As blackouts roll through California, the New Hampshire Supreme Court cleared the way for electrical restructuring, while a Vermont utility assured legislators that what is happening out West can’t happen here.
As I hear people try to explain California’s electricity problem, I wonder whether anyone really understands the market system. We discuss it endlessly, we have whole university departments to study it, we nearly worship it. But when we say things like “competition will bring down rates,” I wonder if we know what we are talking about.
I’m not sure I can explain California either. (Ever. About anything.) But there are some things I can make strong guesses about, even from a distance.
First, electricity restructuring is not being driven by the goal of reducing residential rates. The drivers are technology and industry. New ways of making electricity, such as combined-cycle natural gas generators, and soon fuel cells, allow industrial users to produce their own power at lower cost and with less pollution. One by one they are slipping off the grid, leaving the utilities, with their huge, outmoded, unpaid-for power plants, in a panic.
To save themselves, the power companies meet in back rooms with politicians. They must accomplish three things. First, they must allow big customers to lock in low rates, so they will stay on the grid. Second, they must pay off the debt for their dinosaur plants. Third, they must sell the deal to the public by promising lower rates.
The only way to pull off this miracle is with a public bail-out, called “stranded costs” in the back rooms. Stranded cost payments mean that your electric bill will actually be higher, but a chunk of it will be hidden in your tax bill. This maneuver has nothing to do with a free market. It is perverse socialism. Prop up a dying industry by forcing the people to pay for bad investments. Order utilities to cut rates for awhile to lull taxpayers. Then let the people shop for power in competition with the big guys. That’s where the market will come in, but markets aren’t kind to little players competing against big ones.
Restructuring has already squeezed out the best supply strategy, namely efficiency. In almost any application, from lighting to water pumps to electric motors, it is cheaper and far better for the environment to install devices that deliver the same service with less power.
However, the market competes for lowest up-front price, not lowest price over the lifetime of a product. How many of us will buy a 10-buck compact fluorescent light bulb instead of a regular one for $1.50? Even if we believe that over 10 years the more expensive bulb will save money?
In the old electric system, it cost utilities less to subsidize our more efficient bulbs than to build another dinosaur power plant. In the deregulated system, they have only one incentive: to sell us as much power as possible at the lowest apparent price. So much for efficiency.
California at the moment is experiencing another market flaw. Prices oscillate. The magic point where supply meets demand is not written in the sky. It is found only by producing too much, finding that the excess isn’t selling, so cutting price and production until you’ve cut a little too far, then correcting upward again. This cycle is especially vicious for electricity, because the machines that produce (generators) and consume (motors, appliances, heating and air conditioning systems) tend to be expensive, long-lived, and slow to build. Therefore over- and under-corrections can go on for months or years. One of the difficult blessings of the old regulated system was that it forced onto utilities a bias toward overcapacity that damped market cycles.
California’s immediate problems result, I think, from all the above factors plus bad luck. Temporarily capped residential rates, giving consumers no incentive to conserve, spurred demand not so much in California as in surrounding states on the grid. A few major power plants happened to shut down. The feds chose that vulnerable moment to remove caps on the wholesale rate that utilities can charge each other. Suddenly California utilities had to buy power at uncontrolled rates while selling at controlled ones. Consumers with their fixed rates saw no reason to cut back. Opportunities opened for price gouging. Aluminum plants in Washington state are making a bundle by shutting down and selling power (which they buy at locked-in low rates) to California. Because money cannot instantly transform itself into working power plants, there are still rolling blackouts.
Could it happen in the East? Not likely, I think, but not impossible. Other surprising things could happen too.
How do we help this vital system make the transition to a decentralized future, with power supplied by gas, sun, wind, and hydrogen instead of coal, oil, and nuclear fission? No one fully knows. But some general rules are obvious. Plan far ahead, and plan for the welfare of the whole system, not just the utilities or the big consumers. Remember that demand reductions are just as effective as supply increases, and cheaper and cleaner. Don’t set up the poor to bid against the rich. Don’t try to control prices in only one part of the system. Don’t hide real costs. Throw away comfortable myths about how the market will do everything for us and start thinking.
Above all don’t allow anything as critical as electricity (or health care or airline safety or food or pharmaceutical safety) to be restructured by power brokers in back rooms.
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