Illinois Can Learn From California Energy Crisis

Deregulation can get it right

California’s electricity crisis comes at an interesting point in Illinois’ deregulation process. As of this month, commercial and industrial customers can choose among competitive electricity generators, and by May 2002 all Illinois customers will be able to choose. At the same time, we face higher energy prices, particularly natural gas prices, which also are contributing to the difficult situation in California. These factors could cause us to rethink our deregulation process, not wanting to risk the outcomes that California is experiencing. We should seize this opportunity to learn what not to do.

We also should learn from the success stories of electricity deregulation and reform, both in the United States and abroad. For example, Pennsylvania initiated deregulation in 1996, around the same time as California, but has achieved substantial price decreases, significant switching to alternate suppliers and high customer satisfaction.

The Center for the Advancement of Energy Markets Retail Energy Deregulation Index 2000 ranked Pennsylvania first in the nation for its progress and success in electricity restructuring, and in August 2000 a survey by Power Perceptions (a Colorado energy market research group) found that more customers in Pennsylvania are “completely satisfied” with their electric service than the national average. The center’s index ranked Illinois 13th and California 16th, partly reflecting the fact that 24 states have yet to initiate electricity reform.

Pennsylvania has achieved price reductions and customer satisfaction by:

  • Allowing buyers and sellers in wholesale regional power markets to enter long-term contracts and use financial instruments to hedge the risk of price increases for natural gas, coal and emission permits.
  • Creating a transparent regulatory policy that does not discourage the construction of new generation capacity.
  • Implementing deregulation for all customers over a two-year period instead of a prolonged phase-in.

Pennsylvania provides an example that, when done well, electricity deregulation and restructuring creates benefits for consumers.

Illinois’ deregulation policies should avoid the mandates and restrictions that led to the California crisis, and instead follow Pennsylvania’s lead and create rules that enable a market to evolve.

Lynne Kiesling is director of economic policy at Reason Foundation and senior lecturer in economics at Northwestern University.