Foes of electric power deregulation are citing the snafus in California to make the case that freeing up electric markets doesn't work. But economists say that it works just fine and California's problems stem from past regulation and remaining vestiges of regulation.

"The deregulated market in California has actually worked," comments Enron Corp.'s chief power trader Steven J. Kean. "It's the regulated market where there have been horrible problems," he adds.

• Experts say California went wrong by cluttering its 1996 deregulation law with various bits of regulation -- capping the price utilities were allowed to charge customers for a transitional period, for example, which left consumers with no incentive to conserve during peak demand periods.

• The caps are scaring off power producers who had hoped to build in California -- forcing them to construct their projects elsewhere.

• Electricity reliability has improved in states which handled deregulation correctly -- with Texas, Illinois and the Southeast seeing new power plants being built so investors can profit from deregulation.

• More important, power producers are lining up to ease the demand situation with applications to build new plants in states that have deregulated -- about half the states.

California has a backlog of applications for plants capable of generating 11,700 megawatts of power -- double the increase in the state's peak demand since 1996. Observers report that the biggest problem now is processing all those applications while meeting the state's strict air-quality rules.

All in all, California has become an object lesson in how not to deregulate.

Source: Peter Coy and Christopher Palmeri, "Gridlock on the Power Grid," Business Week, August 28, 2000.