NCPA - National Center for Policy Analysis

California Deregulation That Wasn't

February 14, 2001

In 1994, California enacted legislation designed to deregulate the electric power business and establish competitive markets. By January 2001, flaws in the California approach had become evident with the state's utilities driven to brink of bankruptcy and California suffering blackouts and shortages. What happened?

The problem, observers point out, is that deregulation never really took place. Instead, political forces imposed a contrived market structure that made failure almost predictable.

  • In September 1996 the legislature unanimously passed a bill setting up a short-term wholesale market in which all power producers pool their output and utilities purchase all their power.
  • Electric rates were cut 10 percent for existing residential and small business customers and frozen until 2002.
  • Beginning in 1998, California utilities operated in a system unlike any other in the world -- they could buy only on the shortest-term market imaginable, and were prohibited from using long-term contracts.

By the summer of 2000, wholesale prices had skyrocketed, but utilities could not raise customers' rates. By February, their estimated net cash shortfalls were over $6 billion and rising. Because of objections to major power plants, none had been built in 15 years.

At the heart of the problem, observers say, is that the state confused price controls and artificial markets with true deregulation, and is now reaping the consequences.

Source: Robert J. Michaels (California State Fullerton), "California's Electrical Mess: The Deregulation That Wasn't," National Center for Policy Analysis Brief Analysis No. 348, February 14, 2001.

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