Darkness in California: The Political Obstacles to Genuine Deregulation

by Richard E. Wagner

There are many wonderful things about California. This is why so many people choose to live there. The stories coming out of California these days, however, are not about wonderful things. Nor are they about smog or earthquakes, or even about traffic jams and high taxes. They are about electricity, particularly the lack of it. Electricity in California has become scarce and unreliable. Brownouts and even rolling blackouts have occurred. Traffic signals have stopped working and busy intersections have become snarled. Elevators have stopped between floors, leaving their passengers stranded until the power returns.

Deregulation was not supposed to make electricity scarce and unreliable. It was suppose to make it plentiful and secure, much as it has worked for long-distance telephone service. Only it hasn’t, an now a number of political figures in California are talking about the need for yet more regulation, and perhaps even an outright state takeover of electric companies. In a dramatic gesture to evoke support for yet more regulation, this past Christmas season California’s Governor Gray Davis pulled the plug on the lights of California’s official Christmas tree.

There is widespread recognition that deregulation is a good thing. It has worked well in all cases where it has been tried. To be sure, this does not mean that everyone is pleased with all of the outcomes. Airline fares are much lower than they were before deregulation, but planes are also much more crowded. For people who travel at their own expense, deregulation has surely been a good deal. After all, if they do not like the crowds that accompany the lower prices, they can always choose to fly first class.

The situation is different, of course, for people who fly at someone else’s expense. They may well prefer the more spacious conditions that prevailed before deregulation. The general point here is that while most people will generally gain from deregulation, some might not. The political difficulty for deregulation arises when those who prefer continued regulation carry significant political influence. Such influence can in turn lead to failures of deregulation, and even to extensions of regulation.

Deregulation creates an situation much like an all comers’ track meet where anyone can enter the competition simply by paying the entry fee. This is how it has worked for air transportation and long-distance phone service. In sharp contrast, regulation creates a kind of invitation-only competition, where you must be approved by a regulatory agency before you can enter the competition. This is how it works for electric power in California, as well as in much of the rest of the nation.

You cannot build a new power plant in California without being granted a permit to do so. These days you have no chance of being granted a permit unless you generate electricity by using natural gas, and even this gives you no guarantee, as many applicants have found.

Some people commend this kind of regulation on environmental grounds, though coal is much cleaner than it used to be and the danger of nuclear power has been grossly exaggerated. Regardless of such issues, this very regulation of types of power plants undermines any effort at genuine deregulation.

Consider the simple fact that gas-generated electricity is more costly than other forms of electricity. Why would investors choose to build new gas-fired power plants when other types of plants can generate electricity more cheaply? The answer, of course, is that they will do so only if regulation prohibits construction of those cheaper sources of power. The value of investments made in gas-fired power plants is maintained by a regulatory umbrella that protects those investments from competition from lower-cost forms of electricity. Regulation both creates and is supported by what might otherwise seem to be an unholy alliance between commercial investors and radical environmentalists. Whatever differences these two groups might have in other respects, they are united in their support for regulatory control over the construction of new power plants.

But this is not all that these two groups agree upon. They must also support the continued regulation of consumer prices, and for this reason they must oppose genuine deregulation. A regulation on new construction that protects the value of gas-fired investments will have little effect if electric retailers can buy power from lower-cost producers outside of the state. If power companies could compete on prices, as they could under genuine deregulation, less electricity would be generated within California and more of it would be transmitted into California. The in-state ban on coal and nuclear plants would be bypassed through transmission of power from outside California. For this reason, a regulatory limit on the construction of new power plants requires the continued regulation of consumer prices as well.