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Fortnightly Magazine - February 1 1999

Deregulation, you say? We still haven't seen any.

Let's begin with a quiz. We'll use the multiple-choice format, developed at the University of Wisconsin during the 1960s to address overcrowding caused by the World War II "baby boom." Choose only one of the following 10 possible answers. Be careful. It's tougher than it looks.

Question: What is meant by the term electric restructuring?

A. To provide all consumers with retail access to multiple "energy" providers.

B. To separate the ownership of power generation from other functions.

C. To "unbundle" electricity into a lot of separate services not easily definable but recognizable when one sees them.

D. To shift regulation to the federal government through a process in which one utility sells all the power plants in its franchise territory to a second utility, which reciprocates by selling all its local plants back to the first utility, or perhaps to some other company instead.

E. To create an international market by transferring ownership and operation of all or part of the U.S. electric power system to foreign investors, or to government-owned, foreign utility systems or conglomerates not wishing to be called conglomerates but lacking a better name.

F. It's the same as "convergence" - except in England, where it also includes the provision of water service through pipes.

G. It's an excuse to create numerous huge and quasi-governmental agencies to run certain portions of electric transmission systems to prevent the owners from deploying their assets in a manner that might yield a greater profit than if a disinterested third party operated the same assets for the "public benefit."

H. Answers A, B and C.

I. Answers A, B, C, E and F, but not D.

J. All of the above, except in Alaska and the District of Columbia.

Without tipping my hand just yet, let me note that I believe that true "restructuring" of the electric power and gas industries, with competition and a substitution of markets for regulation, can bring great benefits for all consumers. Restructuring can serve the public interest if it meets these conditions:

It's achieved in a timely manner, with minimal transaction costs;

The process follows market signals and market discipline;

Markets set the balance between risk and reward;

Successor companies receive incentives to become more efficient;

Regulation is reduced to necessary levels;

A national market can emerge without undue barriers; and

Consumers are not bothered with telemarketing calls at dinner time, while in the bath, or at any other inconvenient moments.

The Promise of Competition

I'm not one to overplay my hand, however. Thus, let me offer two caveats that could limit the amount of any expected consumer benefits.

The first caveat: Can competition reduce prices for delivered energy? The problem here is to make an informed guess as to the course of energy prices under the current regulatory model.

Regulation tied to rates of return and cost of service has been in practice since the turn of the century, and the record suggests a predictable pattern of prices. I have texts going back to World War I