On 10/19/10, MJ <michaelj@america.net> wrote:
> The Myth of Energy Deregulation
> Monday, November 07, 2005
> by Adam Summers
>
> While the initiatives on the upcoming November 8 California special election
> ballot backed by Governor Arnold Schwarzenegger have been receiving all of
> the media attention, another initiative that addresses an important issue is
> being overlooked. Proposition 80, the so-called "Repeal of Electricity
> Deregulation and Blackout Prevention" initiative, would make some
> significant and detrimental changes in the state's energy policy.
>
> The fact that even a government regulatory body such as the California
> Public Utilities Commission (PUC) is actually against a measure that would
> increase its regulatory powers should tell you something right off the bat
> about the merits of Prop. 80.
>
> California energy consumers are currently served by one of three types of
> providers: investor-owned utilities (IOUs), local publicly-owned electric
> utilities, and independent electric service providers (ESPs). Before the
> state's "deregulation" experiment of the 1990s was suspended in 2001 during
> California's energy crisis, customers could choose to purchase their
> electricity services directly from ESPs through "direct access" contracts,
> rather than through an intermediary such as the local IOU or public utility.
>
>
> Proposition 80 Would Reduce Consumer Choice and Increase Costs
>
> Proposition 80 would permanently prevent all customers receiving electricity
> services from an IOU from switching to an ESP, effectively eliminating any
> new direct access (existing direct access contracts would be grandfathered
> in).[1] Thus, under Prop. 80, instead of having the option to buy
> electricity directly from independent producers, consumers would have no
> choice but to buy their electricity from utilities. By effectively
> eliminating an entire class of providers, the state has stifled competition
> (and would continue to do so), thereby leading to higher prices and, likely,
> lower-quality service.
>
> The effect of this provision on prices would be significant. ESP customers
> include hospitals, local governments, the California State University
> system, several University of California campuses, community college
> districts, and local school districts. The nonpartisan Legislative Analyst's
> Office (LAO) estimates that the UC system alone saves about $12 million per
> year by purchasing its electricity from a lower-cost independent provider.
>
> According to Mike Florio, an attorney for The Utility Reform Network (TURN,
> one of the chief proponents of Prop. 80 that helped craft the measure), the
> ability of consumers to purchase electricity directly from independent
> service providers "destabilizes the whole business … and we'll truly be at
> the mercy of the gods of the free market."[2] How dare people be able to
> choose whom they want to do business with! I suppose TURN hired Mr. Florio
> not for his legal expertise, but rather by the sheer providence of the
> "free-market gods."
>
>
> Proposition 80 Would Impede Innovation and Efficiency
>
> Another provision of Prop. 80 would prohibit the broader implementation of
> "dynamic pricing" of electricity without the consent of the consumer.
> Currently, all but the largest energy consumers pay a flat rate for
> electricity that does not vary by the time of day. Clearly, energy use is
> not constant throughout the day, however. There are certain "peak" hours of
> the day when consumers use lots of electricity, and "non-peak" hours when
> they use very little. The costs of providing electricity vary accordingly.
> As such, the IOUs have submitted proposals to the PUC to charge all
> consumers higher rates during peak hours and lower rates during non-peak
> hours. This price discrimination would be accomplished through the use of
> high-tech "smart" meters.
>
> In addition to making good sense one should pay more for something when it
> is in higher demand dynamic pricing would encourage conservation via the
> pricing mechanism. Dynamic pricing would be a more efficient system because
> higher prices would discourage some from consuming such a scarce resource
> while ensuring that those who place the highest value on energy use are
> still able to consume it. Similarly, those who have some flexibility over
> when they consume their energy would be encouraged to utilize it during
> non-peak hours, thus placing less strain on the system.
>
> Allowing the consumer to opt out of a dynamic pricing model would be like
> forcing a hotel owner to offer customers the choice of the nightly room rate
> or an average of the nightly room rates throughout the week. Since
> significantly more people stay at hotels during the weekend, rates are much
> higher on Friday and Saturday nights. The average weekly rate, however,
> would be higher than normal weekday rates but lower than normal weekend
> rates. The cheaper "opt-out" weekend rates and higher weekday rates would
> encourage even more people to stay during the weekend and fewer to stay
> during the week. The result would be a shortage of hotel rooms during the
> weekend and a loss of revenue for the hotel owner. No wonder demand strains
> the electrical grids during hot summer days.
>
>
> Environmental Issues
>
> Under current regulations, energy producers must increase the portion of
> energy derived from renewable energy sources such as solar, wind, and
> hydroelectric by one percent per year until 2017, when 20 percent of the
> energy produced must come from these sources. Proposition 80 would
> accelerate this deadline to 2010. Interestingly, some environmentalists
> oppose Prop. 80 because a provision requiring a two-thirds vote of the
> Legislature to amend the measure could make it more difficult to increase
> the renewable energy standard in the future.
