blackout
homecaliforniamy billnew businessregulationthe future

the deregulation debate
Should electricity be managed on the free and open market?

Ken Lay

Chairman of Enron Corporation

photo of lay
read more
We use competitive markets to arrange for delivery of our food supply. We use competitive markets to arrange for delivery of our shelter, our housing. We rely on competitive markets to arrange delivery of our clothing, and of course, the gasoline we put in our cars so we can get to work in the morning; the heating oil that we buy in the Northeast and elsewhere to heat our homes when it's 30 degrees below zero. ... If the rules are right--and they were not right in California--but if the rules are right, electricity, like any other commodity, can be arranged for, can be priced more efficiently by competitive market forces than it can be by regulators and monopolists.

Nettie Hoge

Executive director of The Utility Reform Network (TURN)

photo of lay
read more
Electricity is not Q-tips and bubble gum. It's an essential commodity that everyone needs. It's absolutely essential that it be available in a predictable manner to keep the economy going, and that it be available for everybody on a non-discriminatory basis to have justice and equity. And it's really hard to get it started, because there's huge investment in large power plants.

... I believe that essential commodities with high capital entry cost and inelastic demand make a really good argument for rational oversight and regulation--in order to assure stability--and centralized planning, which would mean resource allocation, and fairness to the regular old ratepayer who needs this to live. ...

I think the problem is essentially that we've taken electricity ... and we've given it over to market mechanisms, and the market is ruthless. So we're seeing the exercise of market power and the profligate greed of people who have us in a bind. We gave over regulation of the generation assets--the plants that make electricity--to multinational corporations who have absolutely no concern for how much we pay, or what pain it puts the California economy in. ...

Curt Hebert

Chairman of the Federal Energy Regulatory Commission (FERC)

photo of hebert
read more
Rules of competition govern that economies work, that choice works. It's why we're American. We inherently like choice. It's why we left the mother country. We didn't like the rules they were setting. We want to make our own rules. We want our own choices, and we believe that works. But when you set up artificial markets, it doesn't work. ... We've got to get market certainty. We've got to give some insulation to the American public. And that's what we're doing. ...

Loretta Lynch

President of the California Public Utilities Commission (CPUC)

photo of loretta lynch
read more
You and I have to buy electricity every day, and we can't store it. ... Electricity must be used when it's made. ... So the people who make electricity know that you and I can't just decide not to buy it today if the price goes up too high, and they know we don't have a substitute for it. You can't just light candles to make your computers run. So they know they have a fundamental economic necessity that people will buy at any price, and so they charge any price they want.

That's rational economic behavior on the part of the person who has the golden goose, right? But it's not good corporate behavior, and it's not behavior that's good for our economy; which is why virtually every industrialized nation in the world regulates the prices that somebody can charge for electricity.

Pat Wood

FERC Commissioner

photo of pat wood
read more
I think those of us who are strong advocates for the free market recognize that "free" is a relative word. "Freer than what it used to be." ...

So you're not a supporter of a totally free unregulated marketplace, sort of Adam Smith with the invisible hand coming in?

No. I think that that ignores the basic realities of this industry. There is a lot that we can do less of on the government side. There are three areas of the electric industry: there's power generation; there's power delivery, which are the poles and wires; there's power sales. Only the middle of those is a natural monopoly. ... So that's where competition works its magic, on that 75 percent of my bill that is power generation and power sales.

Markets can deliver that just and reasonable outcome more effectively than regulators can. And I happen to be in agreement that that is the truth, because I am a regulator, and I can tell the dirty truth: We don't do a good job. It's like regulating the flow of Niagara Falls with a bucket. We think we're doing good because we walk out of it wet, but you look in the bucket and you've got half a cubic foot of water, and 50 million times that amount has gone over. So markets tend to be better.

But where markets don't work--that's what regulators are there for. The just and reasonable rate is the goal here. As we move from a system that works on a mediocre level--regulation--we need to make very sure that the system we're moving to is at least an improvement on that. So the market system ought to be better than regulation, and if it's not, then we need to rethink it. ...

