Press Center

 Lawrence H. Summers, Deputy Secretary of the Treasury, "The Benefits of Electricity Restructuring for Consumers, Industry and the Environment"


12/8/1997

Good afternoon. I would like to thank the Department of Energy and the National Association of Regulatory Utility Commissioners for putting together this important conference. Deputy Secretary Moler has already outlined in greater detail than it would be wise for me to attempt the principles that are guiding the Administration's development of a final policy position on electric power restructuring.

This morning I would like to discuss the Clinton Administration's broader goals. This is a remarkable time for the global economy and for America. It cannot be an accident that the fall of Communism and spread of capitalism through the developing world, the transformation of American business and the rapid growth of the American economy have all occurred in the same decade. We now live in an age of markets, an age for which we, in the United States, are uniquely well adapted. It is now clear, for example, that the 1990s are the first decade when the US will growth faster than Japan or Germany. The story of the post war era has been one of convergence but that decades old story of convergence is over and the US is pulling ahead.

Our challenge now is to keep adapting and to keep prosperity moving and, as I shall argue, electric restructuring is a key part of meeting that goal.

A Strong Economy

When I look around me today, I see an economy that is as strong as it has been in generations.

14 million new jobs since the President took office, an unemployment rate of 4.6%, the lowest since 1969, and uninterrupted growth now stretching into an eighth straight year, all point to the strength of this expansion. And it is a healthy expansion. The economic expansions of the recent past were too often built on increases in government spending. This one has been built on investment and exports. Purchases of capital equipment, for example, have risen by more than a 20% annual rate over the past two quarters. That suggests this recovery should have a long way to run.

The exceptional performance of the American economy both domestically and overseas reflects first and foremost the remarkable dynamism of the American private sector. But that dynamism, in turn, is based on a solid policy foundation.

Sound Macroeconomic Policy

The first key element of that foundation is a commitment to sound macroeconomic policy.

Under the President's leadership, we have cut the deficit to $22.6 billion in 1997, the smallest level since 1974 and, at 0.3% of GDP, the smallest percentage since 1970. As a result, we have seen our net rate of national savings nearly triple in the last three years, making more capital available for investment by industry. The deficit reduction we have achieved has freed up more than a trillion in capital that otherwise would have gone into the sterile asset of government bonds.

At the same time, continuing vigilance by Chairman Greenspan and the Fed have helped keep inflation in check, not only at the supermarket checkout counter but at the factory gate.

The strength of American asset markets with bond rates 150 basis points lower than one would expect at this stage of the expansion speaks to the effectiveness of deficit reduction and respect for an independent Fed.

A Commitment to Markets

The second key element of the President's policy has been a commitment to let markets work.

Indeed this commitment to markets, I believe, may be why America leads the world in every example of post-industrial activity you can think of from Federal Express to Microsoft, from McKinsey to McDonalds, from AIG to Harvard Higher Health.

We've reduced regulation where it's not needed, cutting almost 16,000 pages of federal regulations. The Vice President's initiative to reinvent government has also cut the size of government by over 300,000 employees and increased its efficiency.

We've also reformed or dismantled regulations that once governed large sectors of our economy.

In 1994, the President signed into law interstate banking legislation that has made finance safer and eliminated the remaining barriers to efficient nation-wide banking which has led to reduced costs and increased quality of service.

By deregulating intrastate trucking, we will save shippers and consumers from $3 to $8 billion per year.

The 1996 Telecommunications Agreement will do to local service what earlier reform accomplished for long distance companies, introducing competition among a wide variety of participants. While the bill's effects are just beginning, estimates suggest it may save consumers as much as $5 billion.

Our commitment to markets is even more visible overseas. Through agreements from NAFTA to the Framework with Japan to the GATT, our trade policy has reduced regulatory barriers that were holding back American producers. The Uruguay Round was the largest tax cut in the history of Planet Earth. It was also a tax cut whose benefits flowed directly to the export sector. The 200 trade agreements we have won have led to higher American exports.

For example, exports in sectors covered by the Framework with Japan, have grown twice as fast as exports to Japan overall since the Framework took effect.

