A FERC-less Energy Policy

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The Road to Good Inventions

Curtis L. H&eacute;bert took a step in the right direction recently when he resigned as chairman of the Federal Energy Regulatory Commission. Now, if only the remaining members of the commission would take the same step. If only President Bush would refuse to appoint their successors. If only the Federal Energy Regulatory Commission could be dissolved.

Descended from the old Federal Power Commission, a New Deal agency assigned to protect the public from the likes of utility magnate Samuel Insull, FERC is America's answer to OPEC. Among other dubious tasks, it attempts to fix the price of interstate transmission of electricity according to a standard defined in 1935 as "just and reasonable." If not an OPEC, it's at least a federal, interstate version of a state Public Utility Commission; indeed most members of FERC, Democrats and Republicans alike, have had service at a PUC somewhere on their political r&eacute;sum&eacute;s.

Such economic regulatory agencies are clumsy compromises between public and private ownership. Populists never persuaded enough Americans to try out state ownership of railroads, trucking, communications systems, airlines or electric utilities, but in the first half of the 20th century they gradually handcuffed private owners and managers of industrial companies that seemed to have monopoly power. State and federal governments would not allow such companies to merge; they would subject prices to severe regulation.

Even with the power of government backing them up, cartels are unstable, and Federal Power Commission regulation of interstate energy trading started to break down in the 1970s. A disparity between the unregulated price of gas produced and consumed within a single state and the regulated price of gas that moved in interstate commerce created a severe shortage of cheap interstate gas and a surplus of relatively expensive intrastate gas. To the horror of shivering Northeasterners, some profligates in Texas actually burned natural gas to generate electricity because they couldn't ship it out of state without having their prices gouged downward.

The regulatory mess was so obvious and so oppressive that Congress changed the name of the Federal Power Commission to the Federal Energy Regulatory Commission. Deregulation, ordered by Presidents Carter and Reagan and gradually implemented by FERC, created new surplus problems: The new price of natural gas was lower than what some producers needed to cover their costs, although it was higher than some consumers were willing or able to pay.

Some producers had to shut down operations; most simply stopped drilling for gas in expensive, deep holes. Some gas companies had entered into long-term contracts and then found that their customers did not want as much gas as they had when it was cheap. They had to pay for the gas, whether they took it or not, and some went bankrupt doing it.

The "gas bubble" of the 1980s and 1990s was supposed to pop at any moment, yet it lasted for years. FERC spent most of those years restructuring the gas industry by changing the form of pipeline regulation. Pipeline companies were split off from production companies. Local utilities and big end-users negotiated prices with producers and contracted with pipelines for carriage of their gas.

The nation's electric utilities absorbed the gas surplus by building most of their new generating capacity to use natural gas, and FERC moved on to restructure the interstate electricity market.

Wholesale producers could apply to FERC for authority to sell power at market rates, if they could show that they did not have a dominant, price controlling position in the market. This made state deregulation possible, with the stricture that utility companies would have to split themselves up so as to separate monopoly distribution from power production. Like pipelines, the utilities also would have to open their transmission lines to all producers.

FERC economists were present at the creation of the California Power Exchange and the state's Independent System Operator. Although their help was not crucial to the collapse of a legislative scheme born to fail two years earlier, the FERC advisers did nothing to reverse the state's march to disaster.

At the very beginning of the California energy crisis, FERC unwittingly helped it along. When owners of power plants noted in 1998 that supplies were becoming short, they started increasing their prices for reserve power. FERC quickly let the California Independent System Operator "cap" the price of reserve power and command the owners of strategically located generating plants to provide reserves at state-mandated prices. The action served notice on all participants in California energy markets to get what they could as quickly as possible, because politics would determine what was just and reasonable, not supply and demand.

The rest of the Western energy crisis has played out that initial action. It has been a political tug of war, starring FERC as the rope. Producers sought high short-run prices and FERC inaction; the state demanded that FERC take action to fix prices lower at that just and reasonable level.

Chairman H&eacute;bert resisted the temptation to solve California's problems with price controls. He kept telling Californians that their problems were a just and reasonable result of their mismanagement, but that just prolonged the tug of war. President Bush decided to make the political problem -- and H&eacute;bert -- go away.

Under pressure, FERC allowed California, New York and other states with spiraling prices to paralyze their markets, and H&eacute;bert resigned, effective at the end of August. Another FERC commissioner, a former head of the Texas PUC who is noted for his ability to negotiate, compromise and settle disagreements, will take H&eacute;bert's place.

Perhaps we should wish the new chairman, Pat Wood, all the luck in the world. He will need all his skill and a lot of luck to regulate the nation's electricity markets without making another huge mess.

But we hope he fails. Nothing personal: We'd like to see foolish regulation produce the kind of instructive failure that educated the nation about price controls in the 1970s and produced the political conditions for free-market prosperity in the 1980s and 1990s.

The Road to Good Inventions

The government cannot create new technology with money and wishful thinking

The future will have to be postponed. A committee of the National Research Council says the government and the American car companies cannot meet their 2004 goal of designing marketable and affordable family sedans that will get the equivalent of 80 miles per gallon.

American car companies could deliver 80-mpg cars that would have satisfactory performance, comfort, cargo space, utility and safety. But "affordability appears out of reach," the committee said.

The politically-inspired Partnership for a New Generation of Vehicles was supposed to show how government could help and steer business to achieve national economic goals. Since 1993, the Feds have spent about $800 million and the car companies have spent about $1 billion researching lightweight auto-body structures, an advanced diesel engine and more futuristic technologies, such as fuel cells. The researchers developed some useful technology, but their most important discovery was the limit of good intentions.

Spending even more would not ensure on-time development of an affordable, marketable 80-mpg car, the committee said. "Breakthrough ideas and talented people are more stringent constraints than money."

Thomas G. Donlan receives e-mail at tg.donlan@barrons.com