Deregulation in the Energy Market

Henry Thompson


While deregulation is blamed for collapse of the California electric industry, 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 state confiscated utility property as collateral for paying the $12 billion debt it created. The California electric industry was never deregulated and is a government owned enterprise.

The first step in regulating the US electric industry occurred during the 1930s when state governments created franchise monopolies out of the competing local electric companies. The competing electric companies petitioned state governments for monopoly franchise. State politicians were happy to oblige in return for reliable tax revenue. The state utility monopolies are inefficient but with abundant regulated energy sources the price of electricity has remained low over the decades.

The main cost of electricity is fuel. Coal remains the fundamental source of fuel. Natural gas burns more cleanly and has become cheaper but the generators are small. 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 one certainty is that the price of electricity will rise.

The game is changing as the price of electricity rises. Retail competition allows customers to choose suppliers. Customers in high price 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.

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