Discord over energy deregulation in Europe should remind US officials haggling over energy policy of something missing from their debate.
As members of the European Union prepared to meet in Stockholm late last month, the policymaking European Commission intensified its pressure on deregulation laggards. Earlier this year, it had threatened legal action against member nations failing to meet deadlines for deregulating their natural gas industries.
The week before start of the Stockholm summit, the EC proposed that EU members complete gas and electric power deregulation by 2005. The move drew protests from Germany, which disputed plans for assignment of an independent energy regulator for every member state, and France, a target of the earlier EU warnings.
Problem for UK
Slow movement on the continent is a growing problem for the UK, which has deregulated gas distribution and come to account for one fourth of EU gas consumption. Linked to the continent by the 2-year-old Interconnector gas pipeline, the country has been victimized to an arguable degree by sluggishness of market liberalization on the other side.
A study for a government-industry task force by ILEX PLC recently blamed continental rigidity, among other things, for high British prices (OGJ Online, Feb. 6, 2001). With continental purchases from Norway, Russia, and the Netherlands indexed to oil, and with market liquidity limited by regulation, prices leapt last summer in response to the earlier jump in crude values. The UK market, freer than its continental counterpart to respond to price changes, exported supply through the Interconnector and, in effect, imported the price hikes.
Late last month, UK Energy Minister Peter Hain addressed the imbalance in a three-part response to high gas prices (see related story, Newsletter, p. 7).
As one part of the strategy, he said, his government will work with the EC to accelerate total liberalization of European gas markets. Other parts of the plan are enhanced access to market information and action against anticompetitive behavior-especially with respect to the Interconnector.
While comparison of the US and European energy markets is never perfect, an important parallel runs through recent events.
In the US, the problem is with electric power. The federal government left retail deregulation to states, which differ greatly in their approaches toward and acceptance of the process. With half the states still regulated at the retail level and regional grids largely autonomous, opportunities for location arbitrage are limited. The promises of national price-balancing and improved delivery efficiency, therefore, remain unfulfilled.
They're likely to stay that way for a while, thanks to California's electricity disaster. By deregulating wholesale and capping retail prices, the state's deregulation plan manufactured shortage and squeezed utilities nearly to death. A regulatory framework long hostile to power-plant construction aggravated the problem. And the government's response-borrowing to buy power under long-term contracts for current consumption-will compound the distress.
The grief spreads. The high prices California now must pay wary out-of-state generators are sapping supplies from neighbors and driving up prices there. Their plights are not unlike that of the UK.
The emerging lesson is that piecemeal deregulation might never work. With California foundering, one flawed piece might yet spoil the whole US mosaic. Several states have stalled or are reconsidering power deregulation because of California's sad, self-inflicted experience.
And in Washington, DC, an important dimension of the subject has gone undercover. In all the talk under way about energy policy, little is being said about any new role for the federal government in electricity deregulation. California's ordeal seems to have thrown a political shroud around a question that, only a few months ago, was high on the energy agenda.
EC determination
So far, Europe hasn't been similarly intimidated. The EC seems more determined than ever to implement deregulation of electricity and natural gas. And it holds the stouter whip. It can force laggards to act. The US government must tread carefully with states.
The time fast approaches, however, when Congress and the administration will have to decide how strongly they think the nation needs electricity deregulation-and what constitutional issues they are willing to raise to bring it about. Where clarity of purpose is concerned, they should use Europe, not California, as the prototype.
