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Jewish World Review August 31, 2000 / 30 Menachem-Av, 5760

Amity Shlaes

Amity Shlaes
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Consumer Reports

A revolution fails to bring power to the people

California's experiment in deregulating electricity has run into trouble, but the state's politicians should keep the faith -- Nothing brings trouble like a bit of unexpected good fortune. Consider the case of southern California, where some people blame too much economic growth and too many sunny days for the state's power crisis. Shortages are doubling electricity prices, and forcing blackouts. Gray Davis, the state's governor, is calling for charges to be halved, and a price freeze.

Power is so short that President Bill Clinton has stepped in, ordering officers at the US Navy, San Diego's biggest consumer of megawatts, to work by the light of their computer screens. The problem has even touched Shamu, the superstar killer whale at SeaWorld. The San Diego Union-Tribune reports that the electrical chillers that should keep his tank at the ideal temperature for Chardonnay are being switched off from time to time to spare wattage.

But the main casualty of California's hot summer may be the nation's young experiment in the deregulation of electricity. This movement has taken place at the level of the individual states, which have traditionally regulated power in the US. California, the nation's largest market, was the first to launch a plan to open the industry and free prices, with other states following.

Now California's troubles are provoking a push for reregulation among state lawmakers in Sacramento, and other states are watching. In deregulated New York, authorities are already joining bellwether California and slapping on the price caps.

All this has electrified the private players with rage. "They said they want to run an experiment," says Chuck Griffin of Southern Energy, an Atlanta-based utility that operates globally. "But then they won't put all the chemicals in the experiment to let it run. The missing ingredient here is allowing the market to operate."

The story of California's power troubles says much about the pitfalls of deregulation.

Back in 1996, California lawmakers unanimously voted for deregulation. The state took pride in this move, feeling that it was living up to its reputation as the Land of the Future. Pete Wilson, then the governor, promised that the free market would bring lower prices and be "a powerful new stimulant" for the economy. But it is not a simple matter to deregulate a behemoth of an industry such as electricity. Success demands a number of preconditions, not all of which were in place.

The first is a functioning grid, so that companies can buy and sell power at market prices across the country. But America's grid does not yet work well. This is partly because many states have not yet deregulated. Cross-trading among states remains a haphazard affair, which has made it hard for desperate California to find cheap supplies.

Then there is generation itself. A new generating plant, unlike an e-retail website, is not something you can throw up overnight. Still, it is possible for work to proceed relatively quickly if regulators get out of the way. Take the case of the Midwest. A 1998 price spike there moved Enron to build three plants in 10 months. Other companies, including Southern Energy, were allowed to follow.

Contrast this with California. Due to what was long a poor economy, and a militantly aggressive environmental crowd, no new plant went on line in California for a decade: Enron estimates that the state faces a 5,600MW shortage. Plants that could deliver some 8000MW are waiting to be built by companies such as Southern Energy and Calpine, but the state's energy regulators are finding so many environmental obstacles that the average lead time for a plant in the state is four years. The result is that while California sweats through August, Illinois is well-prepared for strong growth.

Another damaging factor in California has been the business culture of the power companies. Worldly players such as Enron have large derivatives departments, and are nimble traders in the secondary market. Not so officers at some of the smaller or older utilities, many of whom are survivors from the days of regulated monopoly. In their time, electricity prices mostly moved in tandem with interest rates. When they did not, there was always a state government around for a bailout.

According to industry analysts, San Diego Gas & Electric this year failed to take up forward contracts for the supply of power - the market's version of price controls. Instead, the company gambled that the summer would be a cool one, and lost. It did not help that the deregulation law placed constraints on some forms of hedging.

Finally, there is political commitment. Instead of sticking by their plan, California lawmakers are now cowering in the face of consumer rage. They now talk of "socialising the peak" - building state plants to supply in moments of acute shortage. The damage is spreading. This month a planned auction of 174 publicly-owned dams and plants was cancelled, an action so significant that it will reach the global electricity market.

Of course, such sagas are routine in the rest of the globe. As eastern Europe has shown, deregulating is almost always harder than regulating. The scenario is fraught with drama, often involving colourful players. Evil rent-seekers make obscene profits, at least for a while. Some consumers suffer, at least for a while. Lawmakers need to have epic courage. As a Polish official once said to me: "It's easy to turn an aquarium into fish soup. But turning fish soup into an aquarium is a much tougher undertaking."

Still, with power deregulation moving forward in much of Europe, it is disconcerting to see it founder in freewheeling California. "They can't have free markets and then take them away," says Gary Ackerman of the Western Power Trading Forum, which represents producers and sellers. Yes, apparently, they can -- - even in the Land of the Future.

JWR contributor Amity Shlaes is a columnist for Financial Times . Her latest book is The Greedy Hand: How Taxes Drive Americans Crazy and What to Do About It. Send your comments by clicking here.


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