A CLEAR MESSAGE ABOUT CALIFORNIA'S ELECTRICITY CRISIS

Politics and blame-dodging obscure lessons that should be clear about California's electricity crisis.

Politics and blame-dodging obscure lessons that should be clear about California's electricity crisis.

An unfortunate result of the confusion is wariness in other states about restructuring of electricity markets. Already, several states have reversed course on electricity restructuring or delayed programs in this area.

Movement has stalled, therefore, toward a nationwide free market for electricity, linked by trading with markets for natural gas and other power-generation fuels.

This setback in a development that had been very promising for the energy industry and its customers is all the more regrettable because it represents political reaction against something that never existed: electricity deregulation in California.

The observation is very important to future political decisions at state and national levels. But it is getting lost in California's political hysteria.

The state's politicians naturally don't welcome suggestions that poor regulation or policy mistakes had anything to do with their energy dilemma. Gov. Gray Davis is blaming everybody he can outside his state: power generators, federal regulators, Republicans, Texans-the list goes on.

And, of course, criticism of what California portrayed as a deregulation program gets swept aside as partisanship.

Clear words on the subject from the Federal Reserve Bank of Dallas are therefore useful and timely.

Writing in the May/June issue of the Dallas Fed's newsletter Southwest Economy, Stephen Brown, director of economics, says, "California has not created a transition to a free electricity market, and its restructuring should not be considered deregulation."

Brown assesses California's restructuring against what he describes as five restructuring fundamentals typically envisioned by policy analysts:

1. "Electricity generation is opened to competition with free entry of new power plants and private contracts." While California opened its generation markets to competition, it didn't permit free entry of new power plants.

2. "Transmission and distribution remain in the hands of the utilities and under regulatory control because they are viewed as natural monopolies." California accordingly retained regulation of transmission and distribution but put a public agency in control of some transmission lines.

3. "Marketing to consumers is opened to competition." California didn't open marketing and sales to competition.

4. "Electricity prices are free to move." California froze retail electricity prices.

5. "A range of market instruments, including long-term contracts, spot sales, and market-making activities, is allowed and encouraged." California banned long-term market instruments and required power transactions to occur through a daily spot market operated by a public agency, thus discouraging market-making activities.

States bothered by California's failed experiment with a faulty approach to electricity restructuring need to hear Brown's message. The problem isn't restructuring. The problem is how California went about it after discouraging, for decades, the work essential to development of energy supply.

Of course, in California, they'll disavow the message because it originated in Texas.

More in Editor's Perspective