Energy fix from Britain

As summer ends, consumers are relishing the annual dip in their electricity bills. Yet larger energy-supply issues remain, and a recent Wall Street Journal analysis of the United Kingdom’s deregulation success story reminds us the United States still pursues a costly, ineffective energy policy in need of an overhaul.

Britain’s energy deregulation began under Margaret Thatcher in 1988. For the next decade, improvements came in fits and starts. But since about 1998, Britain’s model has become an international example of what can be accomplished when government regulation is implemented in its proper sphere, allowing market forces to work in theirs.

The British model is true deregulation, as producers, consumers and intermediaries deal directly with each other. The British have already abandoned the “energy pool” strategy – combining power from several producers for distribution by a single utility – that has failed California so dramatically. They have also allowed utilities and suppliers to make contracts locking energy prices over time, thus avoiding the energy price swings that crippled utilities in California, where energy-price contracts are prohibited.

As a result of these policies, 7.8 million British consumers have switched energy suppliers since 1998, cutting their household energy bills by about 12 percent. British energy prices overall have dropped 15 percent since March.

But while Britain confines its regulators to monitoring the amount of power on the grid during any half-hour, California and the federal government have recently relied disastrously on price caps. Intended to prevent price gouging by energy wholesalers, the caps caused suppliers to cut California off entirely, since the complex price-cap formula left them unable to determine what price would be paid for their energy.

The last few months’ price caps also failed on the demand side. From January to July, under a price freeze, Californians did manage to lower their consumption 10 percent. But in nearby Washington, rising uncapped prices prompted consumers to lower their demand twice as much. In San Diego, rising prices reduced demand 9 percent by August 2000, but after the state capped prices the next month, demand rose to pre-crisis levels.

Areas that have followed the British direct-dealing model – parts of Pennsylvania, New Jersey, Delaware, Maryland, the District of Columbia and Virginia – avoided California’s fate. Since 1997, those areas have seen falling prices and no brownouts. One expert reports Pennsylvania consumers have saved more than $3 billion and pay 4.5 percent less than the national average for energy. These areas also allow the price contracts California bans, and 150 new power plants are planned for these regions.

Of course, few will argue government should abandon energy policy entirely, but the contrast between Britain and California shows us the fallacy of shielding consumers from their energy decisions.