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deregulating the power industry
A primer on the ideology behind deregulation and an overview of the arguments of opponents who say that some commodities are too precious to be left to the open market.
Competition drives down prices. You know this instinctively when you shop around for the best deal on a mattress, a cup of coffee, or a car. But should an open market determine the price of a vital commodity like electricity? That is the central issue behind deregulation. California turned toward the open market when in 1996 it was the first state to introduce competitive measures to the electricity market. The California Public Utilities Commission (CPUC) lifted caps on wholesale electricity prices, allowing rates to float on the free market subject to supply and demand. However, retail consumer rates were still subject to price caps. In addition to changing pricing policy, the public utilities were also encouraged to sell off their generating plants to private companies. These sales created more suppliers of power and thus more competition. For a few years, the price of energy did fall, before spiraling to its highest price ever. As a result, the ideology behind deregulation has come under renewed attack, and the debate is shaping other electricity deregulation schemes nationwide.

Regulations exist ostensibly to protect consumers, and play a special role in industries where there are only one or two competing companies. Until deregulation in California, this situation described California's energy market -- three utilities provided electricity to three distinct regions. The fear is that so-called monopoly industries will abuse their market power and gouge customers who have little choice but to pay the high prices. In other words, the government acts to balance the market power of monopolies or near monopolies in crucial industries such as electricity, natural gas, telecommunications, and airlines. In the case of electricity, for example, the Federal Energy Regulatory Commission (FERC) has a duty to ensure that wholesale electricity prices are "just and reasonable."

Deregulation is simply a removal of these regulations. To a free-market advocate, price caps, for example, are a restriction on the laws of supply and demand, which when left alone, they say, provide the best value to consumers. Leave the markets alone, say deregulation proponents, and the competition among companies in the pursuit of profit leads to more innovations, more efficient operations, and the lowest prices no matter what the product.

Deregulation opponents say that some commodities are too precious to leave to the market. Under a pure market economy, they say, the poor will often suffer since companies will not find it profitable enough to serve them. They don't dismiss the benefits of competitive markets, but they say that some level of government oversight is necessary to provide universal access to things such as phone lines or electricity.

The debate is as old as Adam Smith's theory of the "invisible hand" determining optimal market prices. But in the last 30 years, the debate in the U.S. has taken on a practical edge. Since the early 1970s, natural gas, telecommunications, and airlines have all been deregulated to one extent or another. All faced the same ideological arguments.

Twenty years after the 1978 deregulation of the airline industry, for example, conservative think tanks like The Heritage Foundation called for further deregulation, saying that the rules in place were still prohibitive. Meanwhile, new, short-haul airlines were calling for "re-regulation," complaining that large airlines were squeezing them unfairly out of the market.

The debate over California's electricity deregulation is similar. Proponents such as Enron CEO Jeff Skilling and Chairman Ken Lay say that California's "deregulation" has merely substituted one set of regulations for another, and that these have actually made it harder for energy companies to do business in the state. They point to the natural gas market as an example of successful deregulation. David Freeman, energy adviser to California Governor Gray Davis, says that is just sour grapes. He says the regulated market is reliable, provides cheap energy, and is humane. He says that faith in the market is blind, and cites the current energy debacle as proof that deregulation doesn't work.

The truth is that deregulation is a transition, a long painful one as California's experience in the electricity market so clearly demonstrates, rather than a state of being. Natural gas took 15 years before it could be called fully deregulated. And after more than 20 years, the debate still continues over airline deregulation. California seems to have gotten in trouble by trying to protect the capital investments of the utilities during the transition, and by placing caps on the price consumers pay but not on wholesale electricity prices. Proponents say to give it five years to work itself out, while opponents say that consumers don't have that kind of time. Whether this gap can be closed will likely determine how deregulation proceeds in California and elsewhere.

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