Any pen-l comments on the following op-ed piece?
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The Answer: Turn Up the Thermostat
Blaming price-fixing conspiracies won't end the problem. New investment
in power sources will take time.
By GEOFFREY ROTHWELL
When California electricity deregulation was contemplated in the early
1990s, economic growth was low and electricity reserve margins were high.
When the Legislature adopted deregulation in 1996, concerns about new
investment in electricity generating capacity were low and optimism about
an electricity market that would generate the proper investment incentives
was high.
Today, after a summer threatened by rolling blackouts, reliability is low
and prices are higher than anyone could have imagined in the mid-1990s.
What happened to the vision of competition reducing California's high
electricity rates? An economics cliche: Too much demand and too little
supply. As more people move to California to work in the high-technology
sectors, more electricity is required.
But with this shift in the economy, there has been little investment in
new electricity generating capacity in California. While markets were being
defined between August 1996 and March 1998, investors were too unsure about
the profitability of new capacity. After March 1998, many out-of-state
investors purchased existing facilities with the hope of upgrading or
building new capacity at older sites.
Although new electricity technologies (primarily fueled by natural gas)
are much cleaner than old technologies, Californians do not want power
plants in their backyards. Also, environmentalists prefer investment in
renewable resources, such as wind and solar, rather than building
fossil-fueled power plants, nuclear or environmentally harmful hydro.
Therefore, some environmentalists usually oppose all nonrenewable projects,
even those that would replace polluting plants. As a result, little new
capacity has been approved and still less has come into production.
As a result, prices have risen in recent months in areas served by San
Diego Gas & Electric and will soon rise elsewhere. These price increases
should signal customers to consume less electricity and should signal
investors that new capacity would be profitable in California.
Unfortunately, consumption changes slowly, leaving ratepayers with huge
bills. New generation cannot be built overnight, leaving reserve margins at
less than 3%. Also unfortunate is a political response that attempts to
find price-fixing conspiracies.
What would be different if California had avoided deregulation? The
Public Utilities Commission would have continued to grant annual rate
changes. Electricity prices would have decreased in the late 1990s with
declines in the price of fuels. Recent increases in these prices would have
been passed on to customers. It is unlikely that new capacity would have
been built because of delays in the approval of power plant projects. We
would have had rolling blackouts and the public would have demanded that
state politicians look into mismanagement in the electricity sector.
Can California re-regulate electricity generation? The PUC continues to
regulate transmission and distribution services. To re-regulate the
wholesale electricity market would require either the sale of generation
assets to the traditional electric utilities at prices determined through
regulatory proceedings (a regulatory nightmare) or the resuscitation of
rate-of-return regulation and its application to dozens of electricity
generators (an even bigger regulatory nightmare). Either option would take
several years. And during those years, no new capacity would be built and
prices would rise with scarcity and uncertainty.
The solution? We must be willing to live with less electricity and live
next to electricity generators. Politicians should investigate why so
little supply has come into production. They must be willing to make
politically difficult decisions to encourage less consumption and more
production. Trying to fix rates in an emerging electricity market could be
counterproductive in the long run, although it will be an opportunistic
issue for those running for office this November.
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Geoffrey Rothwell Is the Senior Lecturer in the Economics Department at
Stanford University
from the L.A. TIMES, August 9, 2000
copyright L.A. TIMES.
Jim Devine [EMAIL PROTECTED] & http://bellarmine.lmu.edu/~jdevine
