Phony Deregulation

Ralph Nader recently characterized San Diego as the "canary in the coal mine" of electricity deregulation, arguing that the state essentially sold out the public's right to a reliable supply of electricity when it tried to open the door to competition. He misplaced the blame. San Diego's skyrocketing electricity rates are the result of political horse-trading and compromise, not free markets.

The 1996 law at the center of the debate is not some radical rewriting of the rule books. California didn't deregulate its electricity market; it "restructured" it. While the generation of electricity was partly deregulated, additional regulations and controls were placed on the rest of the system. The result violates most basic principles of deregulation: It discourages entry into the market, it restricts expansion of capacity, and it sustains the old systems and rules that prevent competition.

Witnessing the legislative battles and compromises, most potential competitors outside California adopted a wait-and-see approach. The most recent attempts to freeze electricity rates at pre-restructuring levels have only confirmed their worst fears–it isn't a deregulated market at all, just some hybrid that no one knows how to navigate.

Under real deregulation, higher prices would spur more competition. But under California's system, political hurdles ensure that no out-of-state relief can be expected anytime soon.

So what about new power supplies in-state? Many pundits complain that no new capacity has come online since restructuring, but they don't bother to ask why. First, the restructuring law forced California's utilities to get out of power generation and sell their power plants–so they aren't investing in new ones. Several groups have applied to build new generation plants, some of them immediately after the law was passed. But even after four years, those new plants aren't likely to come online until next year because of the glacier-slow approval process.

As important, restructuring left California's existing power supply dangerously exposed by lengthening the regulatory process for repairs and upkeep. The last thing you want during a power shortage is to have existing plants break down. But because of a deal brokered in restructuring, power companies must now get regulatory approval before doing major repairs or refits. The result: While San Diego County suffers blackouts, the power supply problem gets worse.

Worst of all, because electricity rates were not uniformly deregulated–only San Diego is experiencing "unregulated rates"–folks upstate have no incentive to conserve power. Supply is further diminished, and prices are pushed higher.

Given that the normal benefits of deregulation–competition and price-sensitive demand–were compromised out of the restructuring legislation, what do lawmakers want to do now? They want to reimpose price controls. While this may offer San Diegans short-term relief, it will have no effect on the long-term health of the power supply. In fact, combining artificially low prices with severe bureaucratic barriers to new supply is a recipe for major power shortages.

Contrast this with true deregulation in other industries, such as trucking and long-distance phone service. In those cases, prices were deregulated uniformly across the market; barriers to entry were removed, not added; and firms were encouraged to add capacity and were allowed to grow, shrink, or revamp themselves to respond to changes in demand. The result has been huge decreases in prices and increases in service quality and choice–the very things those who labeled California's electric restructuring "deregulation" promised.