Time Will Tell If Deregulation Works

HOUSTON -- Deregulation in the energy markets, for the most part, has worked according to a mini-conference held by International Association of Energy Economics in Houston.

The conference addressed the issue of deregulation in the energy markets and whether efforts in the power and natural gas markets have proven successful. Those asked to present came from various backgrounds such as academia, banking, and energy firms.

The consensus from those speaking at the conference was that the energy market has reaped many of the same rewards of deregulation that other industries have enjoyed namely: innovation, efficiency, and lower costs for the consumer as a whole.

Dr. Clifford Winston of The Brookings Institution noted that experiments with deregulation schemes are necessary to develop a successful wide scale deregulated power market. One of the most famous examples of these experiments is California. While not considered actual deregulation, Dr. Winston argues that the failures associated with the deregulation scheme implemented in California, eventually leading to price spikes and blackouts, proved to be a valuable lesson for market participants and regulators in designing a system that can one day be useful for California and states with fully regulated power markets.

Dr. Winston also noted that harmonizing other policies to support the infrastructure of deregulation is critical for successful implementation.

Citing the natural gas industry, Dr. Jeffrey Leitzinger, President of Econ One Research, Inc., agreed that deregulation has helped reduce the overall cost of service, but argued that much of the savings have come through the absorption of stranded costs rather than innovation and efficiency since the levels services offered were reduced along with their respective prices.

John Olson, Chief Investment Officer of Sanders Morris Harris, spoke of the dismal performance of energy stocks over the past year as well as the difficulty in accessing capital for many companies with subsidiaries that transact in deregulated markets. Mr. Olson mentioned that losses suffered by investment banks through the use of special purpose vehicles and other private equity investments to energy companies have in effect diminished lending by banks causing a credit crunch. Companies that Mr. Olson expects to be successful in the current environment are those involved in exploration and production since that area of energy is expected to receive sizeable investment over the next year.

On the topic of market oversight, Dr. Parviz Adib, Director of the Market Oversight Division of the Public Utility Commission of Texas, stressed the prevention of gaming, communication with market participants, independence from government, and penalties to discourage market manipulation as the main objectives for regulatory bodies. Implementing policies is half the battle according to Dr. Adib, the other half is restoring confidence in energy companies as well as energy deregulation.

The International Association for Energy Economics is non-profit professional organization founded in 1977 in response to the 1970’s energy crisis. The organization has members in over 70 nations who strive to provide an interdisciplinary forum for the exchange of ideas, experience, and issues among professionals interested in energy economics.

Source: RiskCenter