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Reason Foundation

Orange County Register

Scapegoating Isn't an Energy Policy

Blackouts, high rates are the result of government's poor decisions

Lynne Kiesling
March 26, 2003

In winter 2000-2001, California experienced rolling blackouts and state regulators approved electricity rate hikes of up to 46 percent — dramatic symbols of the negative consequences of the state's dysfunctional wholesale electricity market. Today, Californians are stuck paying some of the highest retail electricity rates in the U.S. even as wholesale prices have dropped to one-tenth of their late 2000 peak.

The California Public Utility Commission passed these rate increases to counter its own mistakes and balance the mismatch between the wholesale prices the utilities paid for power and the regulated retail prices they could charge us. Thanks to consumers paying these higher rates for over a year and a half now, the utilities have regained financial solvency.

So when will Californians see a rate decrease? Not anytime soon.

Following the electricity fiasco, Gov. Gray Davis made a hasty retreat to traditional command-and- control regulation and demanded refunds from energy companies. These efforts recently yielded a $1.7 billion settlement with El Paso Corp., and today the Federal Energy Regulatory Commission is expected to announce its findings on price gouging and alleged misdeeds by other energy companies.

Once the decision is in, California should accept FERC's findings and move on. This means shifting the state's focus from searching for scapegoats to developing an actual electricity plan that no longer asks consumers to subsidize past electricity mistakes.

Luckily, there is a blueprint available. Electricity industry experts and analysts have achieved substantial consensus that California needs market-based restructuring of its electricity regulation. In February, a group of prominent industry participants and economists, including Nobel laureate Vernon Smith and UC Berkeley's Severin Borenstein, signed a manifesto endorsing one approach.

It states that California's residents, businesses and electricity industry would benefit in the long- and short-term from competitive wholesale and retail electricity markets, transparent and stable oversight rules governing these markets, freedom of contract for consumers and suppliers, and the option to choose real-time pricing.

Allowing consumers to choose when and how to consume their power with real-time pricing would allow families who need to save money the chance to do laundry and other electricity-draining activities at times when rates are the cheapest. And large companies like Intel or IBM could alter production schedules to take advantage of inexpensive or discounted rates in off-peak hours.

Freedom to choose an electricity provider would enable families and small businesses to shop for discounts and force electricity companies to compete with one another for each customer. We reap the benefits of such competition every time we make a long-distance phone call or choose a cell-phone provider and plan.

Simple and stable oversight rules — such as requiring that energy suppliers who bid into wholesale markets are financially committed to their bids when they make them — would give energy companies the right incentives and prevent price spikes and strategic manipulation of the rules.

Deregulation of electricity markets wasn't to blame for California's plight. The state's poorly devised plan contained so many problems, perverse incentives and regulations that many would argue it wasn't deregulation at all.

Had it featured simple, transparent rules in an unpoliticized framework; integrated wholesale and retail deregulation; and the option for customers to choose among a variety of electricity service offerings, we'd have the foundation for a thriving electricity industry.

In the two years since the blackouts, we've held plenty of hearings and assigned lots of blame. Gov. Davis has garnered more than $2 billion in settlements from companies charged with manipulating the system. But we haven't done anything to improve California's electricity industry. For the sake of the state's businesses and residents, this must change.

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



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