There’s No Going Back
California’s electricity market is a mess. First a hot summer in the south brought shortages and skyrocketing prices. Now the state is threatened with another wave of rolling blackouts stemming from elevated heating demands caused by a cold snap and from power plants being out of service. Californians may even be asked to turn off their Christmas lights to conserve energy.
Deregulation of the industry in 1996 is being blamed for California’s energy crunch, to a large extent justifiably. The rules under which the “deregulated” market has been operating, combined with woefully insufficient power generation capacity, have allowed some power providers to make a killing at the expense of consumers. Because electricity was plentiful in 1996, the state froze all new power plant construction in the belief there was enough capacity to meet future needs. Going back to privately owned or state-run monopolies, however, is not the answer. Rather, the rules have to be changed to give the utilities more freedom in buying and selling electricity and to encourage power generators to build new plants in the state. For their part, consumers should conserve more electrical power.
The Federal Energy Regulatory Commission, which controls the wholesale electricity market and drives deregulation nationwide, has drawn up rules aimed at bringing relief to consumers as soon as the changes are adopted. In the long run, however, it is up to the state to streamline and speed up procedures for approving new power plants. It takes years just to comply with rigid environmental laws and get all the paperwork done.
The reason California led the way in electricity deregulation is that the old monopoly utilities were inefficient and their rates were among the highest in the country. Re-creating that system, aside from the cost, would return the state to the sluggish monopolies. It would do nothing to solve the underlying problem of insufficient power supply. New capacity would still have to be built to accommodate the booming economy.
The cornerstone of the federal proposal is the elimination of state rules that have forced utilities such as San Diego Gas & Electric Co., the guinea pig in the deregulation experiment, and Southern California Edison to buy or sell most of their load on the highly volatile spot markets. That prevents them from entering into long-term contracts that would make supply more reliable and prices more stable. Power suppliers, aided by spikes in demand, used the state restrictions skillfully to drive up prices. Los Angeles was spared the high cost and power shortages because its city-run utility, the Department of Water and Power, is not subject to the illogical state market restrictions.
Other federal proposals would overhaul the state’s power transmission and exchange agencies to make them independent of the power generators and utilities and require them to report noncompetitive market behavior. The federal government could then require sellers to refund their ill-gotten gains.
Gov. Gray Davis was right in telling the federal energy commission last week that the market rules have been manipulated in California to generate “obscene profits” for power suppliers. But he was wrong in suggesting that the state should regain control of the industry. The market behaved according to the flawed rules the California Legislature wrote for it. The federal proposal would go a long way toward fixing the problem. Sacramento, meanwhile, should encourage energy conservation programs and the development of alternative and renewable power sources.