Will a deregulated electricity market be good for consumers?

Severin Borenstein

Director of the University of California Energy Institute and a professor of business at the Haas School of Business at California-Berkeley

read more
If we got rid of all regulation, the next few years would be such a massive transfer of wealth from consumers to companies like those owned by [Enron Chairman] Ken Lay that the voters would never stand for it. ...

Dick Cheney

Vice president of the U.S., Cheney is chairman of President George W. Bush's task force on energy policy

photo of dick cheney
read more
Generally the view has been in recent years--and I think it's a correct one--that having a market approach will attract the investment that's needed in order to produce enough; the law of supply and demand takes over, and that's how you get reasonable prices. The price has shot up in California, for example, because there has been no significant increase in supply in California for about 10 years, although there's been a 24 percent increase in the demand for electricity. So the key to reasonable prices, long term, is supply. ...

David Freeman

Energy advisor to California Governor Gray Davis

photo of david freeman
read more
The economists, they have an interesting word; it's a Freudian slip. They call it "externalities." ... That's their word for saying that the impact on the consumer, you just have to live with it. After all, it's kind of like deregulating the police department and saying, "Well, we have a shortage of police, a few people get murdered, it doesn't matter. Then we'll hire more police and it'll all work out." They are without any human feeling as to the impact on the consumer, or, actually, the impact on small, independent producers when the price gets too low. This volatility, what we're learning, is no good. ...

The truth of the matter is that the price of electricity for public power is lower. Just look at California. Where are the lights on and not blinking? In Los Angeles, where we have public power, and in Sacramento, and in Anaheim, and in Glendale and all these public power cities. They can huff and they can puff and they can say what they want to, ideologically. The plain truth of the matter is California is a vivid demonstration that public power serves the people, and private power has been an abysmal failure as far as the consumer is concerned. ...

What's happened to the price of natural gas under deregulation? You ask the consumers of natural gas in California or anywhere else in the country, where half the homes are heated with natural gas, how they feel about that product's price today. The price has gone up 50 percent to 60 percent. Consumers are angry about the fact that a free market turns out to be very expensive. Now the freedom is for the producer to pick our pockets, literally. I'm not saying that they're doing anything illegally. But the very fact that they are free to charge what the market will bear is turning out to be very expensive for the consumer. ...

Robert Glynn

Chairman and chief executive officer of PG&E Corp., which owns California's Pacific Gas and Electric Company

photo of robert glynn
read more
[Deregulation] will only be good for the consumer if, in the long term, it provides lower prices and more choice of suppliers. I think the average consumer, the residential consumer, or the homeowner, my neighbors, won't feel that they get any benefit out of it if they don't see prices that they like better, and if they don't see choice that they didn't have before. ...

Deregulating the electricity market, or even the natural gas market, has never been the cause of residential consumers in any state that I know of. ... The deregulatory forces were driven by two main things: large consumers of large amounts of energy who wanted to be able to buy it directly--not through, in essence, a middleman; and the ideological view that monopolies didn't need to be in the power generation business if there was a competitive alternative that appeared to be there. ...

Nettie Hoge

Executive director of The Utility Reform Network (TURN)

read more
The [deregulation] legislation that was ultimately passed out of California was basically channeled from the corporate headquarters of Edison and PG&E. It was written by the people who work for them. It was part of a grand scheme that was agreed to in the governor's office in the summer of 1996, between the governor, the large customers of energy--that would be your huge industrial users--utilities, and the independent energy producers, those folks who ultimately ended up owning the power plants. There were no small consumers anywhere near the room. ...

Electricity deregulation has been a failure on three counts. First of all, prices are exorbitant. Second, reliability has suffered. We're having blackouts. And third, we're on our way to putting aside environmental concerns and letting the environment suffer so that we can build more plants. ... This is a dismal failure on all three counts: fair prices, reliable system, and environmental concerns. ...

Ken Lay

Chairman of Enron Corporation

read more
So if rates keep going up in Texas and California, why do we want to deregulate?

