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Like India, like California. (Last Word).

Guess what happens when you flip the switch in India or in California? You sometimes stay in the dark.

Those of us who live in California and who know something about India find the state's electricity system is becoming more like India's. This is no compliment.

A little background: Electricity production in India is the responsibility of State Electricity Boards (SEBs). This system has been plagued with shortages stemming from great waste and underinvestment. India has been moving, haltingly, away from socialism in this sector, as private producers, including foreign ones, are now allowed to invest in generators. A few have done so, most prominently the Enron Corporation.

California is moving in the opposite direction. Until 1996 it had the traditional private monopoly, price-regulated supply system. In that year, the politicians, Republicans and Democrats alike, voted to partially deregulate generation. However, the regulators chose to control prices to users and forbade utilities to sign long-term contracts assuming that plenty of private investment would occur. Instead, the cushion of excess generating capacity shrank and disaster came in 2000.

The parallels are striking:

Users face chronic shortages and interruptions of service. In India, because electricity prices are below costs, it is rationed; also some users are treated much better than others, notably farmers get electricity nearly for free. The resulting waste is enormous, as future generations are saddled with paying off accumulated debt. Similarly, in California there are rolling blackouts, users are not paying full fare (taxpayers making up the difference), businesses are discriminated against in pricing. Here too, debts are mounting.

Interruptions of service entail large costs. Indian farmers (half the population) need electricity to pump water to their fields. Unreliable service causes their pumps to fail and water to be distributed unevenly. California dairies and chipmakers also suffer large losses when the juice stops.

Users try to protect themselves. In both places, businesses that need reliable supply build their own, usually diesel, generators. This is costly and a source of pollution. In both, manufacturers who need reliable electricity go elsewhere. Some firms, including semiconductor makers, have said they will move their manufacturing out of California if the situation continues.

Blame the outsiders. In India, there is a highly audible dispute over rates between the (foreign) owners of the new Dabhol generating plant and the state of Maharashtra, in which populist politicians attack the outsiders. This case is widely seen as determining the future of foreign investment in India. In California, Governor Gray Davis blames outsiders: the Federal Energy Regulatory Commission for not imposing price controls, and out-of-state suppliers, especially those in Texas, for charging too much. This will not encourage investment in California either. (To be fair, he also blames the state's domestic utilities.)

Utilities are bankrupt or are heading there. In India, most of the SEBs are, in effect, bankrupt. In California, Pacific Gas and Electric is in Chapter 11 and Southern California Edison is on the brink. These bankruptcies, stemming directly from state policies, will raise the cost of capital demanded by future investors.

Deregulation/privatization is getting a bum rap. In India, the Dabhol dispute casts a pall over efforts to attract private investments; in California, opponents of deregulation claim the debacle shows that state control is necessary. What the debacle really demonstrates is that substituting a worse form of regulation for a better one is a bad idea.

The politicians are blundering. Politicians are at the heart of the problem, although the California utilities are not free of fault and this is probably also true in India. In California, a Republican governor and a bipartisan legislature passed risky laws. His Democratic successor made things worse by delaying action, then holding down prices to users and socializing the system. In India, the pols created the mess and are being incredibly slow in fixing it.

In California, know-it-all politicians knew better than the market that the price of electricity would fall. Those in India know just how and when new suppliers are allowed to become suppliers. Both have been wrong as can be.

Finally, Indian courts have repeatedly ruled in favor of the foreigners while the California legislature has passed a law that keeps the public utility commission from challenging state decisions and denies challengers to state electricity bonds access to the courts except directly to the state supreme court.

Imagine. India may have an edge in the rule of law.

Henry S. Rowen is a Senior Fellow at the Hoover Institution and Director of Stanford University's Asia/Pacific Research Center.
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Article Details
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Title Annotation:electric utilities
Author:Rowen, Henry S.
Publication:The International Economy
Article Type:Brief Article
Geographic Code:1USA
Date:Sep 1, 2001
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