ADVICE FROM ABROAD ON RESTRUCTURING ELECTRICITY

The U.S. is not the only country overhauling the way electricity is owned and
sold.  England, Hungary, India, Brazil and other nations are well advanced in
deregulating their power markets -- if doing so can be considered an advance.

I'm just back from an international meeting where I heard reports from these
places.  They were mainly horror stories.  The energy experts who told the
stories are worried about electricity deregulation, but not because they love
the old state-owned or state-regulated monopolies.  They want change, but they
want the change to make the electric system better, not worse.

Why is it getting worse?  For reasons familiar to anyone who watches how
markets really work.  Deregulation opens up cost-cutting competition.  But the
cutting tends to come from layoffs and lower pay for workers, from weakening
environmental protections and from hidden subsidies.  Costs aren't really cut;
they're just foisted off onto someone else.  Meanwhile lower apparent prices
undermine campaigns to increase efficiency.

Price cuts go more to industrial users than to households.  Companies lose
interest in small, low-profit customers.  Advertising orgies break out,
sometimes pushing false information.  (For example, some distributors claiming
to sell electricity from "green" environmentally sound sources use dubious
definitions of "green.")  Big companies swallow small ones.  (The Hungarian
electric system is now owned by German companies.)  Over-expensive generating
plants, especially nuclear ones, fail to compete in the market, their owners
lean on politicians, who often force customers to bail out, through surcharges
on their electric bills, the investors who made those bad decisions.

Every market needs regulations to keep the competition fair, the information
honest, the environment and the consumer protected.  The experts from many
countries agreed about what those regulations should be.  BEFORE privatization,
they said, put the following measures firmly in place:

1. Make prices tell the truth.  Every country subsidizes directly and
indirectly various forms of energy.  The subsidies tend to reflect the
political power of purveyors rather than the social or environmental good. 
Nuclear power and large-scale dams are highly subsidized nearly everywhere,
with coal and oil not far behind.  The market can never sort out the best
alternatives until these price-distorting subsidies are removed.

There's another piece to getting the prices right -- folding in the cost of
environmental damage.  Coal-fired electricity looks cheap only because we don't
count the cost of acid rain or greenhouse gases or, in many countries, local
air pollution or strip mines.  Society does pay for diseased lungs and dying
forests and disrupted weather patterns, but not in the price of coal.  Billing
those costs to the polluter, through carbon taxes or other price corrections,
would not only be more fair, it would also make truly green power instantly
competitive.

Full-cost pricing is not done for two reasons.  One is that entrenched powers
such as coal and oil companies oppose it.  The other is that some environmental
costs, especially distributed ones such as acid rain or future ones such as
climate change, are hard to estimate.  It may be difficult to get the numbers
exactly right, but any guess is better than zero, the number now in effect, the
only number that is surely wrong.

2. Protect small users.  Electricity is a necessity of modern life.  People
should not be denied it because of inability to pay, or be charged exorbitant
prices because they use only a little, or be refused service because they bring
small profit to private providers.  A license to deliver electricity should
include the obligation to provide "lifeline guarantees" to all households.

3. Enforce anti-trust measures.  The U.S. government seems to have forgotten
the reason why companies should not be allowed to grow too big -- they destroy
fair market competition.  There should be limits on the sizes of electricity
providers, those limits should be strict and small, they probably should be
geographic, so people can talk to their electric company without crossing state
or national borders.  Denmark is contemplating legislation to ensure the
preservation of local electric coops owned by their customers.

4. Require honest advertising.  To make wise decisions, customers have to know
precisely what "green" means, what all charges are, what services are
guaranteed, what is the full range of alternatives.  The textbook definition of
a free market assumes that complete information is equally available to all
players.

5. Hold investors responsible, with a little compassion.  Investors in nuclear
power plants argue that they made their decisions in good faith in one
regulatory environment, and it's not fair to change the rules in midstream. 
There's something to this argument, though there were warnings all along about
the inadvisability of nukes, and though the nukes have received plenty of
public subsidies.  So, though it's a tenet of the free market that investors
should suffer from their own mistakes, maybe there should be some public
recompense for "stranded costs."  Just some.  The press should be in the room
when amounts are decided, and so should advocates for ratepayers.

6. Keep the system flexible.  The experts I heard think the current changes are
only the start of a huge technical shift in electricity production. 
Deregulation is largely triggered by big companies installing their own
combined-cycle gas generators and going off the grid, leaving the
mega-generating plants of the power companies with excess supply.  Ten or
twenty years from now, they say, households may join that trend, generating
their own electricity with rooftop solar, fuel cells, even mini-generators in
electric cars.  A wildly decentralized system, still connected in grids, could
be much more democratic, environmentally friendly and resilient to breakdown.

We should set up the regs and the market to encourage it.  That means not
creating more massive generators or massive companies that will have to be
bailed out some day.

(Donella H. Meadows is an adjunct professor of environmental studies at
Dartmouth College.)