LUMPY APPROACHES HURTING DEREGULATION OF ELECTRICITY

Deregulation of electricity markets has a problem common to the US and Europe: The process has been too lumpy.

Deregulation of electricity markets has a problem common to the US and Europe: The process has been too lumpy.

And the lumpiness has a common feature: concern over stranded costs.

Electricity deregulation in the US has occurred state by state - where it has occurred at all.

As of this month, according to the Energy Information Administration, 23 states plus the District of Columbia have enacted legislation restructuring energy markets. One state has issued a comprehensive restructuring order. Seventeen states are investigating the issue. And seven states have no restructuring activity.

Furthermore, the degree and form of restructuring vary widely under the term "restructuring." States especially differ in their treatment of stranded costs - past investments by regulated entities in facilities thought to become uncompetitive after deregulation.

The problems of lumpiness are becoming clear. Larry Makovich, Cambridge Energy Research Associates senior director-North American power, summarized them in a briefing earlier this month.

"Because of the state-by-state way in which US power markets have been deregulated," Makovich said, "the nation has an interconnected power grid populated by competing utilities and power marketers operating under different rules.

"Significant increases in the demand on electric transmission are putting stress on a network that was not originally designed to accommodate large power flows across regions-the job it is now being called upon to do with the opening of transmission access.

"This imbalance between system capacity and supply and demand has contributed to well-publicized problems in California and other parts of the country."

Across the Atlantic, lumpy deregulation has caused friction within the European Union.

Members of the EU are supposed to deregulate electricity enough to open at least one third of their markets to international competition by 2003. Ten members have committed to full deregulation by 2006. The European Commission plans soon to propose full deregulation by the others.

Already, Germany, the UK, Sweden, and Finland have fully opened their electricity markets. By contrast, France, which was a year late adopting the EU directive in law, meets minimum deregulation requirements.

The French government is concerned about the competitive threat to its heavy investment in nuclear energy. It's a stranded-cost issue of national proportion. Officials at state-owned Electricite de France say they're ready to compete. Labor and other government officials disagree.

France's foot-dragging angers the EU's more-aggressive deregulators. Financial Times reports that Germany has threatened to invoke reciprocity against EU members slower than it has been to open electricity markets.

As pressures for full deregulation build, conflicts over electricity thus might spiral into broader controversies over trade.

That wouldn't be good for either the electricity business or the natural gas industry, for which electric power is central to future market growth.

If it falls subject to the deal-making and compromises necessary to resolve an international trade dispute, deregulation of electricity can only suffer. Under the EU's cautious, phased approach, the process didn't exactly begin on the fast track. Trade-related compromise would only make it slower.

Thus would lumpiness of approach achieve another parallel with deregulation in the US, where speed also has come into doubt.

Price spikes and brownouts in California and the Midwest this summer have made hold-out states more wary about deregulation than they were before. And there are rumblings about reregulation in states that have restructured.

Deregulation is supposed to get politics out of energy markets. Because of its lumpiness, US and European versions of the process have so far worked the other way. Success will be limited until that changes.

More in Economics & Markets