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Regulate Energy Market to Return Power to the People

by Peter DeFazio
The Oregonian, January 7, 2001

Deregulation has failed consumers,
who live with the threat of blackouts and exorbitant energy prices

Until recently, the United States had a system of electricity production and distribution that was the envy of other industrial nations for its low cost, stability and reliability. Yet, for nearly the entire month of December, California's energy grid hovered on the brink of collapse with inadequate supply and wholesale prices rising 100 times above the previous year.

Analysts have warned that the Northwest can't expect normal seasonal power exchanges with California this winter. Skyrocketing prices and the possibility of blackouts are predicted if the winter proves dry and cold. They say the causes of this crisis are complex and relief in the form of new generation is at least three years away.

The analysts are only partially correct. The cause of this artificially created crisis is not complex. It can be explained in one simple word -- deregulation. But the damage could take many years to repair.

The United States' mixed system of regulated private monopolies and public power stood as a model for the industrial world and served our nation well throughout much of the 20th century. This system was developed after the enormous, unregulated utility conglomerate, the "Insull Empire" collapsed in 1932, and threatened to black out cities across the Midwest.

During the Ronald Reagan era, in the style of trickle-down economics, the appreciation for an efficient regulated industry began to diminish. Following the advice of right-wing think tank economists, Martha Hesse, chairwoman for the Federal Energy Regulatory Commission, began promoting the deregulation of electric utilities.

In 1992, with little scrutiny or public attention, Congress adopted and President Bush signed the 1992 Energy Act. This legislation delegated tremendous power to the Federal Energy Regulatory Commission to mandate transmission and wholesale competition and opened the door for states to deregulate retail electricity. I was one of 60 representatives to vote no, warning that less reliable and more costly power was a more likely result than the promised competition and lower prices.

In 1996, the commission adopted sweeping rules mandating transmission deregulation and opened the door for independent energy generators to sell power to the highest bidder -- with no responsibility to serve consumers. Two years later, a record run up in wholesale prices during a heat wave sent up the first warning signals.

Ironically, the record prices, 104 times greater than normal, occurred in the same Midwest area that triggered the original electric generation crisis in 1932. But the analysts, apologists and burgeoning new energy marketing companies quickly responded, "Deregulation hasn't had a chance to be fully realized. Just give it more time."

That same year, California led the nation with a much-applauded, sweeping retail deregulation scheme allowing consumers to "choose" their energy provider. California also relieved utilities of the "duty to serve," and made them sell off their generating plants to independent marketers. Retail deregulation was a flop -- less than two percent of the state's retail customers signed up by 1999 -- yet the scheme went ahead.

San Diego Gas and Electric was the first to sell off its generation capabilities and fully deregulate. This summer, instead of generating their own power, they were forced to buy from independent power producers at market prices. When the early season heat wave hit, they had no standby generation to call on and were sent scrambling into the marketplace for additional power.

In the face of consumer outrage, the California Legislature was forced to adopt a cap on energy bills for retail customers in San Diego and elsewhere. Utilities were required to buy power at high costs and sell at "normal" rates. Two of the largest utilities, Pacific Gas & Electric and Southern California Edison are now saying that they are near bankruptcy.

Expert analysts insist deregulation "just needs more time." The California Legislature that toasted its work on deregulation just four years ago, is resisting calls to re-regulate and desperately trying to shift blame. Some Californians have set their sights on the Bonneville Power Administration, hoping its reliable, low-cost hydro-power system will cure the ills they've brought upon themselves. Even if they could legislate a power grab, their problems wouldn't be solved and a disaster would be created in the Northwest.

Deregulation defenders argue that high market prices will either reduce demand for energy through conservation or increase supply based on a lucrative market. While economic graphs might confirm this theory, electricity production does not lend itself to perfect competition.

First, finding a site for a generation plant is a long and cumbersome process. Most communities are not eager to have power plants in their back yards, and government entities take time to ensure those plants are safe for people and the environment. Second, if new power plants are built, those energy marketers will have no obligation to supply power in times of crisis. Their only obligation would be to their stockholders or investors.

Finally, energy is influenced by unpredictable weather. A regulated industry can mandate reserves to ensure utilities have physical and financial resources to meet the worst conditions. In a deregulated industry, corporate energy producers profit from weather-related shortages and have no incentive to stabilize the market or bring down energy costs for residential consumers.

It's high time for a host of federal and state policy-makers to admit they were wrong. Regulated utilities with cost-based rates and reasonable guaranteed returns can be required to build the excess capacity that a dependable system requires. New energy producers thrive in market uncertainty and could never justify investing in the excess capacity that would guarantee reliability, smooth out price spikes and cut their exorbitant profits.

We need to quickly return to an efficient, regulated energy market that includes strong mandates for conservation and renewable production. The alternative is costly, unstable and unreliable energy, well into the future.

Rep. Peter DeFazio, D-Ore., has been co-chairman of the Congressional Northwest Energy Caucus and served on the water and power subcommittee.
Regulate Energy Market to Return Power to the People
The Oregonian, January 7, 2001

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