The pendulum swings back

Published on

San Jose Mercury News

Energy deregulation sucks,” said John Burton, the state Senate’s top Democrat, summarizing his support for the ”Repeal of Electricity Deregulation Act of 2003.”

Burton’s loathing for California’s restructured electricity market is widely shared. ”Californians want a regulated energy system that can be counted on to provide reliable and affordable electricity,” said Doug Heller of the Foundation for Taxpayer and Consumer Rights.

Return to regulation has powerful momentum. The repeal bill, SB 888, is sponsored by Burton, and Sens. Joe Dunn of Santa Ana and Debra Bowen of Marina del Rey, the Senate’s Democratic experts on electricity.

With so many people disparaging a partially free market, it’s time to recall some of the shortcomings of regulation.

To be sure, regulation will be essential in a re-restructured energy market. And there’s no question the old regulated system would have been better than the ineptly deregulated one Californians endured in 2000 and 2001. But while regulation will prevent price spikes, it is prone to err in other ways, particularly in keeping prices somewhat too high all the time. Consistently high prices were what led California to experiment with deregulation.

Says Severin Borenstein, head of the UC Energy Institute, ”Going back to the old system because deregulation sucks strikes me as not a very careful analysis of what happened.”

The bill, SB 888, aims to restore ”cost of service” rate-making in which a utility has the responsibility to provide power and the right to be reimbursed for its expenses, plus make a profit.

”Cost of service” is an invitation for a utility to pad its costs. The Public Utilities Commission is supposed to ferret out the overcharges and disallow them. It works perfectly in theory; less so in the real world. Let’s look at three reasons why:

Frank Wolak, an energy economist at Stanford, uses this analogy. Energy companies are like teenagers, he says, and under competition they try to get ahead by fooling their peers. But their peers know all the same tricks.

Regulation, on the other hand, is like trying to fool your parents. Wolak thinks parents can be snookered.

Second is the phenomenon called ”regulatory capture.” As regulators work with regulated companies all the time, they come to sympathize with the company point of view.

Finally, looking ahead to California’s electricity needs, regulators’ crystal balls are no better than the market’s collective wisdom. How many power plants will California need 10 years from now? Regulators will be under political pressure to make sure California never runs short. If they require utilities to overbuild, captive customers will have to pay for idle plants.

Regulation would end the kind of market manipulation encapsulated in the infamous Enron memo detailing the ”Death Star” and ”Ricochet” strategies. There wouldn’t be a market. But market manipulation isn’t the only way to finagle more money out of customers. There’s regulator manipulation as well.

The authors of SB 888 have been provided a small, suspicious example of what might happen. One section of SB 888 would establish the following goal: ”Preserve and renew the skilled public utility workforce by ending employee layoffs, providing reasonable wages and working conditions, and ensuring the public utilities have an adequately sized and trained workforce.”

Why not just tell PG&E to provide the most reliable, most affordable electricity service possible? Why specifically make it a public policy goal to end employee layoffs?

To satisfy the union that represents employees of PG&E, is one likely answer.

Returning to regulation doesn’t end the angling for advantage. It’s a different system with different tactics, but the same game.


Phil Yost is chief editorial writer of the Mercury News.

Consumer Watchdog
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