electric power deregulation

Generally, electricity is supplied to homes and businesses by a public utility that is operated as a monopoly. The result of this has been that electric prices generally have been much higher as a result. The demand for reducing the price of electricity started the deregulation of electric power production with the intent that it would cause prices to drop, similarly to the way pricing for long distance telephone service went down after competition occurred after the AT&T breakup in 1980.

Sometimes this has worked, and sometimes it has not.

The most dramatic example of the failure of deregulation of electric power occurred when California saw the price of electricity go up by enormous amounts and nearly drove the two major power providers to the state, the Pacific Gas & Electric Company and Southern California Edison into Chapter 11 (bankrupt), mainly because the deregulation rules required the utilities to divest themselves of ownership of power plants and buy all electricity every day on the spot market. Not being allowed to purchase long-term contracts for power, they generally ended up paying the highest rates, which they were not permitted to pass on to consumers.

The impression often given by thumbnail descriptions of the boondoggle in California--as we would call it in Canada, where we are following lockstep with these irrational right-wing policies--is that the solution is simply to allow the private, though thoroughly controlled companies pass on the--inflated--costs to the public. To any reasonable observer of current events, this steep rise in cost would indicate the abject failure of the policy that caused it; as it would in any other area. (None of this is to suggest that rfc 1394 is other than a good observer of current events, or that a particular perspective is taken.)

If the goal of deregulation is the free market, well, there isn't one that conforms to libertarian fantasies. If the state government in California forced PG&E and SoCalEd to do anything, like divesting their power generation facilities, even against their better, private enterprise judgment, in some misguided attempt to coerce a free market solution--well the oxymoron is evident.

Even long-term contracts do not alleviate the emtire problem--as the rise in prices for natural gas for the Ontario utility Enbridge demonstrate (Enbridge has long had long-term contracts); there is only a moderation of the steep rise in price.

I'm not even sure the reduction in long distance telephone service rates--and who gets the most benefit for that?--is worth the increase in the cost of local service--who gets the benefit of that without the complementary reduction in long-distance rates: so-called rate-rebalancing--also a feature on the Canadian common carrier scene; there is no mention of this in rfc 1394's write up above.

There is an ideological fantasy abroad in the world that promises an immense decrease in prices and tremendous increase in quality and service when areas once under public regulation are freed. It is promulgated when politicians say If its this good now, think how much better it will be when we let things go! inorder to gain election.

And when it fails; when the pragmatic among us point out the obvious failures of this unreasoning, and unreasonable public policy, not only in California, but also in Alberta, and in Ontario--all bastions of right-wing orthodoxy--we are told: it just needs one more fix, one more exercise of government power to enforce the free market.

Placing the blame on the California power crisis solely on the shoulders of deregulation and the free market is irresponsible because it oversimplifies a very complex issue.

California experienced immense economic growth in the 1990's. Most significant was the technology industries, which require immense amounts of electricity to power their high-tech manufacturing plants and network infrastructures. Power demands in California increased 25% in the past decade. Under normal circumstances, California should build new power plants to accomodate this increased demand, in order to prevent power shortages. But no! Under both Republican Pete Wilson and Democrat Gray Davis, hardly any new power plants have been built. Power supply increased only 6% in the same time frame. The California blackouts would have occurred even if the pro-regulation forces prevailed and no deregulation was enforced in California, by the simple logic that when demand outweighs supply, some people will get left out.

Pete Wilson could not have predicted the surge in power demands; even if he could see the future he would have been handcuffed by the large environmental presence in California, which is responsible for the absence of new power sources. Gray Davis still refuses to adopt a long-term solution, instead, he spent government money to hire two Clinton politicos to smear President Bush and his energy expansion policy! Davis and his cohorts believe that the key to the problem is to reduce demand while maintaining the current supply. Unless there is a major scientific breakthrough in either power efficiency or alternate power sources, there is no way that the "environment-friendly" solution could solve California's power woes, it is an ideological fantasy at best. California falsely assumed that neighboring states would sell them power during rainy days; but those states were in the middle of their own economic booms and were busy building new power plants themselves. The power shortages have little to do with deregulation or regulation; a lack of domestic supply is much more relevant to the power shortages than difference in distribution methods.

