Deregulation, the forsaken panacea for climate change


Sunil Sharan 
By Sunil Sharan

The U.S. Congress has abandoned yet another climate bill. Gridlock in this august body looms large come November, dampening hopes of effective energy legislation in the foreseeable future. America is stuck. Yet deregulation, a concept all but renounced by the country a decade back in the wake of California’s energy crisis, holds the potential to unlock the gates to climatic heaven.

Many American utilities have for long operated as virtual monopolies in their respective jurisdictions, so much so that the service territory itself is quite often ingrained into their name. Georgia Power, Southern California Edison, Detroit Edison, Nevada Power, the list is seemingly endless. Aspiring utilities have traditionally found it prohibitive to enter the domain of incumbents. In such an uncompetitive environment, customers are relegated as "rate payers," with little choice of suppliers or services. Deregulation would herald competition and break down the bastions of utility protectionism.

The European Union mandated liberalization (their term for deregulation) throughout the region four years ago. The fear of a behemoth like EDF of France coming into Italy and snatching a chunk of its customers made the Italian utility Enel roll out the largest grid modernization project in the world five years ago. It thereby transformed its one trick energy delivery pipe into a multi-faceted platform for customer care. Countries like Germany and Spain have become global leaders in renewable energy. Competition has driven industry consolidation, with big fish such as EDF, Enel, E.ON, and Vattenfall snapping up smaller utilities and improving productivity through economies of scale. Choice now on tap, customers are finally able to dump dirty energy purveyors and switch to greener providers.

No wonder Europe is far ahead of the rest of the world in deploying almost every type of clean energy.

Currently only about a dozen states in the U.S. allow consumers a mostly restricted form of choice of electricity providers, with Texas, the largest electricity market in the country, being the most free-wheeling. Deregulation there was phased in beginning in 2002 and is now implemented in over half the state. It is ascribed to have instigated large scale deployments of smart grid and wind energy technologies. Companies like Green Mountain Energy that sell power generated purely from renewable sources have sprung up. Electricity prices in the state, after many years of hovering substantially above the national average, are trending downward, almost touching the mean this year, allaying the fear held by some that deregulation causes prices to rise unsustainably. Texas has become the bellwether for the rest of America to open up electricity markets.

What a contrast from how California went about deregulating itself in the late nineties. In fact, to even call its experiment deregulation is a misnomer. The state allowed new entrants into electricity wholesaling while freezing consumer rates, setting the stage for wholesale prices to be manipulated by the likes of Enron when demand for electricity outstripped supply. For deregulation to succeed, both the retail and wholesale ends of electricity have to be opened up, just as Texas has done, so that demand and supply can track one another. Things went so awry for California that the entire nation stood spooked, effectively putting the idea of deregulation in cold storage. Some states still tinkered with the notion but Bush-era feds all but washed their hands off it.

The Obama administration decided that clean energy in the country needed a jump start and proceeded to offer utilities a generous stimulus package. Deregulation would still remain off the agenda. Many utilities, already flush with cash, were now able to double dip into two set of public funds, the stimulus as well as "rate case" dollars, to enhance their operational infrastructure, without touching their own money. (A rate case transfers the cost of approved capital expenditure to rate payers, typically as an ongoing monthly charge.) Most other industries have no such luxury; they have to leverage their cash flow for operational upgrades.

With hopes fading for another round of clean energy stimulus, and other carbon reduction schemes such as a capping of emissions or a federal standard for renewable energy generation subject to the vagaries of a squabbling Congress, America’s greening could soon grind to a halt. The stimulus provided utilities with a carrot, now it is time to pull up their socks. Deregulation, in effect competition, would move the onus from the already strapped tax payers squarely onto cash rich utilities, and without the opprobrium that something like cap-and-trade seems to provoke. As has happened in Europe, deregulation in the U.S. would make utilities more efficient, responsive, and hungry. It will release pent-up market forces, incentivizing fleet footed utilities to thrive and forcing the dead beats to mend their ways. It will transform rate payers into customers, who would demand to be treated as such now that they would have the option of taking their custom elsewhere.

With such obvious benefits, is it not high time that the U.S. sheds its fear of deregulation and brings it out of the closet? Europe, and at home in America, Texas, have both proven that it works, and that too on a large scale.