Thanks for all this.
On 10/19/10, MJ <[email protected]> wrote: > The Myth of Energy Deregulation > Monday, November 07, 2005 > by Adam Summers > > While the initiatives on the upcoming November 8 California special election > ballot backed by Governor Arnold Schwarzenegger have been receiving all of > the media attention, another initiative that addresses an important issue is > being overlooked. Proposition 80, the so-called "Repeal of Electricity > Deregulation and Blackout Prevention" initiative, would make some > significant and detrimental changes in the state's energy policy. > > The fact that even a government regulatory body such as the California > Public Utilities Commission (PUC) is actually against a measure that would > increase its regulatory powers should tell you something right off the bat > about the merits of Prop. 80. > > California energy consumers are currently served by one of three types of > providers: investor-owned utilities (IOUs), local publicly-owned electric > utilities, and independent electric service providers (ESPs). Before the > state's "deregulation" experiment of the 1990s was suspended in 2001 during > California's energy crisis, customers could choose to purchase their > electricity services directly from ESPs through "direct access" contracts, > rather than through an intermediary such as the local IOU or public utility. > > > Proposition 80 Would Reduce Consumer Choice and Increase Costs > > Proposition 80 would permanently prevent all customers receiving electricity > services from an IOU from switching to an ESP, effectively eliminating any > new direct access (existing direct access contracts would be grandfathered > in).[1] Thus, under Prop. 80, instead of having the option to buy > electricity directly from independent producers, consumers would have no > choice but to buy their electricity from utilities. By effectively > eliminating an entire class of providers, the state has stifled competition > (and would continue to do so), thereby leading to higher prices and, likely, > lower-quality service. > > The effect of this provision on prices would be significant. ESP customers > include hospitals, local governments, the California State University > system, several University of California campuses, community college > districts, and local school districts. The nonpartisan Legislative Analyst's > Office (LAO) estimates that the UC system alone saves about $12 million per > year by purchasing its electricity from a lower-cost independent provider. > > According to Mike Florio, an attorney for The Utility Reform Network (TURN, > one of the chief proponents of Prop. 80 that helped craft the measure), the > ability of consumers to purchase electricity directly from independent > service providers "destabilizes the whole business … and we'll truly be at > the mercy of the gods of the free market."[2] How dare people be able to > choose whom they want to do business with! I suppose TURN hired Mr. Florio > not for his legal expertise, but rather by the sheer providence of the > "free-market gods." > > > Proposition 80 Would Impede Innovation and Efficiency > > Another provision of Prop. 80 would prohibit the broader implementation of > "dynamic pricing" of electricity without the consent of the consumer. > Currently, all but the largest energy consumers pay a flat rate for > electricity that does not vary by the time of day. Clearly, energy use is > not constant throughout the day, however. There are certain "peak" hours of > the day when consumers use lots of electricity, and "non-peak" hours when > they use very little. The costs of providing electricity vary accordingly. > As such, the IOUs have submitted proposals to the PUC to charge all > consumers higher rates during peak hours and lower rates during non-peak > hours. This price discrimination would be accomplished through the use of > high-tech "smart" meters. > > In addition to making good sense one should pay more for something when it > is in higher demand dynamic pricing would encourage conservation via the > pricing mechanism. Dynamic pricing would be a more efficient system because > higher prices would discourage some from consuming such a scarce resource > while ensuring that those who place the highest value on energy use are > still able to consume it. Similarly, those who have some flexibility over > when they consume their energy would be encouraged to utilize it during > non-peak hours, thus placing less strain on the system. > > Allowing the consumer to opt out of a dynamic pricing model would be like > forcing a hotel owner to offer customers the choice of the nightly room rate > or an average of the nightly room rates throughout the week. Since > significantly more people stay at hotels during the weekend, rates are much > higher on Friday and Saturday nights. The average weekly rate, however, > would be higher than normal weekday rates but lower than normal weekend > rates. The cheaper "opt-out" weekend rates and higher weekday rates would > encourage even more people to stay during the weekend and fewer to stay > during the week. The result would be a shortage of hotel rooms during the > weekend and a loss of revenue for the hotel owner. No wonder demand strains > the electrical grids during hot summer days. > > > Environmental Issues > > Under current regulations, energy producers must increase the portion of > energy derived from renewable energy sources such as solar, wind, and > hydroelectric by one percent per year until 2017, when 20 percent of the > energy produced must come from these sources. Proposition 80 would > accelerate this deadline to 2010. Interestingly, some environmentalists > oppose Prop. 80 because a provision requiring a two-thirds vote of the > Legislature to amend the measure could make it more difficult to increase > the renewable energy standard in the future. > > According to the LAO's analysis, Prop. 80 would also require that "the first > priority for IOUs in procuring new electricity is to be from > 'cost-effective' energy efficiency and conservation programs, followed by > 'cost-effective' renewable resources, and then from traditional sources such > as fossil fuel burning power plants."