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Enron Mail |
FYI. From yesterday's editorial page in the WSJ. McFadden's one of the folks
that signed the "manifesto." Best, Jeff ----- Forwarded by Jeff Dasovich/NA/Enron on 02/14/2001 09:02 AM ----- Elizabeth Linnell 02/14/2001 08:17 AM To: Jeff Dasovich/NA/Enron@Enron cc: Subject: WSJ California Needs Deregulation Done Right By Daniel McFadden 02/13/2001 The Wall Street Journal A26 (Copyright © 2001, Dow Jones & Company, Inc.) The electricity market in California has swung over its history from monopolization by industrialists in its early days to comprehensive regulation, then to partial deregulation in the 1990s, and now back toward substantial regulation and government intervention. In the past, each swing of the pendulum came from public frustration with the way this market operated, and each produced a result that the public again found unsatisfactory. But the memory of politicians and the public is short. The state is poised to repeat the mistakes of the last cycle of regulation. Measures passed by the California Legislature this month are an ill-conceived intervention that will lock the state into high energy costs and put it at a competitive disadvantage for years to come. Unless there is further action, the state will maintain subsidized retail prices that discourage conservation, while capping in-state wholesale prices in a manner that discourages construction of new in-state generation capacity and leaves Californians at the mercy of out-of-state generators. Government subsidization of electricity consumption will drain tax revenues that might be better used for education and other needs, encumber California's children with debt to pay the state's energy bills, and threaten the state's future ability to sell bonds for public projects. The immediate political cost of consumer outrage from higher electricity rates may be postponed, but the real economic cost promises to be massive. The sad thing is that this is all unnecessary. The source of the crisis was rigid regulation of retail prices in the face of rapid increases in wholesale prices driven by increased fuel prices and increased demand in the national electricity market. The only effective solution to the crisis is to make retail price regulation more flexible, so that consumers see the real economic cost of electricity and respond to high prices through conservation efforts that reduce demand and push prices down. On the supply side, the state should encourage construction of new in-state generation capacity through the right market signals, giving producers the opportunity to site plants and sell power under conditions comparable to other states. It's true that state action was needed to stabilize the electricity market, avoid immediate bankruptcy of the distribution companies, and assure continued delivery of energy. But this step will only postpone the day of reckoning unless sensible electricity pricing is introduced as well. To limit the impact of high prices on the poor, increasing block-rate tariffs can be used in which the rates for "lifeline" electricity use are kept low. These were effective in limiting demand for water during California's last drought, and are already used to promote energy conservation. A more aggressive version that pushes the rates in high-usage blocks to the real load-linked economic cost of electricity would provide an incentive that would stimulate conservation at the precise points that will do the most to moderate demand and push down wholesale prices. Consumers should have the opportunity to hedge against price spikes and average their payments to ease the pain of price volatility. The installation of load-sensitive meters should be accelerated so that consumers can respond to the economic price of the electricity they are consuming. This is new technology for U.S. utilities, but has operated well in France for years. On the supply side, the state and the Federal Energy Regulatory Commission could use their regulatory power to require that existing generators redirect excess profits to finance lifeline rates for retail customers and work off the hangover from previous electricity purchased and not paid for. However, care should be taken in dealing with generators to assure that every kilowatt hour that any generation facility can produce at less than the national wholesale price of electricity is in fact delivered to the market. The state needs to be very cautious about getting into the power business as an intermediary between generators and distributors. Government bureaucracies rarely show dexterity in dealing with private suppliers, and access to general government revenues dulls their incentive to operate efficiently. Negotiating long-term contracts right now, when California is in a weak market position and the out-of-state generators are in the driver's seat, is likely to put the state at a future competitive disadvantage. Consumers need to be reminded that money passed through the government to subsidize electricity comes out of their pockets just as surely as price increases, without the mitigating benefits of demand reduction.The lessons of history suggest that in making the Hobson's choice between a dysfunctional partially deregulated market and a fully-regulated one that promises to be even more dysfunctional, California is picking the greater of the two evils. If it fails to move to sensible electricity pricing in which both consumers and suppliers see the real economic price at the margin, it will face another, even more serious crisis in the not too distant future. --- Mr. McFadden, a professor of economics at the University of California, Berkeley, received the Nobel Prize in Economics last year. Copyright , 2000 Dow Jones & Company, Inc. All Rights Reserved.
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