Markets work. To a large extent, that is the story of why America has been so successful in the last five years and it is a story that, I believe, has very important implications for the future of the electricity industry.

Critical Public Investments

The third key element of our policy foundation has been a recognition that a well functioning market economy requires effective and well functioning government action. We have seen around the world that the heavy hand of government does not work. But we have also seen that we cannot merely rely on the invisible hand. What government must do is provide a helping hand. This is true in many areas. Let me highlight two.

First, President Clinton has stressed more than any other area of policy, the importance of investing in education and the American people. Uniquely, investing in people has the capacity to grow the economy while insuring that all Americans have the opportunity to participate fully in the prosperity we are seeing.

From expanding Head Start to reducing class size...from increasing standards to insuring that every third grader can read and every eighth grader can do basic math to insuring that every American can afford college...from seeing that laid off workers have the opportunity to be retrained to making education a life long proposition, we are coming to understand that investing in people is the most effective thing government can do. And it is a project in which government must lead.

Equally, appropriate government action is necessary if our environment is to be protected.

Some focus on the conflicts between economic and environmental goals. But at the most fundamental level, economic and environmental objectives coincide. Both are to avoid waste.

We have seen that harnessing market forces can produce favorable environmental outcomes at a lower cost than non-market-based approaches.

For example, in the case of sulfur dioxide where an emissions trading system was introduced, it now appears we will cut emissions by 50% more than expected at a cost below what was anticipated.

Similarly, the successful effort to eliminate lead from gasoline caused far less disruption and cost less than expected thanks to the introduction of a credit trading system.

These three imperatives, sound macroeconomic policy, letting markets work and critical public investments come together in thinking about future policy for electricity restructuring.

The Economic Benefits of Electric Power Restructuring

Americans spend more on electricity than they do on autos or higher education. Electricity is what keeps our economy going and growing.

Yet, retail electricity remains the last major networked industry that has not been restructured.

In other industries where competition has been introduced we have witnessed remarkable and unpredicted benefits.

Experts estimate that deregulation of the airlines has saved consumers $19.4 billion. Deregulation of trucking has saved consumers $19.6 billion. Deregulating railroads has saved consumers some $9.1 billion.

And these savings are only the beginning.

For example, airline deregulation paved the way for Federal Express to invent a whole new type of overnight delivery service based on a central, nationwide hub, that literally revolutionized shipping, permitting universal, overnight service. Deregulation of long distance telephone service has led to tremendous innovation, including, arguably, the investments by MCI and others that today underpin the Internet.

How large are the benefits of deregulation in the case of the $212 billion electricity industry?

My friend Paul Joskow of the Massachusetts Institute of Technology, believes they could ultimately reach into the tens of billions of dollars. Staff at the Department of Energy suggest the possibility of a cost savings of $20 billion annually by 2010, with the potential for an even larger reduction in consumer bills as a result of competitive pricing. I have seen other estimates that point to cost savings of over a quarter of the $212 billion a year Americans currently pay in electricity bills.

Understand this is not a transfer from one place to another. This can be the proverbial free lunch and it is a big one. Even a $20 billion reduction could mean a sizeable tax cut, higher real income for American families and additional competitive advantage for US firms.

To bring this down to the level of a family of four, a savings of $20 billion translates into a savings of $100 in electric bills every year. An additional $100 in indirect savings per household may result from lower prices that business customers pass through to consumers.

That is why twelve states including California, Pennsylvania, Montana, most of New England and most recently, Maryland, have already decided upon a transition to retail competition.

Of course, inevitably when there are benefits to split, reaching a consensus involves some work. In the case of electric power generation there is the need to fairly allocated stranded costs and the question of fairness in ensuring equity for low-income users.

We must ensure, for example, that spending by electric utilities for public purposes -- such as low-income assistance, technology development, and renewable and energy efficiency initiatives -- does not come to an end.

At the same time, we must take care to ensure that we fully consider the impact of competition on the existing taxpayer investment in our electricity system.

Similarly, there is the need to respect the authority of the states in this matter and provide for flexibility. These are all difficult questions.

