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Analysis: Any hope for power deregulation?

By HIL ANDERSON, UPI Chief Energy Correspondent

LOS ANGELES, Nov. 30 (UPI) -- The U.S. electricity market was seen as a deer caught in the headlights, when a report out of Washington indicated that it was unable to move forward to a genuine condition of deregulation or backward to the more-orderly and protective times.

The latest look at the U.S. electricity grid comes from the Cato Institute, which despite its libertarian leanings sees enough inherent pitfalls and confusion to make the goal of complete deregulation of the market highly unlikely.

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"The poor track record of restructuring stems from systemic problems inherent in the reforms themselves," authors Jerry Taylor and Peter Van Doren said in the analysis of electricity deregulation that was released Tuesday.

The authors said that while deregulation might offer great benefits to consumers on paper, the market was likely to remain regulated for the immediate future due to the political fallout from last year's East Coast cascading blackout and the California electricity crunches of 2000 and 2001.

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Those unexpected shock waves the past couple of years caused the move toward open markets to stall uncomfortably in the middle of the road where it wasn't doing consumers -- or the power industry -- much of a solid favor.

"Our sense is that we should go either forward with true deregulation or backward to the old regime, but not stay in the current mandatory open-access limbo, which is more regulatory than the old status quo with few, if any, benefits," the report concluded.

Deregulation of the electricity sector, which was launched in the 1990s in the wake of Ronald Reagan's heyday, was touted as a golden opportunity to unleash the power of the free market for the benefit of all. The theory was that opening markets, which at the time were the exclusive turf of local utilities to competitors, that consumers would benefit in the form of welcome lower utility bills.

The plan sailed forward with scant public attention and seemed to be the wave of the future. It was in 2000 that California and the rest of the nation discovered to its utter dismay that competition could drive prices down in a buyers' market, but when electricity supplies were tight, the price of power could catapult into lofty levels.

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California's problems were largely blamed on the fact that while wholesalers were free to charge as much as they could for their parcels of power, utility companies were blocked by state law from passing on the full weight of the extra costs to the consumer.

Even the most hardened of free marketers likely grimaced when San Diego Gas & Electric Co., the one utility that was allowed to pass on its full costs to electricity users, mailed out bills to residents that were pricier than they ever imagined or, in many cases, could even afford.

"Those who believe in markets often argue that an important lesson from California is that true markets were never tried. ... But market retail prices were used in San Diego for more than a year, which proved to be politically unstable," the report said.

"Politically unstable" was a polite way of saying it sparked a financial crisis that led to the state government taking over power purchasing on the spot market from the beleaguered utilities, plunging the state into serious debt and contributing to the unprecedented recall of Gov. Gray Davis.

Davis responded with a pugnacious legal counterattack against Enron and other major power producers that by 2004 were often as well financially struggling.

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The 2000 and 2001 rolling blackouts that symbolized the rough times in California are a distant memory; however the bad taste the situation produced has made supporting deregulation a politically hazardous step for any lawmaker to take.

The result, according to Van Doren and Taylor, is a current situation in which no one really knows the best direction in which to move the electricity market at this time.

"We do not expect full and genuine deregulation to happen in the foreseeable future," they wrote. "But we do expect the case for restructuring as it is to come under increasing political and economic stress."

The current vision for the power sector is largely focused on encouraging investment in the transmission infrastructure that is the key to a truly national market and to the success of future attempts to deregulate. The grid, however, is unique in that power lines are financed on a state level, but they benefit power generators that are often located in other states and must be opened to whatever companies want to use them to move power to the market.

In addition, the report pointed out, some states that enjoy power surpluses and low prices would lose that luxury if their power companies were free to sell the excess energy to other states.

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The current lack of progress is illustrated by legislation passed last month that allows energy companies that sell transmission assets to pay off the capital gains tax over an eight-year period. The Edison Electric Institute, in fact, issued a news release declaring, "This change likely will help spur investment in this crucial sector."

However, such changes can be seen either as a step in a more-methodical march toward deregulation, or nibbling at the periphery of the deregulation issue without tackling the more-daunting tasks of overcoming local economic interests and partisan politics that have dug in to preserve control over an industry that spun out of control in California just a few years ago.

The Cato analysts said Congress could, of course, simply declare state controls over electricity to be "unconstitutional interference with interstate commerce" much as they did when the trucking industry was deregulated in 1980.

Such a Draconian move, however, would not fly given the consequences a lawmaker could face if there was a repeat of the unhappy California experience in his or her home state.

"True deregulation would be an easier sell if one could be certain of the gains that would occur," the authors said. "The second-best solution might be to go backwards, to accept the regulatory oversight of electric power companies...in return for management of the transmission (grid) through vertical integration."

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In other words, the electricity market may be all too important to the well being of the United States to leave to the invisible hand of an unfettered deregulated market.

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(Please send comments to nationaldesk@upi.com.)

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