What it is, is Not Deregulation

Commentary by H. Sterling Burnett

Actor Andy Griffith became famous early in his career for a monologue. The punch line was-"What it was, was football." Griffith plays a rube who, having never seen a football game, tries to explain to the folks at home just "what it was." The same analogy can be applied to the utility morass currently underway in California-"Whatever it is, is NOT deregulation."

Electric power deregulation legislation enacted in 1994 has at this date finally driven the state's utilities to the brink of bankruptcy and caused California's citizens to suffer electricity shortages and blackouts. Legislation designed to establish a competitive market has resulted in a market staggering to provide service to its customers. Were it not for state bonds for long-term contracts and federal mandates keeping power contracts open, California's electricity grid would already have lost its spark.

"Deregulation never took place in California," said Robert J. Michaels, professor of economics at California State University, Fullerton, in a report for the National Center for Policy Analysis (NCPA) titled, "California's Electrical Mess: The Deregulation That Wasn't." Michaels concludes that political forces imposed a contrived market structure that made the state's power failure predictable. "California's disaster was of its own making and largely unavoidable," Michaels added.

We know what happened; Michaels tells us why. Deregulation was born during the energy crisis of the 1970s. But California's odyssey toward deregulation took so many legislative twists and regulatory turns that, by 1998, the state's utilities were suffering under a system like none other in the world-a statewide power exchange operating a short-term market, requiring utilities to obtain all their power from it.

Utilities in all other states utilize a mix of long- and short-term contracts, hedge against price volatility, and trade small volumes in short-term markets. California's system violates all those rules.

If that isn't bad enough, however, almost everything that could raise wholesale prices in the summer of 2000, did-hot weather in the southwest; low water in the northwest cut supplies of importable power; natural gas prices spiked and the price of pollution-control permits rose from $4 to $40-California businesses receive pollution quotas; pollute less and you can sell your rights to a business that wants to pollute more (if you understand these permits, you can begin to fathom the Golden State's current crisis).

Add that no major power plants had been built in 15 years and Silicon Valley's thirst for electrons had outstripped supply, and you get high wholesale power prices that utilities could not collect because rates were frozen for retail customers. According to Michaels, "State government confused price controls and artificial markets with competition."

The cause of California's current problem is that they tried to ignore the basic laws of economics-supply and demand. For 15 years, they have had growing demand while not allowing supply to keep pace. The re-regulation that they instituted only exacerbated the problems. When demand is high, and prices are kept artificially low by government mandate, shortages are the predictable result. It's basic Economics 101.

So are there viable options for Californians to solve the electricity problem? Short-term, Michaels said, the only economic solution is to pay the price, one way or another-either higher rates or severely reduced power consumption. They could also build more plants to increase power capacity. Long-term, however, Californians might try the one thing they haven't tried yet-deregulation.