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The Law Of The Free Lunch

My dad always told me there’s no free lunch—a notion
that seems relevant to electric utility deregulation.

The connection between utility restructuring and the
quest to get something for nothing comes to mind with news that California reversed
a key part of its deregulation experiment. In September the California Public
Utility Commission suspended consumers’ ability to choose their power provider.

It’s not news that California’s pioneering 1996 deregulation
law blew up like a trick cigar, resulting in blackouts, a utility bankruptcy,
and skyrocketing rates. But the decision to remove the central provision of restructuring
marks a milestone that offers a few lessons.

California teaches us the huge complexity of the electric
utility industry, and that tinkering with it can produce a high-stakes failure
of an essential part of modern life. California proves Murphy’s law, because whatever
could go wrong, did, from the weather to the economy. And it shows that even a
state legislature can’t repeal the laws of physics, which govern how electricity
flows, or the laws of supply and demand, which rule how people buy and sell electricity.

One law of physics holds that energy can’t be created
or destroyed—if things change, it just moves around. That law rules other parts
of life as well. Politicians understand that change tends to rearrange rather
than create—when they analyze a proposal they ask: who wins and who loses?

That’s an especially fitting question for utility restructuring.

In California, electricity brokers and speculators
won, making huge amounts of money while utilities and their customers suffered.
Utility restructuring could have different tradeoffs in other states: rates could
go down for large industry and increase for homeowners, or you might get better
rates but worse service.

The point is, there are tradeoffs. Waving the magic
wand of competition won’t lower prices and raise quality. Somewhere, somehow,
you end up paying for your lunch.

That’s not to say there can’t be improvements. Twenty-four
states had begun the process of adopting some form of utility restructuring. Some
of those have now backed away after seeing what happened in California. Others
are moving ahead, saying they will avoid those mistakes. Those states may well
find a better balance of benefits among everyone affected by electricity, but
they won’t create something out of nothing.

Nearly four years ago Kentucky decided to let other
states pursue the free lunch. In 1998 the legislature agreed we should wait to
see how restructuring works in other states before jumping into it ourselves.
Now we have the lowest rates in the nation. It pays to obey the law of the free
lunch.

Paul Wesslund

Editor

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