[3] Of course, if renewable energy > sources and energy efficiency and conservation programs were truly "cost > effective," producers would already be utilizing them in higher numbers > because it would make them more profitable. This clearly is not the case. > Forcing companies to invest significant amounts of their scarce resources on > more costly energy-production methods, which make up a relatively small > share of total energy production (for good reason), will only ensure that > costs and, ultimately, consumers' electricity bills remain higher than > necessary. > > As new technologies and energy-production methods are developed, this may > change, but for now, it is best for both producers and consumers to focus on > the most efficient means of producing energy. Of course, if consumers demand > "cleaner" energy, in a truly free market, producers will have an incentive > to provide it. Indeed, after Pennsylvania successfully implemented its > electricity deregulation effort in 1999 (without the pitfalls experienced by > California), 20 percent of consumers chose to switch to suppliers of "green > power," despite the fact that they had to pay a small premium to do so. > Proposition 80 eliminates this choice, instead demanding that all consumers > support the higher cost of investing more in renewable energy whether they > want to > or not. > > > Misconceptions Over Electricity "Deregulation" in California > > Some blame deregulation for the rolling blackouts, soaring spot market > prices, and utility bankruptcies that sprang from the energy crisis of 2000 > and 2001. But this anger is misplaced. California has never experienced true > deregulation. The "deregulation" implemented in 1996 left price controls in > place and created "artificial" markets ripe for manipulation and disparities > between supply and demand. > > By setting price caps below market prices, California limited the > profitability of the industry. When wholesale energy costs increased, the > price caps prevented energy producers from passing them on to consumers. > Wholesale prices rose dramatically for a number of reasons: natural gas > prices rose, hot weather in the Southwest increased demand, a relative lack > of water in the Northwest minimized the production of hydroelectric energy, > and pollution-control permits, which allow industrial companies that produce > less pollution than allowed by regulations to sell the difference as > "credits" to higher-pollution-producing companies, rose ten-fold, from $4 to > $40. > > The price caps additionally discouraged potential producers from entering > the market and increasing competition, and they discouraged existing > producers from investing profits in adding capacity, of which Californians > were (and continue to be) in dire need. As a result of the price caps and > pressure from politicians and environmentalists, the building of plants and > transmission lines slowed dramatically and energy producers were not able to > keep up with demand, particularly in the Silicon Valley, where the booming > computer and "dot-com" industries led to even sharper increases in > electricity demand. > > After the big three investor-owned utilities Pacific Gas & Electric, > Southern California Edison, and SEMPRA (San Diego Gas & Electric) were > forced to sell many of their fossil-fuel-burning generators to private > firms, regulators prohibited them from entering into long-term contracts > with these firms, forcing them to rely upon the much more volatile > short-term and spot markets. In addition, California forced generators and > utilities to trade power through the Power Exchange, a state-run pool. > > While that requirement was designed to give every company the same wholesale > price for power, it also guaranteed that they would be unable to negotiate > lower-priced power on their own. The California rules essentially barred > utilities from buying power on the futures market, meaning they were unable > to lock in supplies and prices.[4] > > This is as if Wal-Mart and Marshall Field's were forced to acquire their > goods from a non-profit, state-run pool that would guarantee that they would > acquire the goods for the same price. Wal-Mart never would have been able to > develop its efficient and innovative purchasing and distribution system, > meaning it could not generate savings to pass on to customers in the form of > lower prices. > > At the time of the increase in wholesale prices, PG&E and Edison were still > in the deregulation "transition" period, and thus still subject to PUC rate > regulations. As a result, PG&E went bankrupt and Edison teetered on the edge > of insolvency. To add insult to injury, when the government stepped in to > purchase electricity on behalf of the struggling IOUs to try to quell the > crisis, not only did it do so at the height of the emergency, when energy > prices were highest, it locked in these prices with long-term contracts > costing billions of dollars. > > > The Natural Monopoly Justification for Regulation > > The main argument against the full privatization of public utilities such as > electricity and water service is that such industries are "natural > monopolies." That is, they require such high fixed costs (it is easier to > start a new restaurant than to invest in the infrastructure for a new > electric grid) that it is inefficient for there to exist more than one > producer in a particular location. This, it is feared, will lead the > producer to engage in price gouging. > > There are several problems with this rationale, not the least of which is > the notion that "public utilities" somehow constitute a unique set of goods > that must be "protected" by government intervention. As economist Murray > Rothbard noted in Power and Market: > > The very term "public utility" … is an absurd one. Every good is useful "to > the public," and almost every good … may be considered "necessary." Any > designation of a few industries as "public utilities" is completely > arbitrary and unjustified.