Deregulation Is the Answer, Not the Problem

Is deregulation wrecking the economy?

It’s a natural question to ask, given the way electricity deregulation is stumbling badly in California--and electricity suppliers are under investigation.

As electric bills soared in San Diego and south Orange County, President Clinton last week ordered an intensified investigation by the Federal Energy Regulatory Commission of pricing and market practices among suppliers to California’s Power Exchange, the central auction system that governs pricing for 80% of the state’s electricity.

Whether the investigation finds actual wrongdoing, it will certainly find that the Power Exchange model is flawed. California’s auction system is patterned after that of Britain, which deregulated electricity in 1990.

But Britain is now abandoning its auction pool because it proved to be subject to abuses and led to higher prices. Significantly, Britain is going to try a broadened system of electricity trading that invites more competition among power suppliers.

In the U.S., Pennsylvania, Maryland and New Jersey have fared far better in electricity deregulation simply because they encouraged as much competition as possible among suppliers. Pennsylvania, with an electricity market less than 12% the size of California’s, attracted more than 100 new suppliers of power, and the state has seen monthly bills drop 3% on average since deregulation began.

California has attracted only a handful of new suppliers, and that lack of competition has compounded shortages of electricity, which have become acute because the state has not allowed a single new power plant to be built in the last 10 years. Paradoxically, the last decade has seen electricity usage expand at a much faster pace than in previous decades, thanks in part to the increased role of computers in all walks of life.

So is deregulation to blame for California’s troubles? Obviously not.

We should do some straight thinking about words such as “deregulation” and about change and growth in our economy. Deregulation, now in its early days in the mammoth electricity industry, has been a positive force over recent decades in industries ranging from airlines to telecommunications to trucking and railroads.

Customer choice and employment have expanded in all those industries. In telecommunications, costs of long-distance telephone calls have come down dramatically as competitors offered consumers more and cheaper service. New technology has flourished, creating entirely new communications industries. In fact, the highest prices for telephone calls remain in the local systems, which are still largely regulated.

In some industries, new problems have appeared--but they are problems of prosperity. In the air travel sector, beset by consumer complaints of poor service and delayed flights, the tremendous growth in passenger travel over recent decades has stretched the system to capacity.

Air travel is a subject particularly pertinent to Southern California, because the region faces decisions on expanding airport capacity to accommodate almost 100 million passengers a year by 2015, up from roughly 65 million today.

Will the only solution be to build new airports? No, says economist Clifford Winston, of the Brookings Institution. More efficient use of existing facilities and modernization of the air traffic control system can cope with growth.

Winston and Steven Morrison of Northeastern University, who have co-authored books on industrial deregulation, point to Canada for a success story.

In 1996, Canada formed Nav Canada, a private company, to run its air traffic control system. Nav Canada’s board has representatives from the air carriers, airline unions and passenger and shipper organizations. Nav Canada has upgraded traffic control technology and lowered the cost of flying. A private company, with public participation, has accomplished more than governmental agencies could alone.

Significantly, plans for Los Angeles International Airport that will be made public this fall envision more intense use of present runways and a spreading out of traffic throughout the region rather than new airports to cope with the needs of the next 15 years.

Similarly intelligent planning could improve the electricity situation in the state. One reason no power plants have been built is that the California regulatory process is so cumbersome that it takes a minimum of four years to create new capacity. The delays owe as much to the state’s litigious environment as to formal regulation. But the system is not serving the needs of a California economy that is increasing electricity use by up to 6% a year in some areas and at an overall pace 50% faster than in the 1980s.

The idea of freeing up electricity markets from the regulated utility system became a live topic in federal and California government circles in the 1990s as that growth was noted and as technology and the economy changed.

Improved transmission technology allows electricity to be sent over long distances with less power loss in transmission. Thus, buying power from distant suppliers made sense; electric grids between the U.S. and Canada became more extensive.

Gas-turbine generators were developed that allow for smaller power plants to be built at less cost to serve specific purposes. This made possible greater choice and flexibility for businesses and consumers.

Yet the regulatory infrastructure has not reformed to speed approval of such small generators.

The old utility system has been strained for years. California utilities have built power plants, to be sure. But they have done so through unregulated subsidiaries, such as the Mission Energy subsidiary of Edison International, which have built in other states or countries.

At present, five new power plant license applications have been approved by the California Energy Commission and 14 applications are pending. Sometime in the late summer of 2001 is the soonest the state is likely to see power from any of those plants, although the commission could speed approval of requests to refurbish or expand output from existing facilities.

Reform of such a system is needed. Deregulation is needed to bring competition in electricity supply to the state and benefits to businesses and consumers.

The results of deregulation elsewhere, after all, have been dramatic. About “80% of [airline] passengers are paying lower fares than they would have under regulation,” economist Winston estimates.

No comparable results exist in electricity--yet. But deregulation is only beginning.

James Flanigan can be reached at jim.flanigan@latimes.com.