California’s Deregulation Debacle

The California power crisis has made it clear to all but the most theory-besotted ideologues that “trusting the market” does not automatically solve economic problems. This comes as news to few readers of Dissent, but what went wrong is worth a closer look. How something works is often easier to see when it breaks down than when it’s running smoothly.

Before deregulation, electricity was produced and sold by local utility monopolies. To stop the utilities from gouging the consumer, prices were set by government agencies at levels that allowed them to recover their costs and earn a profit on invested capital. Politics, to be sure, intervened when this general formula was applied, and utilities deployed their considerable political influence in a quest for higher earnings.

As licensed monopolies, the utility companies were held responsible for generating enough electricity to meet all demand. Power plants and transmission lines take years to build, so planners had to look far into the future. The companies were happy to take on this job, because more investment meant greater profits. To the extent government oversaw the planning process at all, the regulators’ task was more to prevent overspending on unneeded equipment than to ensure adequate supply.

This system ran into problems in the 1970s. Projecting rapidly growing electricity use into the indefinite future, and facing skyrocketing costs for the oil that fueled many older generators, the utilities embarked on a vast program of investment in nuclear and coal-burning power plants. But in many parts of the country, these plants were hard to build. They were so large that the needed land, water, and transportation could only be brought together in a few places. Nuclear power came under attack, new air pollution rules made coal harder to burn, and NIMBY (not-in-my-backyard) opposition sprang up in many localities. Where these constraints were most severe, the problem of power plant siting was turned over to new government commissions.

Fate intervened before the new siting agencies had to make hard decisions about whether to approve controversial plants in the face of local opposition. Electricity demand fell far short of predictions, while the price of oil dropped from its peaks. Some utilities faced financial crisis when revenues fell short and new nuclear plants cost far more than projected.

By the 1990s, the electric power industry had been coasting for years on the slack created by the overbuilding of the seventies. In sunbelt states, where demand had grown fastest, business had free rein, and it was still possible to build coal-fired power plants. Elsewhere, it was possible to get by with inexpensive and inoffensive natural gas turbines that operated only at times of greatest demand. Rapidly growing California was a special case; it relied on electricity imported from neighboring states where power plants were easier to build.

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