And send California back in time, just as the happy modern primitives who abhor dynamic change want. California Senate Bill 888, about which I posted back in April. This bill has been approved by a Senate panel.
The 1996 deregulation law [AB1890] was intended to foster competition to drive down electricity prices. Instead, wholesale electricity prices rose sharply in 2000, driving three utilities to the brink of bankruptcy when they couldn’t pass on higher costs to customers.
Dunn’s bill would phase out retail competition and let California regulators again set profit margins for utilities.
First, this article’s headline, and the legislation, claims that this bill is about rolling back deregulation and retail competition. Neither of those concepts even come close to describing the morass of regulation that AB1890 represented. It was not deregulation. And while AB1890 did have provisions for retail competition, they were so ludicrous and uncompetitive that the utilities couldn’t survive while abiding by them! Why, you ask? AB1890 allowed the California PUC to retain the retail price caps, so that customers would see stable rates (and in fact, the legislation mandated a discount from 1996 rates and capped them). You call that deregulation? Not in any understanding of the word that I accept.
At the same time, new suppliers couldn’t make money serving the California retail market either, because AB1890 said that the utilities were allowed to charge their retail customers an energy price as low as the wholesale price, which left no margin room against which entrants could compete (i.e., no headroom). In essence, this provision reflected the policymakers’ beliefs that retail service has no value added beyond the value of the energy that gets sold to the customer (or the utilities did a great job of lobbying to remove the real possibility of competition). No wonder that competing suppliers didn’t do a Gold Rush stampede into the California market.
Furthermore, in October 2001 the California PUC abolished the one remaining shred of retail competition in California — direct retail access. Some direct access customers (typically large industrial customers) were grandfathered into their existing direct access contracts, and the proposed re-regulation bill will nullify those contracts and force customers and energy companies who have entered into a mutually beneficial exchange back into regulated utility service.
Second, this article and many others, such as this Desert Sun article and this LA Daily News article, fail to make the crucial distinction between the wholesale market and the retail market. AB1890 was much more about freeing up restrictions on trade in wholesale electricity markets, although it did a pathetic job of that, requiring buyers and sellers to use the government-created faux market that was the Power Exchange, mandating that they engage only in day-ahead and day-of trades, and maintaining the retail rate caps that stifled the transmission of accurate price signals from the retail market into the wholesale market.
How can anyone call this deregulation? It wasn’t, and stop calling it such. Continuing to call California’s restructuring “deregulation” does nothing except play into the hands of policymakers who think that central planning and control is necessary for the existence of electricity service, notwithstanding the mountains of international evidence to the contrary. To borrow Virginia Postrel’s taxonomy, this plays into the hands of stasists who do not acknowledge the benefits possible through dynamic change.
That said, though, Dunn’s proposed bill would lead to an even more stagnant and backward-looking electricity industry in California. Its return to cost allocation as the basis for pricing and for utility profits will provide stability and certainty in the short run, and a lack of innovation and investment from outside of the utilities in the longer run. If other states have regulations that support electricity entrepreneurs finding and redefining the value propositions that they can bring to consumers, then business will choose to locate elsewhere, not in California. Some will even leave California. That will make the job of the utilities easier, because they’ll have fewer customers to serve. But wait, in a cost-based regulated environment with regulated rates, hasn’t it always been the case that the way you make higher profits as a utility is to serve more load? Hmmmm. But if costs are the basis of the rates that the PUC allows, and businesses leave the state (thereby decreasing industrial and residential demand, and probably commercial too), won’t that mean spreading those costs (which have already been incurred, because of the timeframe in this capital-intensive industry) over fewer ratepayers? So … regulation will mean a decrease in demand would lead to higher rates!
That is the illogic of a regulated system. It’s absurd, it’s uneconomic, it’s inefficient. And it’s California’s future if they return to cost-based regulation of wholesale and retail supply.