Legislation for deregulation of the electricity industry passed through the California government with virtually no opposition, and was signed by Governor Pete Wilson in September 1996. In retrospect, it was easy to see that businesses were fully utilizing their powers to persuade the politicians to pave the way for deregulation. The three major privately held utility companies in California spent over $5.3 million in their effort to get the bill passed through.
The legislation encouraged utilities to sell off their generating plants. It also transferred operational control of transmission lines to an independent agency called the Independent System Operator. This ensured open access of all competitors to the transmission lines to allow for competition. Finally, prices were to be set by the California Power Exchange instead of the state government. The California Power Exchange is a non-profit organization that sets prices through auctions instead of political debate.
The new bill took affect in 1998. However, the utility companies were required to maintain a price ceiling for consumers until the utilities were able to sell off their generating capabilities. Electricity production in California was now open to competition and the utility companies had to buy power on the open market. However, during the period of time that the utilities were selling off their generation plants, they were unable to pass any costs on to the consumer.
The prices of electricity on the open market began to steadily climb, causing severe financial distress in the major utility companies to the point that they were all faced with the threat of bankruptcy. San Diego Gas & Electric, one of the three largest privately held utilities in the state, was the first to lift the price ceilings after finishing selling off its production capabilities in the summer of 1999. Within a year, San Diego consumers saw their electricity bill triple.
The energy crisis began the summer of 2000 when the Independent System Operator declared a power alert because power reserves are too low. The first rolling blackouts begin on June 14, 2000, which are implemented by the utilities in order to stave off a massive blackout. Demand is especially high that day as temperatures in San Francisco reach 103 degrees. The blackouts continue into 2001, with additional blackouts prevented when the federal government forces utilities from other states to sell California power at a “reasonable” rate.
Meanwhile, the two major public utilities that had not yet had their price ceilings removed move closer to bankruptcy, failing to meet bills because they are out of cash. In order to prevent this, the California Public Utility Commission approves rate increases that average 40% for the two struggling utilities. However, Pacific Gas & Electric files for bankruptcy in April 2001. In May 2001, the Federal Energy Regulatory Commission begins to hear allegations from the major utility companies that suppliers colluded to fix prices artificially high.
Proponents of electricity deregulation believe that the energy crisis in California was caused because utilities were not allowed to pass on the increasing wholesale energy costs to the consumers. Had they been able to, demand for energy would decrease as the price went up and equilibrium would be established. The significant profits that were being reaped by the power generation companies would entice existing facilities to be expanded or for new entrants to build new facilities. This increase in supply would eventually lead to increasing competition and price decreases that would eventually be passed on to the consumer. Other proponents believe that the energy crisis in California could not have been averted through either a regulated or unregulated market. California was faced with an exceptionally hot summer during a time when its economy was booming. The increased demand coupled with the existing supply capacity made the shortage of energy inevitable.
Those favoring deregulation are ultimately arguing for the Market Capitalism Model as a normative model. Power generation companies and utilities should be allowed to function within the marketplace independent of inefficient government intervention. Proponents of deregulation argue that government intervention in the California market has caused massive inefficiencies for decades, with the inefficiencies ultimately being funded by the public. Government regulation guaranteed profit for the generation and utility companies. This stifled innovation and attention to operating efficiencies. Utilities were allowed to create capacity that was unnecessary because they were not punished by the market when they did. Lifting regulation in California simply showed how inefficient the industry had become. Although the problems in 2000 and 2001 were bad, the problem could have become much worse if it had been allowed to continue.
Further, although regulation doesn’t punish utility companies financially when they produce excess capacity, it does create massive administrative hurdles when they need to increase capacity. California consumes significantly more electricity than it currently produces. Many believe that this is because regulated power suppliers have met with significant administrative resistance in their attempt to increase their supply capabilities. This limited supply has caused prices to be artificially higher than they should be.
The deregulation of the power supply will encourage additional suppliers into the marketplace and ultimately decrease the price of electricity to the distributors and eventually the general public. Beyond the inefficiencies in the marketplace that government intervention causes, regulation of the energy market also significantly increases the tax burden on consumers and businesses. This is because regulation requires significant amounts of administration in the state and federal government. Politicians are forced to spend time and money enforcing the rates that they set.
Opponents of deregulation of electricity in California believe that the problems during 2000 and 2001 will continue to happen without government intervention. They argue that regulation of natural monopolies was created because manipulation of an unregulated market is too easy for the suppliers and the utilities in California. The State of California has traditionally worked on behalf of the citizens to keep prices at reasonable levels. Removal of those price controls will cause massive economic problems while redistributing significant wealth in California from the electricity consumers to the suppliers.
Given the limited amount of suppliers in the California electricity marketplace, opponents believe deregulation would be encouraging the Dominance Model for business, government, and society relationships. Through price manipulation and accumulation of wealth, electricity companies will continue to gain power over the masses. Consumers will have no say in their electricity rates. Opponents argue that deregulation legislation occurred primarily because of the lobbying efforts of the major utilities. Politicians were also too close to the executives of the companies. President Bush is close companions of several of the energy companies that are accused of manipulating prices.
Opponents believe that companies within an unregulated electricity industry in California will have strong incentives to collude to cut back supply and therefore increase prices. This occurs because there are currently so few suppliers in the State of California, even with the technological changes that have made generation less costly. When deregulation of the utility companies is complete, price manipulation will be even easier.
There are only three major privately held electricity utilities in the State of California. Pacific Gas ; Electric supplies power to over one third of the entire state. Even if suppliers and utilities do not explicitly attempt to fix prices, they will certainly have little incentive to add capacity when they benefit from a tighter market. The monopoly situation would cause the benefits of market economics to be nullified and create a situation that electricity regulation was created for in the first place.