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Electricity: It's Time for Uncle Sam to Restore Order by Tom Karier Guest column, Spokesman Review, February 19, 2001

Electric power restructuring in California has blown a fuse and its effects are reaching Washington state. Prices are soaring for some utilities, debts are accumulating and the reliability of our electricity grid is slipping.

Gov. Gary Locke has been meeting with the governor of California and federal energy officials to urge them to take immediate action to protect Washington consumers. As policy-makers in Sacramento and Washington, D.C., scramble to find a way out of this mess, they will have to take some decisive short-term steps and a hard look at deregulation in the long run.

There is a pressing need for the federal government to temporarily restore regulatory oversight over the extraordinarily high electricity prices before blackouts spread.

There was never any groundswell of public support for deregulation. In fact, most people were probably not even aware that the federal government deregulated the wholesale electric power industry in 1992. In deregulated wholesale markets, utilities buy power for their customers from unregulated companies or other utilities. These unregulated companies and utilities are free to charge whatever they can for power.

Deregulation picked up steam in 1996 as California mandated retail competition, followed by a couple dozen other states. Washington state was not among them.

California kicked off retail competition when regulated utilities sold much of their valuable electricity generation capability to unregulated companies, sometimes subsidiaries of the regulated utilities which produced it. The regulated utility then bought the power back for its customers at whatever price the market would bear.

Companies and utilities responded to deregulation by promptly reducing investments in new plants in the West as well as new conservation efforts in the Northwest. While electricity use increased by 12,000 megawatts on the western grid (a regional power market and transmission system), new generation went up a meager 4,600 megawatts. The difference represents the electrical load of six cities the size of Seattle.

There are plenty of excuses now for the failure to build new generating plants or invest in conservation efforts. The fact remains that deregulation shifted the obligation to meet demand toward the market -- and left no one in charge.

When a market fails there is no one to blame.

For nearly 100 years, regulation ensured that the electric power system had enough backup power to maintain reserves of 7 percent or more. No one knows for sure whether private enterprise can ever provide as much reliability. The first eight years of the deregulation experiment are anything but promising.

A year ago, the Northwest Power Planning Council concluded that the Northwest needed 3,000 megawatts of new generation or conservation. With the West perilously low on reserves it was only a matter of time before we experienced a crisis. The crisis struck last June when there wasn't enough water to fully operate the hydropower dams, a few key thermal plants went down and a heat wave struck California. Shortages led to spectacularly high prices that continue to the present. Electricity that once sold for $30 per megawatt couldn't be bought for less than $150 per megawatt and reached a peak of $5,000 per megawatt.

How Avista and Spokane will be affected by all this remains to be seen. Inland Power and Light was one of the few Bonneville Power customers to lock in low electricity rates for five years. However, even for those that avoid direct price increases it will be hard to avoid the indirect effects as the electricity shortage causes a greater demand for natural gas and bids up those prices.

In the near term, the most critical step is to stabilize wholesale prices. The best way to do that is for the federal government to impose temporary "cost-plus" caps. These would allow wholesale prices that reflect the cost of producing power, plus a reasonable profit. They would also protect customers yet still preserve incentives to conserve and to build new power plants and wind generators.

Since only the federal government can stabilize prices, the Bush Administration must take the lead. Protecting the Northwest from the California debacle is imperative. When we flip the switch we want the lights to come on at a price we can afford.