Deregulation Fiasco, Red Flag for Developing Countries

Category: World Affairs Topics: Business, California Views: 981

Guided by the World Bank and other development agencies, countries throughout Asia and Africa are deregulating and restructuring their electric power sector, even as this prescription is causing havoc in California--the world's sixth-largest economy.

Federal regulators in the United States say that California's experiment in electricity deregulation has failed. "This version of competition was a disaster," said Federal Energy Regulatory Commission Chairman James Hoecker--head of the U.S. government agency which regulates wholesale power distribution--this past December.

High electricity costs and lack of supply have idled factories and businesses from California to the Pacific Northwest. "Businesses are being forced to choose between paying exorbitant power bills or closing their doors," reports Reuters.

Southern California Edison told state officials it might begin to ration electricity to its customers because it has no money to buy more, reported the Washington Post.

The deregulation of California's electricity market--which along with Norway, and the United Kingdom models, are recommended by the World Bank and others to developing countries--was supposed to bring cheaper electricity to the state. Instead, with wholesale electric rates 10 to a 100 times higher than a year ago, California's largest utilities face losses of over $8 billion. To avoid bankrupting the utilities, the state Public Utilities Commission in San Francisco approved emergency rate increases of between 7 and 15 percent.

Amidst fears that California utilities would be unable to pay market prices, U.S. Energy Secretary, Bill Richardson, signed an extraordinary, emergency order that would force out-of-state power producers to supply electricity to California.

California's big three utilities--Southern California Edison, Pacific Gas & Electric and San Diego Gas and Electric--serve about 27 million customers, buy their electricity through the Power Exchange from different public and private producers, such as Houston-based Enron Corporation, which critics charge are manipulating the electricty market.

Enron denies the charge, saying it is merely a matter of supply and demand.

Five investigations into possible market manipulation by electric supply companies are underway, and consumer groups are planning ballot intiatives to reverse deregulation by putting the state in charge of the power system or reregulating entirely, reports the Washington Post.

In 1996, the electricity market in California was deregulated in the hopes that market forces and competition would lead to cheaper prices. Consumers were promised that rates would remain frozen until 2002.

But instead, the "free market" has wreaked havoc. No new major power stations have been built while a booming, high-tech economy has increased electricity demand. Since the summer of 2000, the state has experienced frequent energy emergencies that required businesses to limit electricity use.

Patricia Irwin, a professional engineer and editor in chief of Electrical World magazine, in a full-page display in the Washington Post, December 31, 2000, (apparently designed to calm growing apprehension with deregulation) states that California's electric power shortages are due "first" to the fact that "Utilities there had built almost no new generating plants and very little in the way of transmission capacity for a decade."

True, but Ms Irwin's statement, while explaining the cause of California's electricity shortages, may point to a fatal flaw in California's "deregulated" electric power industry. In a free market, producers have a greater incentive to build in anticipation of supply shortages, rather than when supply surpluses are anticipated. This was not the case in California.

Until the rush to deregulation, the United States enjoyed very high reliability of supply. That is changing under the new system. In mid-December last year, the California Independent System Operator warned that the state would experience rolling blackouts.

And "deregulation" itself is a misnomer. The new system is still regulated, but in ways that provide electricity supply companies greater opportunity for profits, where previously, these companies were limited to recovering only their legitimate costs.

Energy Insight Today newsletter projects that Duke Energy's revenues for the Moss Landing power plant--owned by Pacific Gas and Electric prior to deregulation--will be $238 million for 2000, compared with $49 million for 1999.

As for state Sen. Steve Peace, who took the lead in shaping California's effort to deregulate the electricity industry, experts say his political career is all but over. "He couldn't be elected dogcatcher," said political consultant Ann Shanahan-Walsh.

During the next five years, electric power companies in the Middle East are expected to add 92 gigawatts of new electric power generation at a cost of around $60 billion. Countries such as China, India, and Indonesia are also adding large amounts of new capacity. Unable to pay for this new capacity, many of these countries have sought World Bank and other loans, which come with requirements for deregulating electricity markets, and restructuring the electric power sector.

In many developing countries, the electric sector consumes one-half to three-quarters of the non-defense budget.

"California's deregulation fiasco should serve as a red flag for developing countries," says Enver Masud. Mr. Masud managed the National Power Grid Study, and National Electric Reliability Study, while employed at the U.S. Department of Energy.


Copyright 2001 The Wisdom Fund - This article appears in the current issue of Impact International. You can visit their website at

  Category: World Affairs
  Topics: Business, California
Views: 981

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