Professor Peter Navarro, who teaches economics and public policy at the University of California at Irvine, writes in the Harvard Business Review (January-February 1996) that "[t]he deregulation of the electric utility industry represents an important opportunity to enhance the country's competitiveness and improve the standard of living for its citizens. ... It is the time to move boldly forward to forge an open market, in which competition and choice are the rules and not the exceptions." He argues that a "coordinated federal policy" is needed to "radically restructure" the electric industry. According to Professor Navarro, "a leaner industry will enhance U.S. competitiveness and improve the standard of living for everyone [emphasis added]."
Professor Navarro is a distinguished economist. Not surprisingly, he espouses competition. Also not surprising, he favors federal deregulation of the electric industry, given that he lives in California (em where electric rates are roughly 50 percent above the national average.
But I don't live in California. I live in Virginia, and our residential electric rates in 1995 for investor-owned utilities (IOUs) were 11.5 percent below the national average. Our commercial electric rates were 23 percent below the national average. And our industrial electric rates were 17 percent below the national average. Regionally, there is also a significant difference in electric rates. For example, Virginia industrial electric rates were 39 percent below the mid-Atlantic regional average and 6 percent below the south-Atlantic regional average.
What would happen to electric rates and reliability in states like Virginia? It doesn't take an economist to figure out the answer: Price equilibrium will result for the country. Certain regions will win; other regions will lose. California would win; Virginia would lose.
Professor Navarro's deregulation scheme doesn't address short-term regional impacts, particularly in Virginia. He is convinced that deregulation will benefit us nationally. And he's probably right in the long run. But long-run benefits don't complement Virginia's short-run plans for increased economic development. We do not need (em and, indeed, do not want (em national equilibrium in electric prices if it increases our electric rates, stymies economic development, and reduces our standard of living.
Professor Navarro thinks long run, but we live in the short run. In the last 12 months, Virginia has attracted a $1.5-billion Siemens/Motorola manufacturing facility, a $1.2-billion IBM/Toshiba manufacturing facility, a $3-billion Motorola manufacturing facility, and other new businesses. As our governor is fond of saying, "Virginia is open for business." But he isn't attracting new businesses with a promise of higher electric prices in the future. Quite the contrary. These new businesses expect to pay lower electric prices tomorrow (em an expectation that does not assume a "coordinated federal policy" of "radical restructuring."
Our major IOUs include Appalachian Power Co. (APCo) and Virginia Electric and Power Co. (Virginia Power). APCo's and Virginia Power's retail rates compare favorably to retail rates nationally. APCo and Virginia Power do not need a "coordinated federal policy" to provide Virginia with low-cost, reliable electric service. They know they have to produce low-cost electricity to attract and keep business customers; they know they have to provide business and residential customers with energy options; and they know that downsizing and restructuring on the part of their major business customers requires them to downsize and restructure to meet their customers' lower cost requirements.
How will a "federally coordinated policy" of "radical restructuring" provide additional benefits to Virginia electric customers? Who at the federal level will ensure that Virginia's residential and business customers continue to receive low-cost power rather than power sold in the open market to the highest bidder? Who at the federal level will ensure that customers in Virginia continue to receive the level of reliability they have enjoyed for decades?
These are not rhetorical questions. They must be answered with real names, not economic concepts. We have to introduce prospective businesses to real people. Businessmen contract with real people. Businessmen rightfully expect that real people will ensure around-the-clock reliable electric service. They have businesses to run (em not theories to test.
By now, the economists reading this Op/Ed are choking in disgust. They know that federal deregulation of the electric industry will benefit the country. What they don't know is whether federal deregulation will benefit my region. Why, for example, would APCo continue to sell low-cost power to Virginia businesses if it could sell power in the open market for one cent more per kilowatt-hour (Kwh)? APCo sells approximately 6,666,141,000 Kwh annually to large business customers in Virginia. An open-market price just one cent higher would give APCo
additional annual revenues of over $66 million and, perhaps, reduce cost for businesses in other states. But it would increase cost for Virginia businesses.
I do not intend to knock competition, especially not on the pages of PUBLIC UTILITIES FORTNIGHTLY. I have read Adam Smith's treatise on the "invisible hand." I understand the theory of competition. I have taught economics. But if we have a choice between deregulation under a "federal coordinated policy" or "piecemeal" state-by-state policies (as Professor Navarro calls them), I choose the latter. As former Treasury Secretary William Simon wrote in the Wall Street Journal in 1977, "The more the government tinkers with the markets, the worse things get." I don't know for certain, but I would bet that the government "tinkering" Simon referenced was federal "tinkering." Regardless, regulators at state public utility commissions are capable of addressing the needs of the business and residential customers in their respective states. They can balance the interests of all the citizens in their region, and they can do it without radical federal restructuring.
I don't dispute that a "federal coordinated policy" may be necessary to lower Professor Navarro's electric rates. But I am willing to bet that such a policy will not improve my standard of living in Virginia. Any takers? t
Edward Flippen is a partner in the Richmond, VA, law firm of Mays & Valentine. He has lectured on public utilities at the University of Virginia School of Law, on economic regulation at the T.C. Williams School of Law at the University of Richmond, and on trade regulation at the Graduate School of Business at the College of William and Mary. He will lecture on economic regulation at the
Marshall-Wythe School of Law at the College of William and Mary this fall.
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