Deregulation is a two-step process. First, the industries in question must be placed into private ownership, then, the market in which the industry conducts business in must be transformed into a free market. Californian lawmakers grudgingly accepted the first step of the process, they balked at the second. They insisted that price controls must stay in order to "protect" the consumers. What they really showed was their ignorance of basic economic theory. They allowed wholesale prices to vary according to market conditions but insisted that retail prices be kept frozen at artificially low rates, hence, not a free market. When prices started to rise the utilities were unable to pass the bill to the consumers, leaving them in a huge hole of debt. Both PG&E and SoCalEd were unable to pay their power bills by 2000, with their cut credit ratings.

Then, the same regulators who had caused the mess in the first place tried to rescue the "greedy corporations" by raising the price cap from $0.25 kWH to $0.75 kWH, and then removing it entirely. The utilities, freed from their constraints, immediately raised prices to try to patch their debts. Facing immense political hostility, Davis asked the federal government to help and Bill Richardson, Clinton's SOE, complied by enforcing old price caps and ordering power wholesalers to sell electricity to Californian utilities even though they could not pay for their purchases.

The California utilities were also to blame, because in 1996 wholesale power prices were at an all-time low and the utilities gladly accepted a price cap that still allowed profits. Their short-term thinking did not allow wholesale prices to rise. And the wholesale power market is no monopoly, it is a fiercely competitive market with more sellers than buyers.

Deregulation did not cause price gouging, the price cap caused it by forcing the utilities into debt. Deregulation had little to do with low supply of power, it resulted from a long-term neglect of rising demands with a stagnant supply pool. If the Californian power industry remained in public ownership and the government forced prices to remain low, then it would have forced the government to drastically raise taxes to compensate for the increased wholesale prices. Most Californians would rather know what they are paying for instead of sending extra tax money to Gray Davis, who could well be spending that money on pork barrel spending instead of solving the power crisis, something which he has yet to attempt to this very day.

God forbid we should actually discuss the subject at hand, but I'll do my poor best, if only to confuse people.

The traditional reason for regulation of "public utilities" -- providers of electricity, telephone service, natural gas, and so on -- has been the massive capital investment required to provide these services, and the (in the eyes of many) sheer lunacy of, say, redundant power grids. In addition to the expense and the lunacy, there's the fact that putting together a power grid requires the use of land which simply may not be for sale (sure, the government can pull an eminent domain and give you whatever you want -- but are we still talking about "private enterprise" if that's the case?¹) We call these problems "barriers to entry", and here we've got some darned steep ones. Some economists use the term "natural monopoly" to refer to this kind of situation.

Therefore: In these cases, you've got a market with only one seller available to any given consumer, and it's quite unlikely that any competitor will ever appear in a given municipality. That's called a monopoly. Only people adhering to some very strange political religions are going to try to tell you that an unregulated monopoly is better than a healthy competitive market.

In practice, public utilities are not analagous to hot dog stands or gas stations². Traditionally, public policy in the United States has recognized this fact.

Technologies change, sometimes, but not always and not all of them. Cellular telephones don't require huge webs of copper wire or optical fiber entangling whole continents. They do require some transmitters and whatnot, but it's not on the same scale as the old way. Lo and behold! Cellular providers are competing like weasels. The problem is, they're not analagous to power companies: It's not clear to me that anybody in California is beaming massive amounts of electricity through the air to customers. DSL isn't perfectly analagous either, but it's a lot closer: In fact, smaller DSL providers are having a tough time of it because they're competing against the people who own the wires they're using to provide their service.

If any given consumer in California has only one (1) choice of seller from which to buy his electricity, if there is no competition, then any talk of a "free market" is gibberish. I don't see this question being addressed here. The fact that the current energy crisis is being used as an excuse is of no interest, except to those of us who enjoy watching the ideological acrobatics of the right wing.

The same goes for anyplace else, too: If there's no mechanism in place (or even planned) for retail customers to choose from whom they buy their electrical power, then it's going to be very hard to make a case that deregulation is in the public interest: The rationale for deregulation depends entirely on the existence of a free market. In this case, there isn't one.

---

¹I'm told that it's ungracious to mention George W. Bush's history of abusing eminent domain for the sake of private profit, so I won't.

²Gas stations give us a fine example of happily competitive unregulated distribution of power: This is because the technology is totally different. It's relatively cheap to drive a tank truck on public roads (paid for by our taxes, by the way) and sell gasoline wholesale to anybody who's got a pump and a license. The pump and the license are within reach, too. I buy most of my gas from some guys who take only cash and don't speak much English. They don't need eminent domain to lease a small plot of land on a single street corner. If they raise their prices, I'll drive another block and find another supplier. No problem. My relation to the local electric company is entirely different: I'm not about to go out and string a new set of wires to my apartment if those guys piss me off.