Partial Deregulation - Neither Fish nor Fowl

In response to a student's question about the California brown-outs. The student commented: "The perception I had at the time was that the energy companies were a bunch of criminals, charging whatever price they wanted and the government would do nothing about it."

Great question. I found a website on this topic that looks like a helpful resource. http://www.pbs.org/newshour/bb/infrastructure/power/

My understanding of the California problem is that there was not a real deregulation of the power market, but only partial deregulation. California deregulated wholesale prices, allowing those prices to be determined by the market. However, price controls were still maintained on retail sales (prices that the power companies could charge to customers). To make matters worse, the "deregulation" law mandated a 10% cut in retail prices.

Well even a week into you economics class, I am sure that you understand the effect of mandating a cut in the price. The amount demanded by California consumers increased.

Now consider the situation of the utilities facing this increase in demand. They are legally obligated to purchase sufficient power to cover the demand, but they do not control the price that they must pay to power suppliers. Prices in the power generating market, which were no longer controlled saw an increase in wholesale prices as a result of the increase in demand.

In a free market, an increase in price would cause consumers to restrict their consumption. However, that could not happen in this case because price controls were still in place at the retail level. As mentioned above the situation was even worse because the law reduced retail prices by 10%.

It is no surprise that the California utility companies have had to take on 12 billion dollars in debt to pay for more expensive electricity, which they must sell at cheaper rates. Throw into this mix restrictive environmental laws in California, which makes increasing the supply of electricity and Traders (like those from Enron) who were willing to withhold power from the utilities at peek times to spike prices and force the utilities to pay very high prices to cover peak demand, you can see a real mess in the making.

California's "deregulation" was far from a free market. It was neither fish nor fowl and had no hope of being able to fly.

		August 11, 2005 *Partial Deregulation - Neither Fish nor Fowl*
	In response to a student's question about the California brown-outs. The student commented: "The perception I had at the time was that the energy companies were a bunch of criminals, charging whatever price they wanted and the government would do nothing about it." Great question. I found a website on this topic that looks like a helpful resource. http://www.pbs.org/newshour/bb/infrastructure/power/ My understanding of the California problem is that there was not a real deregulation of the power market, but only partial deregulation. California deregulated wholesale prices, allowing those prices to be determined by the market. However, price controls were still maintained on retail sales (prices that the power companies could charge to customers). To make matters worse, the "deregulation" law mandated a 10% cut in retail prices. Well even a week into you economics class, I am sure that you understand the effect of mandating a cut in the price. The amount demanded by California consumers increased. Now consider the situation of the utilities facing this increase in demand. They are legally obligated to purchase sufficient power to cover the demand, but they do not control the price that they must pay to power suppliers. Prices in the power generating market, which were no longer controlled saw an increase in wholesale prices as a result of the increase in demand. In a free market, an increase in price would cause consumers to restrict their consumption. However, that could not happen in this case because price controls were still in place at the retail level. As mentioned above the situation was even worse because the law reduced retail prices by 10%. It is no surprise that the California utility companies have had to take on 12 billion dollars in debt to pay for more expensive electricity, which they must sell at cheaper rates. Throw into this mix restrictive environmental laws in California, which makes increasing the supply of electricity and Traders (like those from Enron) who were willing to withhold power from the utilities at peek times to spike prices and force the utilities to pay very high prices to cover peak demand, you can see a real mess in the making. California's "deregulation" was far from a free market. It was neither fish nor fowl and had no hope of being able to fly.