A lesson in deregulation from California

At the height of the California energy crisis, many in Washington, D.C., including the then-newly elected President George W. Bush, blamed California’s environmental standards for higher electricity prices and electric power disruptions that eventually cost the state and its consumers up to $45 billion.

Last week, the Federal Energy Regulatory Commission – an independent regulatory agency within the Department of Energy whose members were appointed by Bush – reached an opposite conclusion. The “crisis” was in fact the work of six companies exploiting a dysfunctional, deregulated energy market. In the process, they reaped extraordinary profits and severely crippled California’s economy. As the United States rushes to privatize many government services, it would do well to heed the experience of California last year.

According to the regulatory commission, Enron and five other energy trading companies used illegal antigaming procedures within the deregulated California energy market to artificially boost the spot price of natural gas. Given much of the energy in California is produced using natural gas, utilities were forced to pass higher natural gas prices on to customers. “Poorly designed market rules” allowed energy trading companies to engage in extreme price gouging, the report said.

The deregulation of the California energy market was supposed to be a boon to energy consumers in California. Economists have shown deregulated markets can save consumers money and reduce market inefficiencies. However, repeated attempts to implement clean theory has been difficult; the reality of political compromise, unsophisticated politicians and a political process manipulated by private companies has led to the implementation of flawed deregulated markets.

The lesson to be learned here is simple: As a country we should not rush head-long into the deregulation of markets that provide essential goods like energy, health care and social security. This is not to argue that deregulating certain markets is a bad idea; however, the California energy crisis does suggest market deregulation should proceed slowly, carefully and after much constructive debate.