Smoothing jolts of deregulation

COLORADO SPRINGS, Colo. -- The relaxation of regulations on industries once micro-managed by government has been one of the biggest public policy stories of the past 20 years. Examples include the trucking, railroad, airline, bus, banking and natural gas industries. The last two to face deregulation (not counting government schools) are the telecommunications and electric power industries.

A Western segment of the $200 billion electric industry met here last week under the auspices of the Western Power Producers. The WPP is an association of rural electric cooperatives and the generation and transmission companies that supply most of their power.

The WPP agenda reflected the fact that the electric power industry is at a crossroads. Reason: New, market-oriented reforms are changing everything about the generation, transmission, distribution and retail sale of electricity. Reformers say the result will be more choices and lower prices for consumers. Others say these benefits may be the result for some, but not for everyone or every region.

"The answer you get depends on how you look at it," says Ron McMahan, president of Resource Data International, a Boulder-based energy consulting firm. When you look at the deregulation of electric power from the national level, the results seem to be mostly benefits, with the average price of electricity per kilowatt hour certainly going down, as the reformers say.

But it looks a little different from the state and local level. For example, as high-priced electricity in places like California and many Northeast states comes down, low-priced electricity enjoyed by many Midwestern and Western states outside of California is likely to increase. So even as the national average comes down, many consumers in places like Idaho, Colorado or the Dakotas are likely to pay more. By definition, a lower overall average price means lower prices for some and higher prices for others.

Impacts of deregulation also vary between high-volume business users and low-volume residential users as high-volume business users generally get a better deal. In fact, some large business users already have new ways to hook up directly to the long-distance transmission system, bypassing local distributors and thereby getting lower prices.

Population density is another issue. As the public learned with airline and railroad deregulation -- and are beginning to learn with telecom and electric deregulation -- small towns and rural areas cost more to serve than high-density cities. That's why elected officials on both sides of the aisle invented universal service funds and other mechanisms to subsidize high-cost areas. These subsidies were then used to close the gap between the prices paid by urban and rural customers, even when the cost (as opposed to the price) of service to small town and rural customers was higher -- often substantially higher -- than the cost to serve high-density urban customers.

But in a competitive environment it is hard to fund subsidies. Result: Prices paid by consumers move toward costs. That means higher prices for consumers in small towns and rural areas and for many residential consumers no matter where they live -- a result that is unpalatable and often unacceptable to elected officials.

So, the many overall benefits of deregulation produce a lot of transition problems for some people, some industries and some regions -- especially at the grassroots level where people live and work. Does that mean we shouldn't deregulate? Absolutely not. But it does mean we should slow down, take a breath and listen to those who are closest to the people -- the local elected leaders and the utility executives and managers. Working together, they can minimize the pain as we move our nation's energy economy in the right direction.