Editorial 

DON'T BLAME DEREGULATION FOR SUMMER'S `BROWNOUTS' 
THE ECONOMIST\ 

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09/05/2000 
Seattle Post-Intelligencer 

FINAL 
B7 
(Copyright 2000) 
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This has been a miserable summer in California. Thanks to a surge in 
electricity consumption, Californians and other Americans have endured 
several power failures. 
Since brownouts were rare in the past, some wonder if recent steps to 
liberalize the power market are to blame. Politicians are meddling, 
arbitrarily imposing rate freezes and price caps. This week President Bill 
Clinton offered federal subsidies to poor people and small firms hit by 
higher power prices in California. 
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A growing chorus is arguing that electricity deregulation has gone too far 
and too fast. The problem is just the opposite. The real culprits behind this 
summer's power failures are the muddle and hesitation surrounding the 
introduction of competition in much of America. 
In places such as Britain, Scandinavia and Australia, which began 
liberalizing long ago, the transition to competitive power has been orderly 
and free of mishap; consumers there enjoy reliable power, lower prices and 
better service. 
California's deregulation has failed to yield such gains largely because it 
neglected a variety of market realities. 
Companies will invest in generation only if the rules of the game are clear. 
In America, they seldom are. That is partly because of the country's federal 
structure, which has left the states to take the initiative in electricity 
deregulation. 
About half have opened up their markets, but each has its own peculiarities. 
This patchwork, plus changing environmental regulation, explains why so many 
utilities have avoided building new plants for years. 
State governments should base reforms on clear and consistent rules. The 
federal government also needs to bring order to interstate power trading. 
Regulators must break the monopoly of the aging and overloaded distribution 
system. 
Merely generating more power at big central plants far from markets means 
little unless it can reach consumers - and bottlenecks on the grid mean that 
not enough of it does. Expanding distribution capacity is often impossible in 
crowded urban areas, and elsewhere people dislike new power lines. 
Dramatic advances in technologies such as fuel cells and microturbines, which 
generate power efficiently and cleanly on a smaller scale, may make up the 
shortfall. But regulators still tend to imagine that power will flow in one 
direction only: from big plants to small consumers. 
To ease the bottlenecks, they should follow the recent move by New York state 
to facilitate access to the grid for small micropower plants. 
The other area of reform is the hardest but also the most crucial: the 
consumer market. 
In the long run, liberalization and competition will deliver lower 
electricity prices for companies and households alike. However, in many 
places, retail prices remain fixed by government fiat. 
There is a case for protecting domestic households from price volatility 
until a genuinely competitive retail market emerges. However, the zeal with 
which politicians have introduced arbitrary price "rollbacks" suggests that 
they may turn any exception into the rule. 
This would be a mistake, for unless consumers see fluctuations in prices 
(especially at peak times), they have no incentive to conserve power or shift 
their use off-peak. 
The right way forward is to allow retail prices to fluctuate with market 
conditions. This will encourage consumers to use power more judiciously and 
speed the arrival of such innovations as fixed-price "energy service" 
contracts, which promise outcomes such as certain levels of heating, rather 
than merely delivery of a set amount of electricity. 
Price transparency will also allow micropower plants to buy and sell power on 
the grid as demand dictates, so improving the grid's reliability. 
In fits and starts, America is heading toward the promise of competitive 
energy markets. Consumers in Pennsylvania, for example, now pay $3 billion a 
year less for their electricity than they did before 1999. 
The populism and shortsightedness of its regulators and politicians must not 
stop California from getting there, too. 
Copyright 2000 Economist Newspaper Ltd. Distributed by the New York Times 
Special Features. 

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