By Donella Meadows

–September 17, 1998–

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.

Copyright Sustainability Institute 1998