>
> According to the LAO's analysis, Prop. 80 would also require that "the first
> priority for IOUs in procuring new electricity is to be from
> 'cost-effective' energy efficiency and conservation programs, followed by
> 'cost-effective' renewable resources, and then from traditional sources such
> as fossil fuel burning power plants."[3] Of course, if renewable energy
> sources and energy efficiency and conservation programs were truly "cost
> effective," producers would already be utilizing them in higher numbers
> because it would make them more profitable. This clearly is not the case.
> Forcing companies to invest significant amounts of their scarce resources on
> more costly energy-production methods, which make up a relatively small
> share of total energy production (for good reason), will only ensure that
> costs and, ultimately, consumers' electricity bills remain higher than
> necessary.
>
> As new technologies and energy-production methods are developed, this may
> change, but for now, it is best for both producers and consumers to focus on
> the most efficient means of producing energy. Of course, if consumers demand
> "cleaner" energy, in a truly free market, producers will have an incentive
> to provide it. Indeed, after Pennsylvania successfully implemented its
> electricity deregulation effort in 1999 (without the pitfalls experienced by
> California), 20 percent of consumers chose to switch to suppliers of "green
> power," despite the fact that they had to pay a small premium to do so.
> Proposition 80 eliminates this choice, instead demanding that all consumers
> support the higher cost of investing more in renewable energy whether they
> want to
> or not.
>
>
> Misconceptions Over Electricity "Deregulation" in California
>
> Some blame deregulation for the rolling blackouts, soaring spot market
> prices, and utility bankruptcies that sprang from the energy crisis of 2000
> and 2001. But this anger is misplaced. California has never experienced true
> deregulation. The "deregulation" implemented in 1996 left price controls in
> place and created "artificial" markets ripe for manipulation and disparities
> between supply and demand.
>
> By setting price caps below market prices, California limited the
> profitability of the industry. When wholesale energy costs increased, the
> price caps prevented energy producers from passing them on to consumers.
> Wholesale prices rose dramatically for a number of reasons: natural gas
> prices rose, hot weather in the Southwest increased demand, a relative lack
> of water in the Northwest minimized the production of hydroelectric energy,
> and pollution-control permits, which allow industrial companies that produce
> less pollution than allowed by regulations to sell the difference as
> "credits" to higher-pollution-producing companies, rose ten-fold, from $4 to
> $40.
>
> The price caps additionally discouraged potential producers from entering
> the market and increasing competition, and they discouraged existing
> producers from investing profits in adding capacity, of which Californians
> were (and continue to be) in dire need. As a result of the price caps and
> pressure from politicians and environmentalists, the building of plants and
> transmission lines slowed dramatically and energy producers were not able to
> keep up with demand, particularly in the Silicon Valley, where the booming
> computer and "dot-com" industries led to even sharper increases in
> electricity demand.
>
> After the big three investor-owned utilities Pacific Gas & Electric,
> Southern California Edison, and SEMPRA (San Diego Gas & Electric) were
> forced to sell many of their fossil-fuel-burning generators to private
> firms, regulators prohibited them from entering into long-term contracts
> with these firms, forcing them to rely upon the much more volatile
> short-term and spot markets. In addition, California forced generators and
> utilities to trade power through the Power Exchange, a state-run pool.
>
> While that requirement was designed to give every company the same wholesale
> price for power, it also guaranteed that they would be unable to negotiate
> lower-priced power on their own. The California rules essentially barred
> utilities from buying power on the futures market, meaning they were unable
> to lock in supplies and prices.[4]
>
> This is as if Wal-Mart and Marshall Field's were forced to acquire their
> goods from a non-profit, state-run pool that would guarantee that they would
> acquire the goods for the same price. Wal-Mart never would have been able to
> develop its efficient and innovative purchasing and distribution system,
> meaning it could not generate savings to pass on to customers in the form of
> lower prices.
>
> At the time of the increase in wholesale prices, PG&E and Edison were still
> in the deregulation "transition" period, and thus still subject to PUC rate
> regulations. As a result, PG&E went bankrupt and Edison teetered on the edge
> of insolvency. To add insult to injury, when the government stepped in to
> purchase electricity on behalf of the struggling IOUs to try to quell the
> crisis, not only did it do so at the height of the emergency, when energy
> prices were highest, it locked in these prices with long-term contracts
> costing billions of dollars.
>
>
> The Natural Monopoly Justification for Regulation
>
> The main argument against the full privatization of public utilities such as
> electricity and water service is that such industries are "natural
> monopolies." That is, they require such high fixed costs (it is easier to
> start a new restaurant than to invest in the infrastructure for a new
> electric grid) that it is inefficient for there to exist more than one
> producer in a particular location. This, it is feared, will lead the
> producer to engage in price gouging.
>
> There are several problems with this rationale, not the least of which is
> the notion that "public utilities" somehow constitute a unique set of goods
> that must be "protected" by government intervention. As economist Murray
> Rothbard noted in Power and Market:
>
> The very term "public utility" … is an absurd one. Every good is useful "to
> the public," and almost every good … may be considered "necessary." Any
> designation of a few industries as "public utilities" is completely
> arbitrary and unjustified.[5]
>
> High capital costs certainly will limit the number of actual and potential
> providers, but there is still a profit motive in a free market that creates
> opportunities for lower-cost producers. In addition, it is important to note
> that markets are not static; technological innovations may allow for
> additional competition in the future.
