NCPA - National Center for Policy Analysis

Other States Are Avoiding California's Botched Electricity Deregulation

January 3, 2001

The mistakes California has made in deregulating electricity are being seized upon by deregulation foes to discourage the process. But experts point out that the 23 other states that are in the electricity deregulation process have planned better and are so far avoiding California's costly mistakes.

Where did California go wrong?

  • California barred utilities from raising rates to consumers, putting the utilities into a bind verging on bankruptcy once the national energy shortage started pushing prices higher.
  • Even though electricity demand in California has been growing 4 percent to 6 percent a year, no new major power plants have been built in the state in the past decade.
  • In an effort to manipulate prices, California required utilities to buy all of their power from a "power exchange" in short-term blocks -- thus preventing utilities from entering long-term contracts or adopting hedging strategies that could have helped stabilize prices.
  • After prices spiked, the government worsened the situation by trying to cap the prices utilities could pay for power -- thereby encouraging power suppliers to sell their electricity to other states which did not have price caps.

Experts point out that all this intervention into electricity markets and bureaucratic bungling -- supposedly aimed at "protecting the consumer" -- has, instead, victimized those same consumers.

The mistakes have also brought some large California utilities to the brink of financial collapse.

Source: Editorial, "Prices Spike as California Bungles Deregulation," USA Today, January 3, 2001.

 

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