Deregulation in the Energy Market

Henry Thompson

 

Deregulation is blamed for the collapse of the California electric industry but mis-regulation was the cause.  California regulators set a low retail price ceiling.  Environmental regulations restricting supply led to high wholesale prices.  California utilities had to pay higher prices for wholesale electricity than they could sell it for at retail.  The lawmakers confiscated utility property as collateral for paying the $12 billion debt they themselves created.  The California electric industry was never deregulated and is now owned by the government. 

          The first step in regulating the electric industry occurred during the 1930s when state governments made franchised monopolies of competing local electric companies.  The numerous electric companies were tired of competing and petitioned state governments for monopoly franchises.  State politicians were happy to oblige in return for state tax revenue.  The state utility monopolies are inefficient but with abundant energy sources the price of electricity has remained low. 

As the price of electricity rises, retail competition allows customers to choose suppliers.  Customers in high price states such as California, New York, and Florida want to buy from low priced exporting states.  Retail competition will not lead to much reduction in electricity prices, and will raise prices in the exporting states.  Deregulation should not be favored in the exporting states.

The main cost of electricity is fuel.  Coal remains the fundamental source.  Natural gas burns more cleanly and has become cheaper.  Hydroelectricity is a reliable energy source but there are no new dams due to environmental concerns.  Alternative energy sources cannot provide base load.  Nuclear generation will become more important over the coming decades. 

The best energy policy is to rely on energy markets as much as possible.  Consumers facing higher prices will economize.  The price of energy ultimately depends on investment and supply.