Over a reasonable period of time--and that's probably five years or more--you'll ... have lower prices under deregulation than you will through regulation. ... In virtually every industry with deregulation, we've seen 20 percent to 40 percent cost reductions. ... Those economies, or those savings, are coming back to provide for [a] much stronger economy, stronger job creation, productivity, and all the other things that go with that. ...

Loretta Lynch

President of the California Public Utilities Commission (CPUC)

read more
The problem here is ideology. It was a free market ideology that enabled--or required--the state to step back, because the market would provide. But in this market, you don't need to be an economic Ph.D. to know that when you've got a fundamental economic necessity that has high capital barriers to entering into the market ... and you have a long lead time, meaning you can't just build a power plant tomorrow, ... then you have the classic economic theory for boom-and-bust pricing. And when you have boom-and-bust pricing with a fundamental economic necessity, the people who suffer are the buyers. That's why, since the 1930s or the 1920s, we have always regulated the price of electricity. ...

If you can show me how it's been done in other places successfully to protect consumers and not just the market participants, and if you can show me that there's been additional supply online that is environmentally friendly instead of a whole bunch of [Edison] smokestacks, well, then I would be interested in seeing that model.

But so far, what I've seen is folks who start designing a yellow brick road to an Oz that doesn't exist in the United States. So far what I've seen are folks who have a financial interest in getting us to go down that yellow brick road--pushing it enough to start down the path--but they can't show me that what's at the end of that road is actually good for consumers or for California. ...

David Freeman

Energy advisor to California Governor Gray Davis

read more
Something like electricity, that cannot be stored and is the oxygen of modern civilization, cannot be allowed to fluctuate up and down in price and in reliability and availability under a free market. We've had a vivid demonstration that it is inherently a dumb idea if you don't combine it with a public power presence to make sure that there's always a surplus. ...

The economists have a religious belief that there's no market price that could be bad, and there's nothing that's regulated that could be good. But look at this industry. We grew from nothing to having the best power system in the world, and at the lowest prices under regulation. And what's happened under deregulation? We've got the whole state of California ignoring their education problems, ignoring everything and focusing entirely on fixing something that wasn't broke. If that's not a vivid example of the fact that we shouldn't be doing it, I don't know what is. ...

[Has] this country lived through a disastrous electric power era, from 1960 until 2000? Of course not. The electric power industry was one of our success stories. The prices actually went down, in real terms, over that period. The system expanded. ...

Jeff Skilling

Chief executive officer of Enron Corporation

photo of jeff skilling
read more
I know that consumers will do better in a deregulated market. There will be more price volatility in a deregulated market, because you have to send price signals. You have to tell people to build more power plants or reduce consumption. But over the long term, it will be much less expensive for a consumer if they're in an open competitive market than if they're in a regulated market, and we've proved that. ...

If you're asking me which way I'd rather have--would I rather have a guarantee of being fleeced? That is the system we had in place all over this country three or four years ago. Or you give me an open competitive market--where I know people like Enron and people like Southern California Edison and people like Con Ed in New York are battling each other for market share and for profitability--I guarantee you that I am better served and better protected by that open competitive market than by having a regulator watching over the system. We've proven it. ...

In every place that there has been an attempt, whether you agree with the way it happened or not, at deregulation--California, New England, Pennsylvania, United Kingdom--there's been market abuse. The market's gone through the ceiling. ...

No, that's absolutely not true. If you look at the prices in the U.K. since they opened the market, the prices are probably down 40 percent. In Germany, they opened the market; prices are down 60 percent. In Scandinavia; probably down 40 percent. They were better market structures than we have in place. So, no, I don't buy the premise. ...

There's a lot of feeling that it was a bad experiment and, as David Freeman of L.A. Water and Power said, "Look around the country. Wherever there's public power, the lights haven't gone out."

Yes, and what are the customers paying for public power? There are enormous subsidies to public power in the form of tax preferences. If you adjust for tax preferences in public power and you look at prices--delivered prices to consumers for public power against an open competitive marketplace--I guarantee you the open competitive marketplace will be cheaper. ...

