Energy Deregulation Essay, Research Paper

As we have witnessed the rolling blackouts and emergency alerts throughout many parts of our state of California within the past 12 months, there is a question waiting to be answered. Why do we have an energy crisis when there are other states that are doing just fine? Before we come to any hasty conclusion, let us ask ourselves what happened to the energy policy during the mid 90s? During that period the electric utilities went from being highly regulated to being deregulated following the trend in successful deregulation of many industries such as airline and telecommunication industries. The concept that deregulation will bring more competitive prices and better services to the public, undermined the negative potentials of the free market system. Deregulation bill must be abolished because it brings higher electricity prices, lower reliabilities of electricity, and also it threatens to drag down our economy along with it.

First, we have seen a nation-wide increase in both wholesale and retail electricity prices. In California as an example, the wholesale prices increased seven times last year compared to 1999 (Kahn and Lynch 13). The average residential electric bill almost doubled from $40 to $80 in San Diego when the SDG & E?s retail price freeze ended in June 2000.1 According to Washington Governor Gray Locke, ?the whole energy prices have gone up from ten to twenty times the prices of a year ago (1). In New York, more specifically in New York City and parts of Westchester County which are one of the first areas in the country to deregulate retail prices entirely, the retail rates have increased almost 30% (Eisenberg 47). This is bad when you consider that ones that are going to be most hurt from these unreasonably high electricity prices will be the individuals and families that are in the low-income bracket.

Second, the reliability of electricity was compromised throughout many parts of our state, affecting both residential and business sectors. On June 14, 2000, about 100,000 customers were blacked out in San Francisco Bay Area (Kahn and Lynch 9-10). According to Lorenco Goncalves, the CEO of California steel industries, ?We were interrupted 14 times this month [January] compared to not once from 1987 to 1998. So many other industries depend on what we send them?If they can?t depend on my products, they will [buy them] elsewhere? (Wood and Sherer). These uncertain interruptions are causing a lot of damage in our economy. Jack Kyser, director of the Los Angeles Economic Development Council, asserts that, ?Concern is rippling through every business in the state, because they are getting calls from customers wondering if they will be able to deliver? (Wood and Scherer). The estimated loss from the rolling blackouts in January is $1.8 billion according to Mr. Kyser (Wood and Sherer). A plan that was supposed to deliver better services, has in turn given more troubles to the public.

Finally, there is another problem associated with deregulation and that is price gouging. When the big three utilities were ordered to sell their generation plants to prepare for deregulation, many private companies purchased those power plants. These plants generate electricity that is then purchased by utilities that control transmission and distribution of electricity. However, many private companies who own the plants allegedly created an artificial shortage which results in price spikes (Sloan, Allan). This is a perfect example why public utilities, especially the electric utilities, should not be deregulated. When people take full advantage of the supply and demand such as in this case, the outcome is certainly instability and disorder of our public utility system.

Despite the fact that deregulation was a huge failure in California, the proponents of deregulation argue that it can work to bring more choices and competitive prices. The best real example comes from the state of Pennsylvania where its residents saved $3 billion on their electric bills after the state adopted deregulation bill (Eisenberg 46). Another example is the state of Texas. Eisenberg says that, ??state officials are guaranteeing a 6% rate cut from the get-go when retail deregulation takes effect next year? (Eisenberg 47). However, there are other states that had been deregulated but did not experience more competitive rates. According to Eisenberg, the electric bill in Massachusetts increased by 50% even though they were promised 15% cuts after deregulation (47). Also, it should be noted that municipally owned utilities in Los Angeles and Sacramento,which did not participate in the deregulation process, never faced any spike in electricity prices or blackouts (Ivins).

Others argue that although deregulation had failed in California, it is not the deregulation that directly contributed to the crisis but because it was badly planned and carried out inappropriately. Sloan sites,

?California put a cap on the rates that utilities could charge customers, but until recently, it forced utilities to buy all of their power in the short-term market. The utilities foolishly agreed to this deal. The problem: short-term markets are notoriously volatile. And notoriously ruthless. If there’s a small surplus of power, you have desperate sellers trying to sell power, which can’t be stored. But if there’s a shortage, everyone piles on. Had California utilities been allowed to do the rational thing and buy most of their power in long-term markets, they would have paid more initially, but they and their customers would be in far better shape now. Compounding the problem is that while the state deregulated the wholesale rates the utilities paid for power, they capped the retail rates utilities could charge. Combine that with total reliance on the short-term market and–voila! –you’re totally at the market’s mercy. And markets have no mercy.?

In addition to these flaws, what aggrevated these crisis is that California did not open more power plants to keep up with the demand. While electricity usage increased 15 percent from 1990 to 2000, no new power plants were opened in California?meaning California has to import between 10 and 30 percent of their electricity from other states (Gale Group). Another factor is that no one had ever anticipated the spike in rates for natural gas, which fuels half of California?s power plants and can account for more than half of the electricity costs (Greenwald 39).

The proponents of deregulation?s strongest argument is the successful results of deregulation in other industries. According to Winston, an economist, about “80 percent of airline passengers are paying lower fares than they would have under regulation”(Flanigan). Flanigan sites,

?Customer choice and employment have expanded in all those industries. In telecommunications, costs of long-distance telephone calls have come down dramatically as competitors offered consumers more and cheaper service. New technology has flourished, creating entirely new communications industries. In fact, the highest prices for telephone calls remain in the local systems, which are still largely regulated.?

But just because deregulation worked on many public industries, it doesn?t necessarily mean that it works for every type of industries such as in electricity. As far as electricity is concerned, we have seen more failures than successes so far.

Despite the successful deregulation transition of other industries, the public electric utility must not be deregulated because having more choices and competitions do not outweigh public safety. Also, it should be noted that no matter how beneficial deregulation can be, if it is not properly planned and when the dangerous potentials for disaster are overlooked, history will most likely repeat itself.Notes

1Retail customers of Pacific Gas and Electric company(PG&E), Southern California Edison company(SCE), and San Diego Gas and Electric(SDG&G) were temporarily protected from the impact of rate spikes caused by direct exposure to high wholesale prices. SDG&E?s rate freeze ended in June 2000, and PG&E and SCE?s must end by 2002 (Kahn and Lynch 12).

Eisenberg, Daniel. ?Which State is Next?? Time Jan. 29, 2001: 46-47

Flanigan, James. “Deregulation Is the Answer, Not the Problem.? The Los

Angeles Times Aug. 27, 2000: Commentary. .

Greenwald, John. ?The New Energy Crunch.? Time Jan. 29, 2001: 39-42.

Group, Gale. ?Proponents of Texas Energy Deregulation See No Parallels to

California Crisis.? The Dallas Morning News Jan. 19, 2001.

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Kahn, Michael, and Loretta Lynch. California?s Electricity Options and

Challenges Report to Governor Gray Davis. 2001: 10-13