We Should Learn From California

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We Should Learn From California

A stage 3 power emergency is declared in California any time that electricity reserves fall to less than 1.5 percent. In this situation, power districts can use rotating blackouts to save electricity. Since California was seen as a test case for power deregulation, restructuring seems on the surface to be the main cause of the problems. But power deregulation, which Korea has just started, was not the cause of California''s woes. On the contrary, the California crisis should be a lesson to guide Korea toward a sound restructuring.

That California should give up privatization and return to collectivization, as some insist, shows a poor grip of the situation. Governor Guy Davis'' state of the state message on Jan. 8 only mentioned a resumption of some state controls, not the abandonment of deregulation, and critics here who call for the abandonment of privatization are wrong. Let''s look at the logic as it relates to the current California situation.

First of all, the logic that the scale of the Korean utility, 7 million kilowatts, is too enormous to sell off and the rigidity of electricity purchase contracts will stifle investment in new generating plants has some basis in fact, but not enough to oppose privatization. Rather, the company should be broken up to ease the task of selling it off. When a competitive system is introduced, purchasing contracts will naturally gravitate toward elastic market transactions. Also the concerns about the shortage of power reserves is an illogical jump. The shortage of reserves in California is due to excessive environmental regulation and the unique characteristics of the region. The market system cannot be the primary cause of operating reserve shortages, which is well illustrated by the cases of other states in the United States, Great Britain, Australia, and Spain, where structural reorganizations are underway.

Even before the structural reorganization, expansion of power facilities was difficult in California because of high construction costs flowing from strict environmental regulations. California tried to solve the problem by structural reorganization and expansion of the power market, but paradoxically, facility investment decreased in California when cheap electricity from neighboring areas became available. But since connections with the outside world are impossible here, Korea cannot purchase cheap electricity from neighboring areas.

So when operating reserves decrease, facility investments will rise to take advantage of high prices and to use surplus profits. This is elementary market logic

There are concerns that prices will rise when they are deregulated, but the fluctuation of prices according to demand and supply is justifiable. Eternally low prices are not beneficial; prices should vary with time, season and place.

The current California problem confirms the need to reorganize the power industry, not to abandon reorganization. Most of the problems California faces are similar to Korea''s. They are the distortion of the market due to price regulations, the difficulty of building new power plants because of the NIMBY - not in my back yard - syndrome and the uncertainty of investment values caused by emphasizing political logic over economic logic. In particular, the political logic of Mr. Davis, who defined the deregulation of the power industry as a complete failure and put the blame on the market, makes the situation worse. It should be remembered that the wholesale price of electricity quadrupled because of the cost of generating power rose, but the freeze on retail prices based on political logic led to the near-bankruptcy of the California utilities and the reduction of power furnished by other states. The core of the problem was loopholes in the deregulation policy, which neglected market principles and led to attempts to compromise with political logic, but not adapt to market signals. This should serve as a lesson to Korea, where more weight is placed on political power than on the market.
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