The US still should deregulate electricity markets. It doesn't matter to the argument for deregulation that one of the first states to restructure its electricity business came to grief. And it doesn't matter that one of deregulation's strongest corporate supporters last week sought protection from creditors under bankruptcy.
Deregulation of electricity would still be better than the regulated past for a large majority of US energy consumers. And it would certainly be better than the half-way hash in which state-by-state movement to enhance retail competition has stalled.
Enron's plunge
Opponents of deregulation cite Enron Corp.'s plunge into bankruptcy as new evidence supporting their case. In healthier days, Enron was a front-line champion of customer choice and price decontrol. To advocates of market regulation, Enron's financial collapse joins California's energy crisis as a reason for electricity markets to remain broadly under government control.
Yet the misfortunes of Enron and California have little to do with market deregulation.
California didn't deregulate its electricity business. Its 1998 restructuring legislation included retail price ceilings, which have no part in a deregulatory scheme. Results were predictable. As the state's consumption grew, its generating capacity did not, thanks to permitting hurdles that had discouraged construction of power plants. When demand for electricity and natural gas grew last year in the neighboring states on which California increasingly depended for supply, wholesale prices surged, crushing urban utilities unable to pass along the costs. Electricity users suffered service interruptions and, eventually, elevated prices as ceilings gave way to reality.
The hardship hasn't ended. In the role it assigned itself as electricity supplier of last resort, the state government has borrowed heavily. Taxpayers will repay the debt.
It is a mistake to blame deregulation for any of this. California not only left retail price regulation in place but also limited the contracting flexibility of private power suppliers. That's not deregulation.
The consequent mess spooked other states about deregulation anyway. Eight of 24 states that had started to open retail electricity markets to competition have reversed or delayed their moves. Some have specifically blamed California's misadventure. Other states-most with average electricity prices below the national average-aren't acting on deregulation at all.
Even before Enron imploded, the political mood thus had turned against electricity deregulation, however irrationally. And Enron's calamity was no more the result of deregulation than California's energy crisis was.
The big energy trader's credit-worthiness and stock value collapsed under the weight of losses from aggressive investments, accounting errors, ownership mysteries, and consequent dissipation of investor confidence. That combination of troubles would have crushed the company no matter where it stood on electricity deregulation. Other supporters of customer choice in power markets show no sign of sharing Enron's fate. The problem at Enron is imprudent business practice, not support for electricity deregulation.
The benefits of deregulation are as compelling now as ever. They include increased competition, new system efficiency, lower average costs to consumers, and the promise of future improvement as markets grow in size and sophistication. But they are conceptual and prospective. In a contest of communication, they will forever yield to here-and-now stories about Californians struggling in darkness and Enron employees losing their retirement savings. And in policy-making, deregulation will be forever susceptible to guilt by misplaced association.
When electricity deregulation snags on political doubt aggravated by the California and Enron dramas, producers of natural gas should worry. The gas market's growth potential depends greatly on the electricity market, growth of which depends greatly on deregulation all the way to the retail level. Without an articulate boost, deregulation to that necessary extent might not happen.
Filling the void
With Enron subdued, deregulation has lost a champion. Other supporters of deregulation need to fill the void. They need to distinguish between real deregulation programs, such as Pennsylvania's, and false starts, such as California's. They need to point out at every opportunity that the main purpose of deregulation is not to enrich aggressive traders but to cut costs to people who use electricity. They need to encourage the federal government to act if states won't do the job.
And they need the reinvigorated leadership of the gas industry, which has much at stake in the outcome.
