill for new plants.

FERC’s plan isn’t perfect – nothing is. But it’s a good start, and one that understands how important electricity deregulation is in helping America avoid a national power squeeze.

Lynne Kiesling is director of economic policy at Reason Foundation and senior lecturer in economics at Northwestern University.