Regulation necessary to keep power price down

By PETER DEFAZIO*

I was in New Zealand this year, just after the economic disruption caused by huge electricity price spikes. I have watched with interest as Energy Minister Pete Hodgson and the Labour Government struggle with the disastrous deregulation scheme inherited from a National Administration.

There is no successfully functioning model of electricity deregulation anywhere in the world. The experience in the United States has been a disaster.

Thanks to the rampant manipulation of the California market, residents to the north, in my state of Oregon, are paying 50 per cent more for the same electrons, produced by the same generators, transported over the same wires as three years ago. The story is the same across the US.

British regulators have concluded that market manipulation and collusion have become standard business practice after the Thatcherite deregulation. While wholesale prices have fallen slightly, retail consumers are still paying the same or higher prices than they paid under the old system.

The Canadian province of Alberta went from some of the lowest electricity rates in North America to some of the highest after deregulation. The large industries that pushed for deregulation are now clamouring for reregulation, or moving to provinces that did not deregulate.

German businesses are complaining about high power prices years after deregulation.

And of course you are painfully aware of the price spikes and threatened blackouts in New Zealand.

By its nature electricity is not a competitive industry - it's a matter of plain economics and physics. Electricity cannot be stored in any significant amount. Therefore, supply and demand must be balanced instantaneously.

There is no substitute for electricity, which means demand for electricity is relatively inflexible. Consumption can be reduced only so much, no matter how much the cost rises.

Electricity flows are based on the laws of physics, not at the whim of the "invisible hand" of the market. The distribution of electricity will always be a natural monopoly since consumers do not want redundant wires crisscrossing the landscape, which would be extraordinarily expensive.

Any standard economics textbook explains that successful free markets include: low barriers to entry, adequate transparency and availability of information, many buyers and sellers, and the inability of any competitor to use its size to influence prices on its own.

Clearly, these features don't apply to electricity and never will.

At the height of the California energy crisis, Vice-President Dick Cheney met behind closed doors members of Congress from the western states. He told us the markets were not being manipulated; he said price spikes and blackouts were natural features of a functioning market.

The basic problem in California was caused by Californians, he callously claimed. He said we would need to build a 500MW power plant a week for 10 years to bring prices down.

Of course, subsequent revelations have proved Mr Cheney and the deregulation apologists wrong. Prices in the western US came down only when regulators imposed price caps and cracked down on the games being played by generators.

Continued reliance on the whims of the deregulated market would only further fleece consumers, threaten businesses and the economy, and profit energy conglomerates.

I wish Mr Hodgson well. He has recognised the need for a strong regulatory board to provide general oversight of the industry, contracts for much-needed standby generation during drought years and transmission capacity.

A strong commission with full Government backing might return reliability and reasonable prices to New Zealand.

But in the US the best way to provide reasonably priced power, predictability and reliability is to maintain a fully regulated mix of public and privately owned, vertically integrated utilities with cost-based rates.

*Congressman Peter DeFazio represents southwest Oregon in the US Congress, and is co-chairman of the northwest energy caucus in the House of Representatives.