California Dreamin'
The power crisis in California reminds us of a story from the Philippines, where a president once declared to a small-town crowd that he would fund a new bridge. An aide whispered to him that there were no revenues, adding "It goes against the law of supply and demand."
Turning to the crowd, the president shouted, "I hereby declare the repeal of the law of supply and demand!"
California, too, tried to defy market economics with a partial deregulation of its electricity market in 1996. It let wholesale prices float, but kept caps on most retail prices.
When demand surged in hot weather and a hot economy last summer, utilities that were paying sharply rising prices on the wholesale spot market had nowhere to go but into debt. That situation fed on itself for months until the state's two major utilities teetered on bankruptcy, unable to find power suppliers who trusted them to pay the bills.
Then on Wednesday, the first "rolling" blackouts arrived. The governor and Legislature are trying to fix the problem by having the state, with its better credit, buy electricity and then sell it to the utilities. But that's a partial fix at best, and wouldn't take effect for weeks.
The long-term solution lies in expanding the supply of power within the state - including renewable sources - while also creating more incentives for conservation.
But years of relatively low, regulated prices discouraged the building of new plants or more conservation. At the same time, ever tougher state environmental rules scared off investment in more plants.
At this point, California, which spearheaded electricity deregulation, is a pioneer lost on the wrong trail. Will other states follow it? Some are already traveling a better path:
* Pennsylvania is proving that one deregulation ideal - giving ratepayers a choice of suppliers - is attainable. The key is setting a "transition" price for existing utilities high enough that other suppliers want to compete for customers - as compared with California's unrealistically low retail prices. Nearly 10 percent of Pennsylvania's residential customers have changed suppliers since deregulation began three years ago. That's far higher than elsewhere.
* Texas has mounted a deregulation plan with ample supplies of power. It has built 22 new plants since 1995. Fifteen more will come on line over the next two years. Texas, too, has environmental measures to ensure cleaner-burning plants, but its less complicated regulatory scheme allows it to build new plants much more quickly than California. Also, Texas allows companies that sell retail power to enter into long-term contracts with wholesalers to guard against price fluctuations.
* Ohio's deregulation encourages communities to "aggregate" together for added clout in buying electricity. This tactic gives homeowners and small businesses a shot at the discounted power prices often paid by large industrial customers.
No one state has perfected deregulation. Even California is providing useful lessons by its costly mistakes. Getting rid of government controls over basic industries is not easy.
Done correctly, deregulation should benefit consumers by providing more supply and lower prices.
(c) Copyright 2001. The Christian Science Publishing Society