HEAT WAVE

I was going to spend some time today writing about the heat wave in the West, and how the California electricity network and “market” are responding to this first big stress in a very long time. Then I read Charles Oliver’s outstanding editorial from yesterday on EnterpriseEconomy.com (link courtesy of Instapundit, thanks Glenn), and now I have some free time to think about other things! Charles’ editorial reminds us that much of the ongoing sturm-und-drang in California’s energy environment is the consequence of bad, highly politicized rules and policy decisions.

But it’s important to remember that this activity [alleged generator manipulation of markets] didn’t take place in a free market but in a highly regulated artificial market. State regulators designed that “market,” set the rules and ran the exchange. They forced utilities to divest their own generating plants, and they kept the utilities from making long-term contracts. And they prevented new construction of power plants. The government set in place all of the conditions that led to a crisis.

California’s energy crisis has given energy deregulation a black eye. But two dozen other states have also deregulated their power markets, and they haven’t had the problems California has…

Other states didn’t force utilities into state-run power exchanges. Instead, they left them free to buy power from whomever they wanted. That created competition and increased supplies and helped keep prices down. Pennsylvania started its deregulation program shortly after California “deregulated” its market. Pennsylvania has some 200 wholesale sellers of electricity. California had just 20.

Finally, other states generally did a better job than California at adding new generating capacity. They didn’t wait for a crisis to start building new plants. They anticipated growing demand for new power. Texas alone has built 22 power plants since 1996 and has 15 more in the pipeline.

In short, these states gave more than lip service to deregulation. They actually cut red tape.

California officials want to blame the state’s power woes on deregulation instead of their own misguided rules and regulations. It would be a shame if they were allowed to discredit a policy that has worked successfully elsewhere, a policy that they never really tried.

For those who still want to revisit the causes of last year’s massive energy policy failure in California, here’s the study that my colleague Adrian Moore and I did in January 2001 (one of the first thorough analyses of the situation, by the way), and here’s the version of my study of other states and countries that the Texas Public Utility Commission republished in their consumer education efforts accompanying their deregulation.

The punch line: no U.S. state has really, truly deregulated the electricity industry. Even Texas and Pennsylvania, the jewels in the electricity restructuring crown, have retained retail price caps and other regulatory hangovers as part of the political bargain to get restructuring legislation passed (from the “half a loaf is better than none” school of political compromise). That said, though, they have done a far sight better at delivering efficiency gains and choice than could ever have been possible in the California regulatory environment. And they are continuing to push the envelope and apply an entrepreneurial, dynamic, open-minded perspective on the ability of competitive electricity markets to provide value and choices to consumers safely and reliably.