Economists sometimes get confused - especially when the real world doesn't fit into their neat boxes.
Goodbye to All That?
An analyst looks at prospects for emerging power technologies in light of the recent turmoil over deregulation.
In mid-1997, electricity deregulation seemed on the verge of sweeping the country. Based on our prior experience with deregulation, in natural gas and airlines principally, I became convinced that deregulation would lead to profound changes in the power industry. These changes would lead, in this view, to significant opportunities for new entrants and for companies developing new technologies for the power industry. I based this conclusion on my experience in the early 1980s as a consultant to the power industry and on a close reading of the literature on deregulation, both suggesting that decades of regulation had a stultifying effect on industry generally and, at least in my experience, on the power industry specifically. Deregulation would change all that, bringing new entrepreneurial management to the industry, attracting risk capital, and sowing the seeds for investment in technologies that would change the way power was delivered, priced, and used.
Now, early in 2003, I am not ready to abandon this thesis altogether. The logic of the argument remains sound: History still teaches the benefits of competitive markets and deregulation, particularly in stimulating innovation. But times have changed. In the wake of California's problems, deregulation is stalled, at least for the near term. The current disclosures of greed and wrongdoing at the most senior levels of management among the new entrants to the industry-companies such as Enron that I myself viewed as exemplars of the "new breed"-have reinforced growing skepticism on the merits of deregulation. And, lastly, we seem to have an administration that can do no better than "your father's energy policy" when it comes to tackling America's energy problems.
All of this has worsened the prospects for emerging power technologies. The failure of deregulation means that, at least for the near term, consumers will not get price signals in the marketplace that reflect the true value of power at a specific time, in a specific location, and of a specific quality. These "true" prices become the basis for economically sound investment decisions, decisions that lead, irrevocably, to a system of power generation, transmission, distribution, and use that differs fundamentally from what we have today, insofar as today's power infrastructure is based not on prices that signal true economic value, but on regulated rates that often obscure real value, or hide it altogether.
Granted, not all markets, maybe very few, are characterized by prices that entirely reflect economic value. Some regulatory sleight of hand creeps in somewhere along the way, in the form of government subsidies, tax incentives, or other government intervention. But I don't think we can argue that moving toward market-based prices, even in some small, incremental way, doesn't have benefits to the consumer. Therefore, despite the current freeze on deregulation, we should root for success by the Federal Energy Regulatory Commission in implementing some version of standard market design in transmission: While it may not get us all the way there, it seems to be a step