Off Peak

February 15, 2001

Deregulation 101

 

California high school students put their education to work.

Jan. 11, 2001

Dear Secretary of Energy Richardson:

As students, we are taught the fundamental theories of economics, but are often warned of their limitations. Indeed, theories are exactly what their names suggest, and work only in a theoretical world. Real-world events are often much more complex and much more unpredictable.

That, however, is exactly why, when we examined the energy crisis in the state of California, we were appalled to find the issue clearly and completely explained by pure economic theories. We wondered how such fundamental and obvious theories could be overlooked by the state legislature, the governor, the Public Utility Commission, the Federal Energy Regulatory Commission and all other parties involved. ...

The idea was for generators to compete against each other to sell power to the utilities in the Power Exchange Market, thus driving the price down. However, as demand far exceeds supply, it is the utilities that are competing to wholesale power—thus driving the price up instead. ...

The initial steps taken by FERC are disappointing at best, insulting at worst. As the most logical organization to control the beast that is deregulation, the FERC merely places a soft price cap on wholesale prices of electricity in the Power Exchange Market, thus allowing higher-than-regulated prices if they are justified. But what greedy generator will not be able to find a reason to justify a need for higher prices, especially with the input cost price of natural gas soaring? ...

Gov. Davis also must be more decisive. He should not have allowed deregulation to go on for so long without any intervention, and for that he is partially blamed. However, his State of the State address on Jan. 8 was encouraging and shows a politician ready to be tough against the generators. É Gov. Davis must now stand by his tough words. ...

We recommend the following:

1. The FERC should set hard-line, absolute price controls or price cap in the Power Exchange Market, instead of the current soft price cap. ...

2. California should set a quota that requires generation to sell a certain amount of electricity to California so that the generators will not take their business elsewhere in favor of better prices.

3. The state should buy the power plants back from the generators and sell them back to the utilities or operate them itself.

4. The Justice Department should look into possible illegal collusion by the generators. ...

5. California should expand its power industry and build more power plants in order to solve the shortage problem in the long run.

Just as there comes a point where theories end and the real world begins, promoters of deregulation must now realize that there is a point where their ideology ends and reality begins. It may be possible for deregulation to work effectively and for the benefit of the people, but we must face the fact that, right here, right now, it does not. It is essential, then, for