Don't know if this is helpful in our direct access efforts, but thought I'd pass it along.
Pat

Power to the Consumer:
How Direct Access to Electric Power Serves the Interests of Consumers and 
the California Economy
by Dr. Benjamin Zycher
The following provides key research findings from a forthcoming study by Dr. Benjamin Zycher, which the Pacific Research Institute will publish in fall 2001.
There are several points that are of special concern to California lawmakers and consumers, given the current debate over "direct access" and the upcoming Public Utilities Commission vote on August 24. These include:
Direct access is the right of electricity consumers to purchase electric power services from any supplier they choose. 
Direct access-competition among suppliers-will increase the scope of competitive pricing and service reliability. 
California's electric power system cannot be reformed toward competitive conditions without direct access. 
Direct access will reduce the degree to which future policy decisions can politicize electric rates. 
By furthering competitiveness and reliability, direct access will strengthen economic conditions in California. 
Efficient Policies and the Long-Term Interests of Californians
California-the most populous state and the fifth-largest economy in the world-needs efficient and reliable electric power. As recent events show, efficient delivery of electric power cannot be taken for granted in the Golden State. The long-term interests of California demand public policies that will serve to ensure an efficient and reliable electric power sector.
Public policies chosen in pursuit of an efficient and reliable electric power sector in California will serve the interests of consumers in terms of reasonable and competitive prices, both for electric power services themselves and for the myriad other goods tied to them. They will serve the interests of the utilities and power producers in terms of a reduction of the risks perceived as attendant upon large investments in electric power infrastructure.
Indeed, the interests of consumers, utilities, and producers are largely consistent in that greater risks yield both higher prices and reduced economic returns over time. Such policies will serve the interests of workers by increasing investment in both the electric power sector itself and also more broadly across the California economy, thus increasing employment opportunity, the stock of capital, and wages. And accordingly they will serve the interests of taxpayers and government agencies by expanding the tax base.
The Efficiency of Direct Access
That the interests of consumers are served by competitive pricing is widely recognized, a truism that holds because such a price structure combined with the profit motive yields efficiency-the highest-valued aggregate output of goods and services-in the use of economic resources that are limited, always and everywhere.
That is why an artificially low price for any given good, perhaps counterintuitively, is inconsistent with that efficiency goal-the interests of consumers-in that it yields resource use either too great (in the short run) or too small in the sector of interest, and thus prices in other sectors either too high or too low, respectively, and, therefore, an aggregate output total smaller than possible. The opposite problem is attendant upon prices that are uncompetitively high. This, in brief, is what it means to say that price distortions yield resource misallocation.
The ability of consumers to choose among alternative suppliers is a crucial market constraint yielding competitive pricing. This general condition can be complicated by the possible presence of scale economies in some markets-there may exist a tradeoff between competitive effects and cost effects on price-but the general efficiency of competition among sellers (and buyers) is straightforward and sufficiently familiar that it will not be expanded here.
Somewhat more subtle-but equally important-are the efficiency benefits yielded by that same ability of consumers to choose among alternative suppliers in markets in which legislatures or government agencies play a significant role in the determination of prices. In the context of the market for electric power, that ability is termed "direct access," that is, the right to enter contracts for electric power services directly with a power supplier chosen by the buyer.
This is true whether government implements the rate setting function in a traditional public utility regulatory process or for some other set of reasons attempts to impose prices upon consumers (or some subset thereof) higher than otherwise obtainable. This could be for the purpose of recovering past or future stranded costs, as is likely to be the case in California due to the effects of the retail price controls imposed by AB 1890 (1996), and the attendant debts owed by the investor-owned utilities, or the prices imbedded in the new power contracts approved by the Department of Water Resources, which may prove uneconomically high over time.
Dealing with such costs is a worthy goal-a solution involving the state budget is far more likely to prove efficient-but doing so by denying direct access in effect is an endorsement of uncompetitive pricing by government that would never be viewed favorably were it attempted by the private sector through a collusive arrangement.
Even without the problem posed by such stranded costs, governmental involvement in determination of the rate level and structure introduces powerful incentives under democratic institutions generally-and indirect democracy in particular-to use rates as a vehicle with which to transfer wealth among interest groups, geographic regions, and economic sectors.
Such politicized rate setting, in the absence of enforced constitutional constraints, is the inevitable outcome of democratic competition within political institutions: In the absence of direct access, political processes will bestow artificially low rates upon some consumers, with the costs spread across other consumers.
