Public Power - September/October 2007 - (Page 10)

WASHINGTON FOCUS P legal analysis behind. Thoughtful concepts and increasingly leaveofsound engineering, way to unublic policy debates about electricity deregulation economic, and clear definitions words have given supported assertions or ideology. Economic concepts and terms such as markets, competition, prices, costs, efficiency, and value are given short shrift or are convoluted. Concepts and terms are used to convey positive connotations to advance self-interest positions rather than to describe economic reality. Consider, for example, the “Open Letter to Policy Makers” from nine former Federal Energy Regulatory Commission members, expressing their support for the benefits of “competitive wholesale markets.” The term is used repeatedly, as though saying it is so makes it so. Another example is the FERC’s recent proposed rulemaking on demand-response. The proposal says “a well-functioning competitive wholesale market should reflect current supply and demand conditions” and “the wholesale electric power market works best when demand can respond to price.” This is true enough in principle, but are these markets truly well-functioning? The commission also says prices should reflect the “value of electric power to customers,” and when it does there will be greater demand response, which will lead to increased efficiency. A price equal to “whatever the market will bear” may reflect the value of the item, but that form of pricing for certain products, such as electricity, has been restrained by government action limiting the price to an amount that is just and reasonable. While the goal of increased demand-response is admirable, the reasoning the commission employs to support demand-response illustrates the need for more precise language. Carnegie Mellon University Professor Jay Apt tells us: “Competition and markets are not synonymous terms.” Markets range from being competitive to monopolistic. There are degrees of either, and where an industry falls in the economic spectrum results in significantly different prices and qualities of goods or services for consumers. Economist Charles Lindblom notes that a market is a system for arranging social cooperation; it can be an economic or non-economic system. This notion “goes down hard with people who have long identified the market with competition,” he says. The type and degree of competition faced by small retailers is much different than that faced by deregulated electric power generators with large baseload plants. Nobel economist Joseph Stiglitz defines competition as a “rivalry among firms to supply the needs of consumers and producers at the lowest price with the highest qualities.” Implicit in this view and explicit in the formal notion of competition is that prices reflect the economic costs to society of producing a good or service, not the value of that good or service to a particular purchaser and certainly not long-lived monopoly profits for the provider. Unfortunately, the nexus between competition, price and cost is lost in most discussions. Advocates of deregulation are quick to point to the scant evidence about gains in operational efficiency but ignore the fundamental aspect of efficiency that says prices must measure economic costs. Instead, the term “value” is dropped into restructuring discussions. Prices in competitive markets are not based on the sum of the value customers place on a good or service; rather, in well-functioning markets, prices reflect economic costs of providing a given amount of goods or services. More fundamentally, prices represent the minimum compensation necessary to retain and attract the factors of production. Edward Bodmer’s study The Electric Honeypot: The Profitability of Deregulated Electric Generation Companies (sponsored by APPA’s Electric Market Reform Initiative) demonstrates that prices and profits are significantly above the economic costs of providing electric service in many deregulated areas of the country. Past, current and projected returns to shareholders are more than double traditional returns. Confusion about words and concepts and what they imply lead to unproductive and counterproductive public policy discussions. Worse still, they have led to deregulation policies that at best have reduced the quality of service, increased costs and produced no benefits for consumers, and at worst cost consumers billions of dollars and with reduced quality of service. A start down the path toward more informed and productive policy discussions would first define the economic terms. Then, it would be clear that the threshold question is not one of markets versus regulation; rather, it is one of competition versus monopoly. s Public Policy, as if Words and Economic Concepts Mattered By Alan H. Richardson President and CEO American Public Power Association 10 SEPTEMBER-OCTOBER 2007 PUBLIC POWER

Table of Contents Feed for the Digital Edition of Public Power - September/October 2007

Contents Washington Focus 10 Questions Public Power (Every) Week Training Tomorrow’s Work Force What’s in Your Wallet? U.S. Lags in Broadband Deployment Now What? For Engineers Safety Community Broadband For Governing Boards Human Resources Hometown Connections Customer Service DEED Index to Advertisers Advertisers by Category Parting Shot

Public Power - September/October 2007

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