It’s a situation that demonstrates the unique nature of energy as a product, and why a free market approach just isn’t going to work in this state. For better or worse, California has been backed into a corner where tight regulation of utility monopolies is the only realistic option.
Deregulation was a bad idea to begin with, but it was pushed by big power consumers—oil refineries and industrial manufacturers—who hoped to be able to use their enormous buying power to achieve lower rates.
The plan was drafted under the influence of the utility companies, which provided state legislators with enough campaign cash to ensure that the deregulated market wouldn’t include anything so disruptive as real choices for consumers. The deregulation bill included not only a $28 billion gift to the utilities to help ease their conversion to the new system, but also a provision that made the entrenched monopolies the “default providers” for their old customers. Meanwhile, the power transmission grid—the only means of delivering electricity—remained in private hands. In other words, rate payers were given no real choices and were saddled with a host of new fees, so it was no shock to anyone when consumer prices shot through the roof.
What took many observers by surprise, however, is that wholesale electricity prices also skyrocketed, costing the utility companies billions even as they jacked up rates. Yet the reason for this is simple: Unlike many commodities, electricity can’t really be stored, but must be used almost as soon as it’s produced. This means that the utilities have no choice but to go shopping for electricity at times of peak demand, when prices also peak. Unless the supply exceeded even the peak demand—a scenario that is unimaginable in California, given the skyrocketing demand and the difficulty and expense of building a power plant—retail prices were bound to rise steeply as soon as government controls were removed.
So where does that leave us? In the short term, with one realistic option: the pre-'96 system of regulated monopolies. Because true competition in the electric generation business will not become a reality within the foreseeable future, the state has little choice but to force the utilities to open their books, set prices to include a modest profit margin and admit that deregulation was a colossal mistake.