Call for Real Electricity Deregulation

California failing to learn from past

NO: Proposition 80 would make some significant – and detrimental – changes in the state’s energy policy, proving that we haven’t learned the lessons of the so-called “deregulation” of the 1990s.

Before the state’s “deregulation” experiment was suspended in 2001 during California’s energy crisis, large energy users could choose to purchase their electricity services directly from independent electric service providers, rather than through an intermediary such as the local investor-owned utility or public utility. ESP customers include hospitals, local governments, and schools. Proposition 80 would permanently prevent customers switching from an IOU to an ESP, thus reducing choice and forcing consumers to buy their electricity from (often higher-priced) utilities.

Another provision of Proposition 80 would effectively prohibit the broader implementation of “dynamic pricing” of electricity without the consent of the consumer. Currently, all but the largest energy consumers pay a flat rate for electricity. However, the IOUs have submitted proposals to the Public Utilities Commission to charge residential and small commercial customers higher rates during peak hours and lower rates during nonpeak hours.

In addition to making good economic sense, dynamic pricing encourages conservation. Higher prices discourage some from consuming such a scarce resource, and those who have some flexibility over when they consume their energy are encouraged to utilize it for cheaper during nonpeak hours.

Proposition 80 also promotes investment in inefficient “green” energy sources. Under current regulations, energy producers must increase the portion of energy derived from renewable energy sources – such as solar, wind, and hydroelectric – to 20 percent by 2017. Proposition 80 would accelerate this deadline to 2010.

According to the Legislative Analyst’s Office ballot analysis, Proposition 80 would also require that IOUs place a higher priority on cost-effective renewable resources than on “traditional sources such as fossil fuel burning power plants.” Of course, if renewable energy sources were truly “cost effective,” producers would already be utilizing them in greater numbers.

Some blame “deregulation” for the rolling blackouts, soaring spot market prices and utility bankruptcies that sprang from the energy crisis of 2000 and 2001, but this anger is misplaced. California has never experienced true energy deregulation. The “deregulation” implemented in 1996 left price controls in place and created “artificial” markets ripe for manipulation and mismatches between supply and demand. By setting price caps below market prices, California limited the profitability of the industry. When wholesale energy costs increased, the price caps prevented energy producers from passing the increases on to consumers, resulting in the bankruptcy of PG&E and the near-insolvency of Edison.

The price caps additionally discouraged potential producers from entering the market and increasing competition, and they discouraged existing producers from investing profits in added capacity, of which the state was (and continues to be) in dire need. Furthermore, after the IOUs were compelled to divest many of their fossil-fuel-burning generators to private firms, regulators prohibited them from better managing risk through long-term contracts with these firms, forcing them instead to rely on the much more volatile short-term and spot markets.

Politicians and regulators forced a sham of a “deregulation” scheme on the energy industry in California during the 1990s, and then blamed the free market when it inevitably failed! The problem was not too much free-market competition; it was too much regulation. Quite simply, it was a government regulation failure, not a market failure.

Proposition 80 supporters apparently failed to learn this lesson. Proposition 80 would represent a huge step backward, toward stifling regulation and decisions based on politics, not economic realities.

The real solution to California’s energy problem is to eliminate price caps and all government regulation, thereby removing barriers to entry, fostering competition, offering consumers maximum choice, and affording providers the greatest incentives to increase capacity and best serve their customers.

Adam B. Summers is a policy analyst at the Reason Foundation, a free-market think tank.