Lynne Kiesling on Deregulation

Given the enormity of the Blackout last week it would be impossible to imagine election 2004 without energy policy on the table. The left has already adopted a mantra of accusation; “Deregulation!!!,” they cry pointing their righteous fingers at Bush’s “cronies”. Yet, the reasoned analysis (as opposed to pre-scripted rhetoric) tells us that, not only are we not living in an energy climate devoid of regulation as the left wants you to believe, but that sometimes those regulation cause as many problems as the fix. Here’s what economist Lynne Kiesling has to say about it:

First, the "deregulation" that has occurred in electricity has primarily been in opening up wholesale markets for power generators and their customers (i.e., utilities), enabling people in Manhattan to continue consuming power (and clamoring now for more regulation) without Con Edison having to build more power plants on the island itself. The existence and growing vitality of wholesale electricity markets has created substantial value in the past decade, through encouraging generation where it is cheapest and sales of power to where it is most needed.

But this limited amount of market liberalization has left the industry in an awkward place. Generation is largely governed by market processes, but transmission and retail distribution remain heavily regulated. The investment decisions of transmission owners and the retail rates that they can charge to their end customers all hinge on rate cases that are decided by state-level regulators. The rates that regulators allow take into account changes in costs, required investments, and the payment to the utility of a rate of return on the assets they own. For much of the past decade this rate of return has been substantially lower than what utilities could earn from doing other things with their money, so they did not invest in building much new transmission capacity or in upgrading existing lines. Nor did a regulatory environment that is a relic from the 1930s, constructed to govern and control local, vertically integrated utilities, either have the incentive or the wherewithal to force the utilities to invest in transmission assets that would carry power to customers in other states.

This lack of investment in the infrastructure that carries the product exchanged in growing, vibrant wholesale electricity markets has become a problem -- not an overnight problem, as those who follow the industry have been concerned about transmission capacity for at least five years. The numbers offered this weekend suggest that electricity volume has increased 30 percent while transmission carrying capacity has increased only 15 percent. This fact illustrates the mismatch between the dynamic markets for wholesale power and the rigid, maladaptive set of state-level regulations and incentives that govern transmission investment decisions.

There is more in her article at Tech Central Station.

Posted by Mike Van Winkle at August 18, 2003 2:30 PM