Competition drives down prices. You know this instinctively when you shop
around for the best deal on a mattress, a cup of coffee, or a car. But should
an open market determine the price of a vital commodity like electricity? That
is the central issue behind deregulation. California turned toward the open
market when in 1996 it was the first state to introduce competitive measures to
the electricity market. The California Public Utilities Commission (CPUC) lifted caps on
wholesale electricity prices, allowing rates to float on the free market
subject to supply and demand. However, retail consumer rates were still subject
to price caps. In addition to changing pricing policy, the public utilities
were also encouraged to sell off their generating plants to private companies.
These sales created more suppliers of power and thus more competition. For a
few years, the price of energy did fall, before spiraling to its highest price
ever. As a result, the ideology behind deregulation has come under renewed
attack, and the debate is shaping other electricity deregulation schemes
Regulations exist ostensibly to protect consumers, and play a special role in
industries where there are only one or two competing companies. Until
deregulation in California, this situation described California's energy market
-- three utilities provided electricity to three distinct regions. The fear is
that so-called monopoly industries will abuse their market power and gouge
customers who have little choice but to pay the high prices. In other words,
the government acts to balance the market power of monopolies or near
monopolies in crucial industries such as electricity, natural gas,
telecommunications, and airlines. In the case of electricity, for example,
the Federal Energy Regulatory Commission (FERC) has a duty to ensure that wholesale electricity prices are "just and reasonable."
Deregulation is simply a removal of these regulations. To a free-market
advocate, price caps, for example, are a restriction on the laws of supply
and demand, which when left alone, they say, provide the best value to
consumers. Leave the markets alone, say deregulation proponents, and the
competition among companies in the pursuit of profit leads to more innovations,
more efficient operations, and the lowest prices no matter what the product.
Deregulation opponents say that some commodities are too precious to leave to
the market. Under a pure market economy, they say, the poor will often suffer
since companies will not find it profitable enough to serve them. They don't
dismiss the benefits of competitive markets, but they say that some level of
government oversight is necessary to provide universal access to things such as
phone lines or electricity.
The debate is as old as Adam Smith's theory of the "invisible hand" determining
optimal market prices. But in the last 30 years, the debate in the U.S. has
taken on a practical edge. Since the early 1970s, natural gas,
telecommunications, and airlines have all been deregulated to one extent or
another. All faced the same ideological arguments.
Twenty years after the 1978 deregulation of the airline industry, for example,
conservative think tanks like The Heritage Foundation called for further
deregulation, saying that the rules in place were still prohibitive. Meanwhile,
new, short-haul airlines were calling for "re-regulation," complaining that large
airlines were squeezing them unfairly out of the market.
The debate over California's electricity deregulation is similar. Proponents
such as Enron CEO Jeff Skilling and Chairman Ken Lay say that
California's "deregulation" has merely substituted one set of regulations for
another, and that these have actually made it harder for energy companies to do
business in the state. They point to the natural gas market as an example of
successful deregulation. David Freeman, energy adviser to California Governor Gray Davis, says that is just sour grapes. He says the
regulated market is reliable, provides cheap energy, and is humane. He says
that faith in the market is blind, and cites the current energy debacle as
proof that deregulation doesn't work.
The truth is that deregulation is a transition, a long painful one as
California's experience in the electricity market so clearly demonstrates,
rather than a state of being. Natural gas took 15 years before it could be
called fully deregulated. And after more than 20 years, the debate still continues over airline deregulation. California seems to have gotten in trouble by trying to protect the capital investments of the utilities during the transition, and by placing caps on the price consumers pay but not on wholesale electricity prices. Proponents say to give it five years to work itself out, while opponents say that consumers don't have that kind of time. Whether this gap can be closed will likely determine how deregulation proceeds in California and elsewhere.
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