Ron Rattey

Senior staff economist at the Federal Energy Regulatory Commission (FERC)

read more
Jeff Skilling, the CEO of Enron, says that wherever deregulation has come in, prices have gone down.

It hasn't been the case so far, not in the U.S. Generally, prices have been higher in most of the regions where we have these independent systems operating ... and where the price of electricity generally within those regions is being set by auctions. Probably, during parts of the year, those prices are lower now than they were in the past. But during peak seasons, in the summertime, those prices have skyrocketed in just about all the [independent system operators]. ...

Frank Wolak

Professor of economics at Stanford University, and chairman of the Market Surveillance Committee of the California Independent System Operator (ISO)

photo of frank wolak
read more
Where in the U.S. has deregulation been good for consumers?

I think it hasn't been that good for consumers in the United States, but I don't attribute it to the fact that deregulation can't work. I attribute it to the fact that we don't have regulators that know how to manage the transition from competition to deregulation. ...

Is there anywhere in the United States where this process of deregulating what had been a regulated and controlled market resulted in lower prices for consumers, other than this two-year period in California?

Unfortunately, we really don't know yet. ... Much of the problem is not really, as I say, the fault of deregulation. It's the fault of the fact that we won't let the sort of things that are going to make the market work well actually work. ...

Is the open market for electricity inherently more efficient than
regulation?

Severin Borenstein

Director of the University of California Energy Institute and a professor of business at the Haas School of Business at California-Berkeley

read more
The regulated environment, for the most part, worked. But it worked in a very inefficient way in terms of the amount of capacity we built, and it worked in a way that gave us much higher prices than many people thought, and still think, were really necessary. So the regulated environment, while stable, was probably not as efficient as it could be. The goal was to get a more efficient industry through market forces. ...

Once you have a certain number of power plants on the ground, running them in an integrated fashion is more easily and effectively done in a single utility. The savings that potentially come about in a deregulated market are in the investment in new power plants--getting efficient investments, and avoiding the costs when bad decisions are made.

So, for instance, if Diablo Canyon Nuclear Power Plant had been built in a deregulated setting, it still probably would have cost way too much money, but the shareholders would have paid for that, not the ratepayers. So the savings for deregulation ... were never going to come about through suddenly being able to run that set of plants more efficiently. The savings would take place over a longer period of time, and would take place by having more efficient investments.

The other potential savings from deregulation is through better pricing of electricity. This could also happen under regulation, but it never has. The reality is that the cost of producing electricity changes hour to hour, and our electricity rates don't reflect that. We have no more incentive to save on a hot summer afternoon than in the middle of the night. That's just a dumb way to price electricity at the retail level, while we could change that through real time pricing of electricity. ...

Pat Wood

FERC Commissioner

read more
A market regulator will never be able to say, "We're going to shut that plant down." Because no regulator is going to look the men and women in the eye and say, "We're going to kick you out of a job." We just don't do that well; it doesn't work. But a market does that relentlessly well, saying that this power plant is more efficient that that one. And "efficient," during today's time and age, means clean. It's clean and efficient running together. Because quite frankly, if you're not clean, you've got to spend a lot of money to clean it up, and that just makes it less efficient. ...

Jeff Skilling

Chief executive officer of Enron Corporation

read more
We had a regulated system in North America for a long time that was delivering electricity to consumers at twice what it was worth. We had a cost structure that was ludicrous. You go around the world and look at other regulated structures. There are blackouts in most of the world, consistent blackouts. Where real markets are operating, there's rarely ever a supply shock. ...

home - california - my bill - new business - regulation - the future - new york times reports
video - interviews - glossary - discussion - synopsis - press - tapes & transcripts - credits
FRONTLINE - wgbh - pbs online

power lines photo ©2001 entropy media/images
web site copyright 1995-2014 WGBH educational foundation

SUPPORT PROVIDED BY

NEXT ON FRONTLINE

Losing IraqJuly 29th

FRONTLINE on

ShopPBS