The taxpayer rescue of the California
electric industry was due to mis-regulation, not
deregulation as claimed. California
legislators set a low retail electricity price ceiling and passed environmental
regulations leading to a high wholesale price.
California utilities had to pay over 25 cents per kilowatt hour for
electricity and sale it for 7 cents. The
politicians obviously had no background in the electric business. Their decisions led to financial collapse, illustrating
the pitfalls of government involvement in business. The lawmakers bankrupted the utility and confiscated
its property as collateral for paying the $12 billion debt they created. The California electric industry was never
deregulated, and is now owned by the state government.
The first
step in regulating the electric industry occurred during the 1930s when the states
made monopolies of competing local electric companies. The various electric companies, tired of
competition, petitioned state governments for monopoly franchises. State politicians were happy to oblige in
return for state tax revenue. The state monopolies
are inefficient but with abundant energy sources the price of electricity has remained
low. As energy sources become scarcer,
energy prices rise and deregulation of the electric industry will become more
important.
Lawmakers
and local politicians with little concept of the energy industry are in the process
of restructuring. Retail competition
allows electricity customers to choose suppliers. Customers in high price states such as
California, New York, and Florida want to buy from other states. 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 increased energy
scarcity. Coal remains the fundamental
energy source but causes air pollution. Natural
gas burns more cleanly and is piped from the Gulf Coast to a new generation of
efficient turbine generators. The gas pipeline
system is expanding more slowly than demand and price will climb steadily due
to increasing demand and scarcity. Hydroelectricity
is a reliable energy source but there is no discussion of building new dams due
to environmental concerns. Other alternative
energy sources cannot provide base load for industry. Nuclear generation will become more important
over the coming decades.
Be wary of proposed government
solutions to energy issues. Price
controls are doomed to fail as did the gasoline price caps of the 1970s. Legislators have little knowledge of the
energy industry. The best energy policy
is to rely on energy markets. As
consumers face higher prices they will economize. Prices ultimately depend on investment and
supply as well as demand.