>
> Another misconception opponents of free markets have concerns the very
> understanding of the nature of competition. Even if there is only one
> producer of a certain good or service in town, this does not mean that the
> producer is "gouging" customers through monopolistic practices. Indeed, just
> because he is the sole supplier today does not mean he will be the sole
> supplier tomorrow. As economist Thomas J. DiLorenzo explains:
>
> If competition is viewed as a dynamic, rivalrous process of
> entrepreneurship, then the fact that a single producer happens to have the
> lowest costs at any one point in time is of little or no consequence. The
> enduring forces of competition including potential competition will
> render free-market monopoly an impossibility.[6]
>
> In other words, even if there happens to be only one current provider of a
> particular good or service, in a free market that provider is held in check
> by the mere threat of competition if he charges prices that are too high
> or provides poor service, there will be an incentive for a competitor to
> come in and take market share from him by offering lower prices or better
> service.
>
> The rules change, however, when government regulation erects barriers to
> entry or otherwise suppresses competition. In addition to the many
> government regulations purportedly enacted in the "public interest," there
> are numerous instances where private-sector businesses have been able to
> successfully lobby policymakers to use the power of government to establish
> barriers to competition and protect them from existing or potential rivals.
> Unlike the free-market case, there is no possibility of these monopolists
> losing out to lower-cost providers (barring the elimination of the
> regulations), and they are able to "exploit" consumers. These are the truly
> harmful monopolies. Thus, the only "bad" monopoly is a government-created or
> government-preserved
> monopoly.
>
>
> Conclusions
>
> Proposition 80 would be a step backward for California. It would restrict
> consumer choice, discourage competition, and impose more of the kinds of
> regulations that got the California power industry into trouble in the first
> place.
>
> As awful as Proposition 80 is, however, there is good news. It is trailing
> in recent public opinion polls, and even if it should end up passing it is
> likely to be discarded by the courts. It was removed from the ballot on July
> 22 by the Court of Appeals in Sacramento because the court found that,
> according to the state constitution, the PUC's authority can only be
> increased by the Legislature, not by initiative. The initiative was restored
> a few days later by the California Supreme Court, which did not offer an
> opinion on the merits of the case but felt that the public should have the
> chance to vote on the initiative before the legal challenge is heard. (Of
> course, if voters reject the measure, this will be a moot point and the
> courts will not have to waste their time on it a fact that surely was not
> lost on the Supreme Court.)
>
> Politicians and regulators forced a sham of a "deregulation" scheme upon the
> energy industry in California, and then blamed the free market when it
> inevitably failed! The problem was not too much free-market competition; it
> was too much regulation (despite the "deregulation" doublespeak). The real
> solution to California's energy problem is to eliminate price caps and all
> government regulation, thereby removing barriers to entry, fostering
> competition, offering consumers maximum choice, and affording providers the
> greatest incentives to increase capacity and best serve their customers.
>
> Adam Summers is a policy analyst for the Reason Foundation
> (asummers1@san.rr.com). Comment on the blog.
>
> [1] This option was suspended during the electricity crisis of 2000 and
> 2001, but is scheduled to be reinstated when the last of the power contracts
> signed on behalf of the IOUs by the Department of Water Resources expires in
> 2015.
>
> [2] Carrie Peyton Dahlberg, "Electricity proposition crackles: Will prices
> go up? Will it avert an energy crisis? It all depends on who's talking,"
> Sacramento Bee, October 15, 2005,
> http://www.sacbee.com/content/politics/story/13717834p-14560232c.html (free
> registration required).
>
> [3] California Secretary of State, Official Voter Information Guide,
> Statewide Special Election, November 8, 2005, p. 52,
> http://www.ss.ca.gov/elections/bp_nov05/voter_info_pdf/entire80.pdf .
>
> [4] Terry Maxon, "Power Woes Unlikely in Texas, Officials Say," Dallas
> Morning News, January 19, 2001, cited in Lynne Kiesling, "Getting
> Electricity Deregulation Right: How Other States and Nations Have Avoided
> California's Mistakes," Reason Foundation Policy Study No. 281, April 2001,
> p. 18, http://www.reason.org/ps281.pdf.
>
> [5] Murray N. Rothbard, Power and Market: Government and the Economy,
> (Kansas City: Sheed Andrews and McMeel, 1977), p. 76,
> http://mises.org/rothbard/power&market.pdf. Now integrated into Man,
> Economy, and State.
>
> [6] Thomas J. DiLorenzo, "The Myth of Natural Monopoly," The Review of
> Austrian Economics, Vol. 9, No. 2 (1996), p. 44,
> http://mises.org/journals/rae/pdf/rae9_2_3.pdf.
>
> http://mises.org/daily/1954
>
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Together, we can change the world, one mind at a time.
Have a great day,
Tommy
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