Deregulation needs fine-tuning

Energy deregulation was supposed to save consumers money. But deregulation of electricity and gas has run into one snag after another across the country, with California's recent power shortages, rolling blackouts and skyrocketing bills being just the worst of it.

That's why it is imperative that we reconsider our experiment with deregulation and move to ensure that consumers are not left to the whims of an electric marketplace that sees profit for its only reason for being.

Simply, energy is a lifeline service, a necessity that if taken away can leave one in a life-threatening situation. No heat, no stove to cook on, no hot water, no lights.

The provision of electricity was deemed so important, in fact, that for the last century state governments across the country set the rates electric and gas companies could charge, guaranteeing that the utility firms who generated the power could cover their investments and make a profit.

But beginning in the early 1990s, this bargain came under fire. Critics said the limited-monopoly setup also limited innovation. The major utilities, because they earned a guaranteed profit, had no incentive to trim costs or to explore new technologies.

So lawmakers decided to break up the industry by divorcing the provision of power from its generation and opening the generation side of the industry to competition. Energy consumers would be free to shop for the cheapest power supplier available. Prices would fall and everyone would be happy.

The problem is that states like California did not account for the other side of the equation. Competition can spur a drop in prices, but growing demand tends to drive prices up -- which is what has happened in California and may happen elsewhere as other states move out of their transition periods -- during which most set price caps -- and into the fully opened markets.

In California, that meant an immediate 10% rate cut for the 27 million people served by the state's three biggest utilities and a freeze on rates until 2002, or until the utilities paid off their past investments in nuclear and green energy.

To do so, the state allowed the power companies to sell off their power plants and to float $7 billion in bonds that would be paid for by consumers as a charge on their bills. At the same time, the state did not require the utilities to maintain any backup supplies, assuming the market would take care of any demand.

And when demand spiked, the state was left exposed.

As the Los Angeles Times pointed out in a December investigation, San Diego Gas & Electric was able to pay off its $2 million debt by dumping its power plants and price caps were lifted for 3 million SDG&E customers. The market was open for business -- just in time for the growing economy and a savage heat wave increased demand for power sending rates through the roof and forcing the utility to shut its grid down.

The remaining 24 million consumers served by the other two utilities -- Pacific Gas & Electric and Southern California Edison -- were still covered by the price caps. But, as the Times notes, demand was driving the wholesale price of power upward and the two firms found themselves paying more for power than they were allowed to charge their customers. Both demanded relief, threatening bankruptcy if nothing were done, and the state stepped in granting rate hikes.

Not every state is likely to face the severe disruptions that have plagued California. On the East Coast, for instance, states required that utilities maintain healthy backup supplies to ensure they can meet the region's power demands. California didn't, and now its citizens are paying the consequences.

As Michael Shames of the Utility Consumers Action Network said on a recent ABC Nightline, California may be "the ghost of Christmas future."

"What happened here is we ran out of power, so to speak," he said. "Our market got squeezed. When that happens in your jurisdiction, as it has happened in New York, as it has happened in the Midwest, you will find the same kind of market failures and problems that you saw in California. So I urge you and other states not to sit smugly because, sooner or later, when your system gets tested, you will have dire consequences."

New Jersey is a prime example of the problems with the energy market. Its deregulation plan, approved by the state Legislature in 1997, did several things: It mandated cuts in electric rates, offered consumers a shopping credit if they chose to seek a cheaper energy supplier, created a universal service fund to guarantee electric and gas service at affordable prices and opened the way for towns and other groups to band together to buy energy -- though doing so has been complicated by a state ruling limiting towns' access to utility-firm customer lists.

Staci Berger, energy organizer for N.J. Citizen Action, is telling New Jersey residents to brace themselves for rate hikes in 2003, when the transition phase of the state's restructuring plan will come to an end. So far, Berger says, energy consumers have been lucky. They've received automatic decreases that have, in most cases, made it economically unnecessary to test the marketplace. Beginning in August 2003, however, the automatic reductions will disappear and the energy companies will be free to set their rates, using only the market as a guide.

The state Board of Public Utilities and other deregulation advocates say that the competition will keep rates lower, but there is no way of knowing if this will happen. After all, that's the line that was being spouted in California.

Joel Shain, township attorney for the New Jersey town of Monroe, has been working to force changes in state legislation to make it easier for towns to create their own energy-buying pools. He told the Cranbury Press (the local paper I edit) in January that once the price ceiling is lifted, New Jersey residents are in for a rude awakening.

"New Jersey residents may find themselves dealing with a price increase driven by the elimination of price freezes and escalating energy costs," he said.

We need to rethink our commitment to an unregulated energy market. As Citizen Action's Berger points out, "providing a lifeline service through the market" is doomed to failure, leaving far too many people at the whims of industry.

While we may not be talking about blackouts and power failures, we should not kid ourselves. Rate hikes -- and maybe worse -- are coming. And the poorest of us could, quite literally, be left out in the cold.

Hank Kalet is managing editor of the South Brunswick Post and the Cranbury Press in central New Jersey. He can be reached via e-mail at

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