Business owners and residents in San Diego, California are
understandably peeved that their electric bills have doubled over
the past twelve months. But national media personalities have now
parachuted in, blaming "deregulation" for consumersí woes when both
past and present regulation of the electric power industry continues
to affect market prices.
"Like most consumers, Mike Hawkins took electricity for granted,"
Timeís Daniel Eisenberg wrote for the July 17 issue. "But
when Hawkins got his bill in June from San Diego Gas & Electric (SDG&E),
he was in a state of shock -- $135, nearly twice the previous
culprit," Eisenberg flatly stated, "was deregulation."
In early August, when shortages forced some larger customers to
cut their electricity consumption (Stage 2 emergencies), ABC and CBS
said deregulation was responsible for the disruptions. "Deregulation
was supposed to cut the cost of energy, but in recent months
consumers across the nation are discovering otherwise, especially in
California," asserted news anchor Jon Frankel on CBSís Early Show
on August 4.
"The bills are so high because the San Diego area is the first to
experience Californiaís new electric deregulation law," similarly
reported ABCís Dan Harris on the August 5 World News Tonight.
These statements leave the impression that the buying and selling
of electricity is unregulated, but thatís not really the case.
Electricity is a difficult commodity to trade: demand must be
immediately matched by supply, it canít be stored easily, and even
brief interruptions in the supply can have profound consequences.
That puts local power companies at a severe disadvantage when they
need to go shopping for additional supplies from independent
producers, who at times of peak consumption can charge extremely
high rates to fill in gaps in the supply.
Thatís why most states have put price ceilings on the cost of
wholesale power; Californiaís is a low $250 per megawatt hour. Price
caps ensure that power sellers canít charge outrageously high prices
during times when supplies are tight, but differences in various
state caps mean that electricity might flow to states with higher
caps, where independent producers get a higher price. However
necessary they might be to prevent extreme volatility, price limits,
it should be pointed out, are a form of regulation, not
And, as GeoInvestor.comís editor William Kucewicz pointed out in
an August 7 Wall Street Journal op-ed, SDG&Eís customers are
unique in California in that local power companies in other
jurisdictions are still required to give residences and small
businesses reduced rates, in exchange for refinancing of "stranded
costs" -- bad investments from the 1970s and 80s. Those bad
investments (nuclear power plants, long-term purchase contracts,
etc.) were a key reason that electricity prices in the 1990s were so
far above actual production costs, a fact which stimulated the move
towards deregulation in the first place.
"San Diego Gas & Electric has already recovered its costs,
thereby eliminating the mandated rate reduction, which is why its
customers are receiving higher bills," Kucewicz explained.
"Consumers elsewhere in the state [are] ... still enjoying the 10%
rate reduction mandated by the 1996 deregulation law. This has
exacerbated Californiaís woes, because these price controls offer no
incentive to conserve energy."
The most recent issue of Regulation magazine, published by
the Cato Institute, discusses both the promise and problems of
electricity deregulation in its cover stories. In one article,
Severin Borenstein, the director of the University of Californiaís
Energy Institute, and James Bushnell, the Energy Instituteís
research director, cautioned that restructuring of the electric
power industry must take into account the fact the need for
continuous supply will give sellers a huge advantage in market
"Given the enormous size of this industry," they wrote, "even
small amounts of market power imply large transfers from consumers.
This means that for consumers restructured electricity markets may
be more costly in the short run than were their regulated
predecessors. For restructuring to benefit consumers, the long-term
gains stemming from improved investment decisions on both the demand
and supply sides of the industry must be sufficient to outweigh the
potential short-run costs."
But the story that the media were telling in August 2000 was all
about short-term pain, not about whether the state was moving
smartly enough towards a genuine market system. "With California
facing rising electric prices, as well as the threat of blackouts
this summer, deregulation is getting a bad name," CBSís John
Blackstone said on the August 4 Early Show. And some
journalists were certainly doing their part.