Features

The California energy mess has created two vastly different reactions, a popular impression that deregulation has failed and a determined opposition that views it as the only solution. 

The latter, in fact, blames the long-term myopia of regulators in general for having produced energy shortages, and the misguided efforts of California officials for having exacerbated it into a crisis. 

Never, they say, was the free market given a proper chance to match supply with demand. California reformers, they say, adopted a system that left only part of the market free while the rest remained regulated. 

Broadly stated, the California formula deregulated power generation but left regulated its distribution via utilities. As demand rose, power generators raised prices but utilities could not, losing on every sale. 

No matter how well-intentioned, “it wasn’t a free market,” says Bill Fogel, power technology analyst at First Albany securities. But the unanticipated shortages and rising prices had a long prior history. 

Since the 1920s, the nation’s electricity system was highly regulated through mandated monopolies, and environmental issues added additional regulations. Competition was insignificant, as were incentives to build infrastructure. Still, prices fell because of technological advances. 

In California, deregulators expected that competition at the wholesale level would keep prices level or even force them down, and that the utility retailers, even under fixed prices, would make a profit. 

However, the years of inattention to the infrastructure, both in generation and transmission of power, coincided with the growth and shifts of the nation’s economy. The effect was especially strong in California. 

Alternative sources of power were plentiful on the drawing board but not yet in the marketplace, where they could have provided new energy sources and competition. Developmental incentives were few. 

Specialists Peter VanDoren and Jerry Taylor describe how earlier deregulation and alternative energy sources, so long discouraged by a monopoly marketplace, might have helped avoid the current emergency. 

“If consumers faced real hourly varying prices – instead of fixed monthly costs – they would have an incentive to buy or contract for small-scale power sources,” they comment in an article for the Cato Institute, a Washington, D.C., free-market think tank. 

These new sources, such as fuel cells that convert hydrogen and oxygen to electricity and heat without combustion, and small turbines, could be activated by computer whenever the cost of other power rose too high. 

“Consumers would also have an incentive to shift their electricity demanding activities away from peak periods,” they say. 

Fogel tends to agree, and adds that we shouldn’t overlook solar and wind power too, although he concedes these are not immediate remedies to shortages and high prices. And then there is nuclear power to consider. 

In the meantime, the power problem conceivably could spread – and, in fact, has begun to spread – to other states. Twenty-two states and the District of Columbia are net importers of electricity. 

Among advocates of free and competitive markets, there is a resigned sense of irony about impressions that deregulation failed and that the solution, as has been proposed in California, is re-regulation. 

John Cunniff is a business analyst for The Associated Press