Deregulation--Or Reregulation?
By David Holcberg (Hartford Business Journal, February 19, 2001)

Hundreds of thousands of California residents have been suffering from sudden blackouts that have now become routine. This past week thousands of businesses, as well as hundreds of schools and day-care centers, were left in the dark for hours. Pacific Gas & Electric and Southern California Edison, the state's two largest utilities, are on the brink of bankruptcy. California's future does not look bright, and further chaos lurks ahead. Who is to blame for this mess?

Governor Gray Davis blames the state's 1996 "deregulation," declaring the program "a colossal and dangerous failure." He's wrong. The fact is that no real deregulation took place in 1996. Far from freeing up the market in electricity, California legislators delivered a flood of new regulations to replace the old ones. Indeed, reregulation--not "deregulation"--lies at the heart of California's woes.

Until 1996, Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric shared a government-granted monopoly over California's electricity market, under the condition that state officials controlled utilities' prices. With the stated purpose of increasing competition and lowering prices, legislators ended this monopoly in 1996, but placed new regulations on the market's "structure." The new regulations forced utilities to sell off their gas and oil-powered plants, which caused utilities to lose control over power production and to become dependent on power plants for the electricity they needed to serve their customers.

California legislators also forced utilities to buy electricity strictly on a daily basis. The rationale put forth was that in such a setup utilities would be prevented from closing long-term deals with power plants that might keep competitors out of their market. The chaotic effect of this regulation was that utilities had to renegotiate their electricity prices with power plants every day, and therefore endure huge energy-price fluctuations. Could you plan your life if you had to renegotiate your rent with your landlord or tenant--every day?

The utilities' death sentence was handed to them through another new regulation: a four-year cap on the price utilities could charge consumers. Southern California Edison and Pacific Gas & Electric Co., for example, were forbidden by law to charge their 24 million customers more than 14 cents per kilowatt-hour of electricity. Recently, because of steep price increases in natural gas and oil, and the lack of long-term contracts, unregulated power plants from other states raised their prices from 5 cents up to 50 cents per kilowatt-hour. Southern California Edison and Pacific Gas & Electric Co. began running huge losses because they had to buy electricity at up to 50 cents per kilowatt-hour but sell it at the government-mandated price of 14 cents. The more electricity utilities sold, the more money they lost. In the last eight months, the state's two largest utilities paid $12 billion more for electricity than they charged their customers. No wonder the utilities are facing imminent bankruptcy. Could you make a living by buying something for $50 and selling it for $14?

In sum, the main culprit in California's energy crisis is not deregulation--but rather the massive government reregulation of California's power market. Perversely, Governor Davis has dared propose more government regulation as the solution! His audacious proposal for a government takeover of utilities and power plants is the worst possible answer to getting us out of this government-created nightmare.

If we want this energy crisis to end--and not to be repeated anywhere in America--we must get the government out of the energy business once and for all, and demand an immediate repeal of all price controls and regulations that have been choking the national energy industry for decades. Only the total removal of regulations and the establishment of a free market--one in which individuals and businesses are completely free to invest, operate and trade--can ensure us abundant energy supply at stable, reasonable prices.

The twenty-five states presently considering energy deregulation should learn from California's energy crisis that government should stay out of the energy business. Regulations are inherently destructive to any industry, economy or country, for they restrict production, trade and freedom.

If we really want energy producers to solve this energy crisis--and supply us with the electricity we all need to live and prosper--all we have to do is very simple: Set them free.

David Holcberg, a former civil engineer, is a writer for the Ayn Rand Institute in Irvine, Calif. The Institute promotes the philosophy of Ayn Rand, author of Atlas Shrugged and The Fountainhead.