For the economy as a whole, this outcome is highly inefficient-the losses greatly exceed the gains-but public decision making (public choice) nonetheless is driven toward it because the benefits are more concentrated politically than the costs, and because public decision makers, particularly under term limits, are likely to have time horizons shorter than those relevant for the economy as a whole.
In short, just as consumer choice is a powerful constraint upon uncompetitive pricing generally, direct access in the context of the electric power market is an important institution constraining the natural incentive of government institutions to transfer wealth through a politicized rate structure. The proscription of direct access, therefore, analytically is a collusive arrangement under which government prevents a particular (and important) form of competition; and the longer-term effect is to prevent true deregulation because the latter would destroy the politicized rate structure and attendant wealth transfers.
California cannot have an efficient electric power sector without direct access. Moreover, a transition from the current industrial structure-as shaped by the historical regulated system, by AB 1890, attendant PUC policies, and subsequent policy adjustments, and by market expectations about future policies and market conditions-cannot be implemented without direct access. Such a transition requires market prices yielding efficient investment incentives; but the absence of direct access, facilitating a rate structure designed to transfer wealth among groups, is inconsistent with that goal. Without direct access, a transition away from substantial rate regulation will be difficult or impossible.
Hazards of Industrial Structuring through Political and Regulatory Processes
By the early 1990s, the traditional system of PUC rate regulation in California had yielded electricity prices roughly half again as high as those in the rest of the U.S. The evolution of the electric generation system under regulatory incentives and constraints had resulted in substantial economic inefficiency in terms of siting, total capacity, the capacity mix distribution, and other central parameters.
The regulated rate structure, inexorably shaped by political pressures, engendered large cross-subsidies among economic sectors, geographic regions, and consumer groups. And the processes of regulatory permitting and public policy formulation that had evolved over time can be described as highly politicized and rife with delay.
At the same time, technological advance and market forces were creating important competitive pressures in both generation and transmission and distribution, with respect to which traditional regulatory and policy processes were poorly suited and inconsistent. These underlying trends-coupled with the severe recession through which California suffered during the early 1990s-imposed substantial costs upon the California economy and created powerful incentives for adverse business location decisions.
The policy response of the California state government was AB 1890 (1996) and a series of related PUC initiatives on contracting and vertical de-integration of the electric utilities. In summary, California implemented a partial deregulation that, whatever the political compromises necessary for enactment, yielded highly inefficient pricing at both wholesale and retail levels, an inefficient industrial structure in the electric power sector, an inefficient and costly allocation of risk, a large implicit tax on electricity consumption, disproportionate costs imposed upon the business sector, and other adverse effects.
Because of retail price controls and, until the defeat of Proposition 9 in 1998, delays in permit filings for the construction of new generating capacity, as well as other factors, important shortages emerged in 2000, the response to which has been the actual and effective bankruptcies of PG&E and Edison, respectively.
Other effects include the imposition of a system of price controls and a sharply growing involvement of the state government, which generally will introduce important rigidities. In particular, it will politicize the market further, in part because of the pressures to use rate structures to transfer wealth and in part because of the political incentives of public decision makers facing time horizons substantially shorter than those relevant for the economy as a whole.
Direct access allows consumers to avoid such effects in whole or in part. That is why it is a necessary component of a policy designed to move California toward economic efficiency in the market for electric power.
Conclusion
The long-term interests of electricity consumers, producers, taxpayers, and the state government are broadly consistent in terms of efficient prices, reliable service, investment risk reduction, a market freed from political constraints, and in terms of economic growth and tax-base expansion. 
Direct access is the right on the part of buyers to enter contracts for electric power services directly with a power supplier chosen by the buyer. 
Just as consumer choice is a powerful constraint limiting uncompetitive pricing generally, direct access in the context of the electric power market is an important institution constraining the natural incentive of government institutions to transfer wealth among groups through a politicized rate structure. California cannot have an efficient electric power sector without direct access, and indeed cannot implement an effective transition process toward an efficient system without direct access. 
Efforts by public decision makers to design industrial structures are ill advised and likely to yield serious unintended consequences and inefficiency costs. This outcome is likely in part because the efficient evolution of a market structure is driven by subtle and complex market forces understood only imperfectly by economists and even by market participants themselves. It is also likely because the compromises needed to forge policies can yield efficient market structures only by accident, even if understood well. Political processes simply cannot respond well to technological advances and other important shifts reflected in market behavior and prices. These underlying conditions reinforce the short- and long-term advantages of direct access, an institution facilitating the operation of competitive market forces. 

Dr. Benjamin Zycher is a Senior Fellow in Economic Studies at the California-based Pacific Research Institute. He can be reached via email at pripp@pacificresearch.org <mailto:pripp@pacificresearch.org>.