The California Energy Collapse


Henry Thompson


The taxpayer rescue of the California electric industry was not due to deregulation but to mis-regulation.  California regulators set a low retail electricity price ceiling.  Environmental regulations restricted supply and led to high wholesale prices.  California utilities had to pay much more for wholesale electricity than they could sell at retail.  This led to financial collapse of the utilities, illustrating the pitfalls of government involvement in business.  The lawmakers confiscated utility property as collateral for paying the $12 billion debt they themselves created.  The California electric industry was in truth 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, tired of competing, petitioned state governments for monopoly franchises.  State politicians were happy to oblige in return for state tax revenue.  The state utility monopolies have been inefficient but with abundant energy sources the price of electricity has remained low. 

Retail competition allows electricity 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.

Coal remains the fundamental energy source.  Natural gas burns more cleanly.  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. 

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.  At least, avoid the example of mis-regulation set by California.