By Ken Malloy

“Electric Deregulation” has been blamed for the 2003 Blackout, and for California, Enron, and the meltdown of the generation trading sector before that. Some suspect that it is behind SARS
as well.

Despite its prominent mention in the mass media, there is precious little “deregulation” of electric markets. What exists are severely bastardized attempts at deregulation that poison any common understanding of the word.

I therefore propose a new word to describe what has been implemented that could accurately be blamed for the Four Horsemen of the Electric Apocalypse — Deleguration. It sounds like deregulation, it looks like deregulation, it might even on occasion seem like deregulation. But it’s not deregulation. And deregulation should not be blamed for the Four Horsemen.

Stripped of the technical and obfuscating terminology, electric deregulation is actually quite simple. The historic approach to regulated electric markets was to give a utility monopoly control over four functions: supply (generation), long distance movement of the supply (transmission), short distance movement (distribution), and the relationship with the customer (sales, marketing, billing, metering, and many services). In return for yielding to regulation, the electric utilities were protected from competition. Very few industries in our economy have such a privileged position. Not even water has quite the monopoly that electric has.

Electric deregulation would essentially break up the utility’s monopoly over two of the four functions. New suppliers would be allowed to generate and sell electricity in wholesale markets and new retail marketers would be able to serve the consumer. The other two functions — transmission and distribution — would remain regulated. That’s it! At a conceptual level that is all that we mean by electric deregulation.

We have broken up telephone, natural gas, airline, trucking, and railroad monopolies over the last 25 years and consumers have received spectacular benefits in terms of price and technological, product and service innovation. Yes, I know that I will hear carping about how even these deregulation policies were not perfect and we get squeezed like sardines on airlines and called at dinner by long distance telephone companies. Believe me; you wouldn’t want to trade the good for the bad.

Why isn’t deregulation working for electric? Again it can be easily explained, but never is. It isn’t working because it hasn’t been tried. What has actually been tried — deleguration — has created a Christmas tree with a little ornament for each special interest, the sum total of which completely pulls the rug out from under the original goal of deregulation —effective competition.

First, states and the federal government are fighting over who runs the two functions that will remain regulated (transmission and distribution). Until this food fight is resolved, uncertainty will paralyze the industry and needed investment.

Second, advocates of competition did a poor job of selling deregulation by over-hyping price reductions instead of modernization, technology, green benefits, and “right” prices (yes, that means higher prices are a good thing in times of shortage).

Third, many utilities used the deregulation train to obscenely seek compensation for bad investments (“stranded” costs) and to get illicit competitive advantages in place before we deregulated.

Fourth, big customer advocates (mostly industrial) used deregulation as a pressure point for getting cheaper long-term contracts from utilities.

Fifth, small customer advocates (mostly residential) demanded that regulated prices be reduced and price caps be put in place for extended periods. Hard to see how this helps competition.

Sixth, the Department of Energy fiddled while Rome burned. DOE is myopically committed to the development of technology (not a bad thing) but has largely ignored market structure and regulatory reform issues. (I worked in DOE’s policy office between 1986 and 1996 for the Reagan, Bush and Clinton administrations.)

Seventh, environmentalists insisted that reform include public benefits charges and renewable portfolios– both of which may be worthy causes but each of distorts competition.

Eighth, governors and state legislators saw it as either economic development or a payoff to politically powerful interests (mostly utilities and industrial customers).

Ninth, Congress. Don’t get me started. Republicans are obsessed with command-and-control supply and Democrats with command-and-control conservation. Frankly, both are wrong. Markets and prices drive the best balance of supply and demand.

Tenth, the “energy” industry has failed the Nation by not providing leadership on the reform and modernization of the cardiovascular system of the U.S. economy.

So please spare me the angst over how electric deregulation has failed and hurt the Nation. As an advocate of energy competition, you’d think I’d be a happy camper with “electric deregulation” breaking out all over. I’m not. We can do it right but we haven’t done it right yet. Let’s all say it together: Deregulation not Deleguration. Let’s use these recent disasters to steel our resolve to do it right.

Ken Malloy is the CEO of the Center for the Advancement of Energy Markets.