Deregulation can work

Earlier this month, Texas became the second most populated state in the nation to begin deregulating its electricity markets in order to promote competition and reduce prices for consumers. Despite the results of California\'s failed attempt at deregulation, legislators say they have learned from past mistakes and taken steps to ensure a smooth transition to retail competition in the future. While it is still uncertain whether such measures will guarantee success, Texas is headed in the right direction and should be congratulated for seeing California\'s experience for what it was: an example of how not to deregulate, not a failure of deregulation itself.\nDiminished investment in electric power generating capacity was a leading factor that contributed to high prices and power shortages in California. The state's rigorous environmental regulations were largely to blame. Given the hostile regulatory climate, investors were reluctant to build new generators in order to work through the state's bureaucracy, doing so required an average of seven years. In the 10 years prior to deregulating, not a single new power plant was constructed in California even as demand increased.\nIn Texas, thirty new power plants have already been built in just the last six years. Instead of taking seven years to bring new power generating capacity online, the process has been streamlined and takes only two or three years. The state\'s current electrical supply already exceeds demand by 23 percent, according to an article in the Jan. 3 edition of the New York Times. Without the heavy hand of government to interfere with the construction of new generators, investors will be able to adapt more quickly to changes in demand and protect against power shortages in the future. \nA flawed market design also caused problems for California\'s deregulation. The state\'s wholesale and retail markets were de-coupled. This exacerbated the existing shortages. As wholesale prices skyrocketed in response to climbing demand, the state imposed retail price caps. The caps prohibited retail rates from rising with higher wholesale costs. Without higher prices to encourage conservation, the gap between available supply and unchecked demand continued to widen.\nIn Texas, wholesale and retail markets have been deregulated together. This will allow consumers to receive more accurate price signals that will reflect changing wholesale costs of electricity. During peak hours, when demand is highest, higher prices will encourage consumers to use less. This, in turn, will help moderate price fluctuations for buyers who can't afford to reduce consumption.\nCalifornia\'s centrally controlled bidding process mandated that utility companies buy power only through short term contracts. This further contributed to the state\'s energy problems because it left utilities vulnerable to upturns in wholesale prices. In Texas, utilities will be permitted to enter into long and medium term contracts to limit their exposure to short term price increases. This will allow them to reduce costs and more effectively compete to provide consumers with the electricity they demand at the lowest possible price. \n Although electric utilities might never be completely deregulated, there is a much larger role for the private sector in the industry that has yet to be fully realized. The process of shifting ownership from government to the private sector will be difficult, as California has shown. But Texas legislators seem to be on the right track. \nIndiana would do well to follow their lead when legislators reconvene today for the 2002 legislative session. After years of consideration, it's time for us to deregulate, too.