Letters for April 2004.
Jim Johnston is Policy advisor at the Heartland Institute.
To the Editor:
Cato's Peter Van Doren and Jerry Taylor analyzed the electricity crisis in the February 2004 issue of Public Utilities Fortnightly ("Rethinking Restructuring," p. 12) and concluded that the solution to a bad situation is vertical integration and mandatory real-time pricing. In my opinion they have got it half right.
Vertical integration of electric utilities has been the dominant form of organization since the beginning of the industry and even before there was regulation. It is a substitute for long-term contracting and as such is a hedge. It is especially relevant now given the need to maintain and modify the transmission grid to meet the new interstate sales of electricity in a reliable manner.
The form of vertical integration that works well for interstate oil pipelines and natural gas pipelines in Texas is one where transmission is typically a joint venture owned by the shippers in rough proportion to the value of their throughput and subject to light-handed regulation. That structure solves the problems of under-investment and opportunistic behavior in reserving capacity. As any landlord will tell you, owners take better care of property than mere renters. Vertical integration is the part of the Van Doren-Taylor prescription that is right.