ELECTRICITY RESTRUCTURING AND FAITH IN THE MARKET

As blackouts roll through California, the New Hampshire Supreme Court just
cleared the way for electrical restructuring, while a Vermont utility assures
legislators that what is happening out west can't happen here.

Why not?

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 electri
c
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 ten-buck compact
fluorescent light bulb instead of a regular one for a dollar fifty? 
Even if we
believe that over ten 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.  Since
money cannot instantly transform itself into working power plants, there are
still rolling blackouts.

Could it happen here?  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.

(Donella Meadows is an adjunct professor at Dartmouth College and
director of
the Sustainability Institute in Hartland, Vermont.  See www.sustainer.org)