I’m less than impressed with the quality of thinking brought to bear on the issue of electric deregulation and reregulation in Virginia. Deregulation of the electric power industry in Virginia, almost everyone has concluded, was a failure. The question that no one deems worthy of asking is this: Why was deregulation a failure?
Could it be that “deregulation” is a misnomer? Consider the fact that when Dominion, the state’s largest power company, “deregulated” in 1999, it did so on the condition that its rates remain frozen for 10 years, with some exceptions for fuel costs. Is it possible that potential competitors were scared off by the knowledge that Virginia’s electric rates, already lower than the national average to begin with, would not increase for 10 years? Who would want to compete under those conditions?
Here’s what else proponents of reregulation are not considering: “Deregulation” coincided with a period of time when Dominion did not need to build any new base-line power plants. The utility was able to import cheaper electricity over electric transmission lines from the Midwest. But that source of power can no longer be counted upon to accommodate future demand growth in Virginia. Dominion plans to embark upon a multi-billion dollar construction program to build its own power plants. “Reregulation” will ensure that Dominion has the field to itself: It doesn’t have to compete with outsiders to add that capacity.
Another baneful effect of regulation, argues Jerry Ellig, a senior research fellow at the Mercatus Center at George Mason University, is that it will inhibit innovative pricing policies that could promote conservation. Writes Ellig in the Times-Dispatch today:
Competition could facilitate dynamic pricing options that would vary retail electricity prices as the cost of producing electricity changes over the course of the day. Like cell-phone plans that offer free night and weekend minutes, dynamic electricity pricing would let consumers save money by moving some of their electricity use to times when electricity is cheap to produce, such as late at night.
With less electricity demanded at “peak” times, fewer new power plants would be needed, and prices would be lower.”
“Transparent price signals that better reflect the actual cost of power give consumers incentives to seek out novel products and services that better enable them to manage their own energy choices,” notes Lynne Kiesling, a lecturer in economics at Northwestern University who has studied dynamic pricing experiments around the nation.
Don’t expect that kind of innovative proposal from monopoly utilities. Forced to charge the same price all day, regardless of cost, they can increase their profits only by selling more electricity and building more power plants.
Electricity markets have changed in unanticipated ways since Virginia passed its restructuring legislation, so some regulatory changes may be necessary. But with higher prices all but certain, it makes little sense to abort consumers’ right to choose.
