Other States Put Brakes on Deregulation

Alarmed by California’s power crisis and what it could mean for electrical grids across the country, officials in state after state are flipping the switch off--at least temporarily--on their own deregulation plans.

The backlash will slow, by several years at least, the transition from state-regulated to free-market electrical systems, short-circuiting a public policy trend that seemed almost unstoppable not long ago.

“I would say that California’s problems have put a very, very definite slowdown or halt on every state’s deregulation effort--if they’re not so far into it that they can’t turn back,” said David Hoyle, a state senator in North Carolina. “It would be impossible to pass legislation that starts any kind of process to deregulate until we get to the bottom of California’s problems.”

Among the 24 states (plus the District of Columbia) that have approved deregulation plans, Nevada, Arkansas, New Mexico, Montana, West Virginia and Oklahoma have delayed or appear likely to delay their efforts. Of 18 states that were actively investigating deregulation or have legislation pending, Minnesota and North Carolina already have stalled their efforts.

The momentum behind a proposal for federal deregulation legislation also has collapsed.

For Hoyle, one of two North Carolina legislators charged with crafting an electricity deregulation plan for his booming Southern state, the sky-high prices and rolling blackouts a continent away have been “horrifying.”

Determined not to make the same miscalculations as California did with its discredited deregulation scheme, Hoyle’s committee decided two weeks ago to put its plan on hold--indefinitely.

North Carolina was in the early stages of crafting its plan to introduce competition into its electricity market. But even some states where the plans have been signed into law and were soon to take effect have put on the brakes.

Nevada Gov. Kenny Guinn has delayed his state’s plan for the second time. Retail competition had been scheduled to start in September.

“We must learn from the mistakes of California, so that we never repeat them here,” he said in his State of the State address last month. “I cannot and will not support deregulation until I am assured that power supplies are secure and those who would be hardest hit by rate increases are protected.”

In New Mexico, the chief sponsor of that state’s deregulation bill, which was signed into law more than a year ago, is busy trying to persuade the state Senate to delay implementation until at least 2007.

“The people of New Mexico should not be exposed to the risks of the marketplace that California ratepayers are now experiencing,” state Sen. Michael S. Sanchez said in a statement.

States began adopting plans to open their electrical generating markets to competition in response to 1992 congressional legislation authorizing an open wholesale market. According to the Department of Energy, in addition to the states that have already deregulated through legislative or regulatory action, two more have legislation pending, and 16 were actively investigating deregulation until California’s crisis unfolded. Only eight states--Idaho, South Dakota, Nebraska, Kansas, Tennessee, Alabama, Georgia and Hawaii--have resisted the trend.

Among those states whose deregulation programs are proceeding, Texas is often cited as a potential model. Among other things, the state launched the process in 1995 by encouraging out-of-state companies to build power plants in Texas; 22 plants already have been added over the last five years.

California was near the head of the pack with its 1996 legislation. Although the plans differ from state to state, each restructuring plan offers power customers a choice of suppliers and attempts to prevent established utilities from using unfair tactics to dampen competition.

Some plans, including California’s, encourage the development of alternative power sources.

In Arkansas, the governor and legislative leaders decided last week to postpone deregulation until October 2003 at the earliest.

“It will give us a chance to study why [deregulation] is working in other states or why [it is] not,” said Jim Harris, spokesman for Arkansas Gov. Mike Huckabee. “We see the problems [California is] having. We want to see how it will play out before we implement here.”

In Oklahoma, Atty. Gen. Drew Edmondson wrote each legislator a letter, which mentioned California’s problems, and urged the lawmakers to delay implementing the state’s 1997 restructuring law. The state Legislature meets this week, and several bills already have been introduced to delay competition in the retail electricity market.

Oklahoma’s law calls for competition in the retail electricity market to start on July 1, 2002, but there appears to be a consensus for a delay.

Oklahoma’s electricity rates are among the nation’s lowest, and the state’s attorney general is worried deregulation would change that.

“We want to ensure those low rates can be protected for the benefit of consumers in Oklahoma,” said Cece Coleman, assistant attorney general in charge of the public utilities unit.

Edmondson is advocating that the state conduct an economic impact study and an infrastructure impact study to make sure that the state’s power grid can handle the extra load of competitive suppliers.

Still, some states are plowing ahead with their plans despite California’s predicament. In Richmond, Va., a state House panel last Thursday defeated by voice vote an effort to delay its deregulation plan. Virginia’s lawmakers believe they have avoided California’s pitfalls.

Unlike California, Virginia has been building new generating plants over the last 10 years, and more are scheduled to be built in the coming years.

“We saw California doing it overnight,” said Jim Norvelle, spokesman for Dominion, one of the largest energy companies on the East Coast. “We wanted customer choice to win in Virginia. To do so, there had to be a long transition period. There had to be no chaos.”

Even in states where deregulation efforts appear to be going forward, some lawmakers are using the California crisis to try to halt deregulation.

U.S. Rep. Peter DeFazio (D-Ore.), for example, is trying to encourage his state’s Legislature to drop its plan.

Energy experts warn that stalling deregulation plans heaps uncertainty on power generating companies, making it difficult for them to make the long-term investments they need to build more power plants.

“Stalling is worse than choosing either of the alternatives,” said former U.S. Deputy Energy Secretary Charles B. Curtis, who left the job in 1997. “If you don’t know what the rules are, you aren’t likely to make an investment.”

Mark Stultz, spokesman for the Washington-based Electric Power Supply Assn., which represents competitive power suppliers, said that given the seriousness of California’s situation, “every state has had to reexamine” its approach to deregulation.

“I think it’s very important that people learn from California’s situation. We would much rather have markets that work rather than have states rush something through and end up with another California,” Stultz said.

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Thinking Twice About Deregulation

California’s electricity crisis has slowed down or stopped some other states’ deregulation efforts. The status of electric industry restructuring by state as of January:

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Source: Energy Information Administration