The collapse and taxpayer rescue of the
California electric industry was due to half baked deregulation. California legislators set a retail
electricity price ceiling and passed environmental regulations leading to high
wholesale price. California utilities
had to pay over $.25 per kilowatt hour for electricity and had to sale it for
$.07. The politicians had little
background or interest in the electric industry. Their regulatory structure led to the
financial collapse of the industry and illustrates the pitfalls of government
involvement in business.
The lawmakers created the financial crisis
and then confiscated the property of the utility company as collateral for
paying the $12 billion debt created by their regulations. The California electric industry was never
deregulated and is now owned by the state government. Taxpayers stand to pay the losses.
In the 1930s US states made monopolies of
electric utility companies but previously competing electric companies kept
local prices low. The electric companies
grew tired of competition and local taxes, and petitioned state governments for
monopoly franchises. State politicians
were happy to oblige in return for the state tax revenue. The public service commissions
regulate the monopolies, aim to make them behave like competitive firms. The utilities are inefficient but with
abundant energy sources the price of electricity has remained low. Energy sources are now becoming scarce,
energy prices are rising, and the electric industry will assume increased
importance.
Lawmakers and local politicians with little
idea about the energy industry are in the political process of
restructuring. Retail competition allows
electricity customers to choose suppliers.
Customers in high price states such as California, New York, and Florida
would like to buy from other suppliers.
With retail competition, producers are also free to choose customers and
prices in the low price states will rise.
The push to restructure the electric industry
comes from environmental regulations and increasing energy scarcity. Coal remains the fundamental energy sources
but they both cause air pollution when burned, aside from the ambiguities of
global warming. There are ample supplies
of coal, still the main fuel for electricity but pollution concerns may limit
coal burning or require expensive scrubbing.
Natural gas is a popular fossil fuel because it burns more cleanly. Natural gas from the Gulf Coast comes up the
expanding pipeline system to a new generation of efficient gas turbine
generators. But the pipeline system is
expanding more slowly than gas demand and natural gas prices will climb steadily
due to increasing demand and scarcity.
Nuclear reactors run on relatively cheap uranium fuel but the
radioactive waste creates a problem.
Hydroelectricity is a reliable energy source but there is no discussion
of building new dams due to environmental concerns.
Be wary of proposed government solutions to
the pending energy shortage. Price
controls are doomed to fail, as the gasoline price caps the oil embargoes of
the 1970s. Government officials should
not offer subsidies to influence the potential energy sources. Experienced market professionals with profits
at stake will do a much better job. The main requirement of competition is a
price signal to ensure payback for research and development. As consumers face higher prices they will
economize, and prices ultimately depend on investment and supply as well as
demand.