It is not my purpose here to discuss how best to resolve them. What I can say is if there were only $5 billion on the table, it would be worth finding a solution. With $20 billion or more on the table, it would be criminal not to.

The economic case for letting markets work in the case of electricity restructuring is compelling. It is supported by experience in other regulated industries, by economic logic and by careful studies of utilities. But there is another case for electricity restructuring as well. Restructuring has the potential to support our environmental goals.

Environmental Benefits of Electric Power Restructuring

The move to a competitive electric power industry will reward the pursuit of efficiency. It will, over time, benefit firms that define their role not as producers of electricity but as providers of service. As a consumer, what I want is not electricity per se but what electricity can do. To slip into economic jargon for a moment, kilowatt hours do not enter my utility function. Light in my home does. What is important is to find the best solution, one that benefits the environment and the economy.

There can be no question that electricity generation contributes significantly to our nation's environmental emissions. For example, electric generation accounts for 35% of our nation's greenhouse gas emissions.

As you know, there is now a global conference underway on this subject in Kyoto. There is now a scientific consensus about global warming. President Clinton has laid out an approach that is market friendly, that is based on the carrot, not the stick and that must help the economy as well as the environment. That is why electricity restructuring played such an important role in the President's statement on climate change.

At a time when the US has pledged to work towards a 30% decrease in greenhouse gases, electricity restructuring can make an important contribution. While the ultimate ability of electric restructuring to reduced these emissions remains open to debate, by some accounts, competition could cut emissions by as much as 10 to 20%.

It is sometimes said that lower prices are likely to increase consumption along the demand curve, actually increasing pollution. To this I would respond that given the large "restructuring dividend" or savings to users that we are likely to receive, there is ample room to cover the cost of investing in new environmental technologies.

There are three other reasons why increased demand should not lead to more emissions.

First, increased electricity use would be likely to replace other fossil fuel uses. For example, electric cars while increasing electricity consumption would reduce gasoline consumption.

Second, emissions are likely to be reduced through supply side innovation. The major supply side innovations will be increased use of cogeneration and improved heat-rate efficiency, through actions such as improved insulation and burner improvements. Today when utilities can pass through costs, there is no incentive for them to increase their use of cogeneration or reduce their fuel costs through heat-rate efficiency.

Finally, emissions reductions may also occur through demand side innovations. Under a regulated environment, consumers of electricity do not pay much attention to managing demand. But under a deregulated environment, demand side management will be sold as part of a package, bundled with the electricity itself. In other words, energy efficiency will be translated from a fixed to a marginal cost. In a newly competitive world, demand will seek out product with the lowest marginal cost, and energy efficiency will be bundled in to provide a lower cost on the margin.

Another phenomenon that is likely to benefit the environment is that of green marketing. Evidence from more than a dozen green pricing programs that have been offered by utilities to date suggests that consumers are willing to pay between $1.75 and $36.00 more per month for green power. California is planning for anywhere from 5 to 20% of residential consumers to choose green power in their deregulated environment. In New Hampshire, over 20% of consumers have chosen green sources of generation.

Conclusion

In conclusion, the story of the last decade has been one of markets leading to greater efficiency and stronger economic performance. As the last networked utility to remain highly regulated, the electric power industry represents an opportunity not only to advance prosperity, but, to improve our environment. As I have discussed, these goals which sometimes diverge, unite in the case of the electric power industry.

As America approaches the 21st Century, I believe that we must stay the course of investing in the future. Introducing competition to the electric power industry offers an opportunity to provide our children not only with a stronger and more efficient economy but with a cleaner and safer environment as well.

We live in a remarkable period of change. This country has done well because it has not stood still. Economic growth and success are a lot like riding a bicycle. It is much easier to stay balanced if you are moving forward. When I look at opportunities where we can help consumers and businesses, where we can compete more effectively abroad, where we can be better global citizens, where we can create jobs and reduce inflation, electricity restructuring is high on the list. That is why this is a process that deserves and will receive the very highest priority and attention from economic policy makers as we go forward.

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