[5] > > High capital costs certainly will limit the number of actual and potential > providers, but there is still a profit motive in a free market that creates > opportunities for lower-cost producers. In addition, it is important to note > that markets are not static; technological innovations may allow for > additional competition in the future. > > Another misconception opponents of free markets have concerns the very > understanding of the nature of competition. Even if there is only one > producer of a certain good or service in town, this does not mean that the > producer is "gouging" customers through monopolistic practices. Indeed, just > because he is the sole supplier today does not mean he will be the sole > supplier tomorrow. As economist Thomas J. DiLorenzo explains: > > If competition is viewed as a dynamic, rivalrous process of > entrepreneurship, then the fact that a single producer happens to have the > lowest costs at any one point in time is of little or no consequence. The > enduring forces of competition including potential competition will > render free-market monopoly an impossibility.[6] > > In other words, even if there happens to be only one current provider of a > particular good or service, in a free market that provider is held in check > by the mere threat of competition if he charges prices that are too high > or provides poor service, there will be an incentive for a competitor to > come in and take market share from him by offering lower prices or better > service. > > The rules change, however, when government regulation erects barriers to > entry or otherwise suppresses competition. In addition to the many > government regulations purportedly enacted in the "public interest," there > are numerous instances where private-sector businesses have been able to > successfully lobby policymakers to use the power of government to establish > barriers to competition and protect them from existing or potential rivals. > Unlike the free-market case, there is no possibility of these monopolists > losing out to lower-cost providers (barring the elimination of the > regulations), and they are able to "exploit" consumers. These are the truly > harmful monopolies. Thus, the only "bad" monopoly is a government-created or > government-preserved > monopoly. > > > Conclusions > > Proposition 80 would be a step backward for California. It would restrict > consumer choice, discourage competition, and impose more of the kinds of > regulations that got the California power industry into trouble in the first > place. > > As awful as Proposition 80 is, however, there is good news. It is trailing > in recent public opinion polls, and even if it should end up passing it is > likely to be discarded by the courts. It was removed from the ballot on July > 22 by the Court of Appeals in Sacramento because the court found that, > according to the state constitution, the PUC's authority can only be > increased by the Legislature, not by initiative. The initiative was restored > a few days later by the California Supreme Court, which did not offer an > opinion on the merits of the case but felt that the public should have the > chance to vote on the initiative before the legal challenge is heard. (Of > course, if voters reject the measure, this will be a moot point and the > courts will not have to waste their time on it a fact that surely was not > lost on the Supreme Court.) > > Politicians and regulators forced a sham of a "deregulation" scheme upon the > energy industry in California, and then blamed the free market when it > inevitably failed! The problem was not too much free-market competition; it > was too much regulation (despite the "deregulation" doublespeak). The real > solution to California's energy problem is to eliminate price caps and all > government regulation, thereby removing barriers to entry, fostering > competition, offering consumers maximum choice, and affording providers the > greatest incentives to increase capacity and best serve their customers. > > Adam Summers is a policy analyst for the Reason Foundation > ([email protected]). Comment on the blog. > > [1] This option was suspended during the electricity crisis of 2000 and > 2001, but is scheduled to be reinstated when the last of the power contracts > signed on behalf of the IOUs by the Department of Water Resources expires in > 2015. > > [2] Carrie Peyton Dahlberg, "Electricity proposition crackles: Will prices > go up? Will it avert an energy crisis? It all depends on who's talking," > Sacramento Bee, October 15, 2005, > http://www.sacbee.com/content/politics/story/13717834p-14560232c.html (free > registration required). > > [3] California Secretary of State, Official Voter Information Guide, > Statewide Special Election, November 8, 2005, p. 52, > http://www.ss.ca.gov/elections/bp_nov05/voter_info_pdf/entire80.pdf . > > [4] Terry Maxon, "Power Woes Unlikely in Texas, Officials Say," Dallas > Morning News, January 19, 2001, cited in Lynne Kiesling, "Getting > Electricity Deregulation Right: How Other States and Nations Have Avoided > California's Mistakes," Reason Foundation Policy Study No. 281, April 2001, > p. 18, http://www.reason.org/ps281.pdf. > > [5] Murray N. Rothbard, Power and Market: Government and the Economy, > (Kansas City: Sheed Andrews and McMeel, 1977), p. 76, > http://mises.org/rothbard/power&market.pdf. Now integrated into Man, > Economy, and State. > > [6] Thomas J. DiLorenzo, "The Myth of Natural Monopoly," The Review of > Austrian Economics, Vol. 9, No. 2 (1996), p. 44, > http://mises.org/journals/rae/pdf/rae9_2_3.pdf. > > http://mises.org/daily/1954 > > -- > Thanks for being part of "PoliticalForum" at Google Groups. > For options & help see http://groups.google.com/group/PoliticalForum > > * Visit our other community at http://www.PoliticalForum.com/ > * It's active and moderated. Register and vote in our polls. > * Read the latest breaking news, and more. -- Together, we can change the world, one mind at a time. Have a great day, Tommy -- Thanks for being part of "PoliticalForum" at Google Groups. For options & help see http://groups.google.com/group/PoliticalForum * Visit our other community at http://www.PoliticalForum.com/ * It's active and moderated. Register and vote in our polls. * Read the latest breaking news, and more.
