The Deregulation That Wasn't

California's energy crisis has been stoked by the excessive revision of rules--in a supposedly deregulated market. A recent survey [1] of public-utility commissioners in the United States showed that nearly 75 percent intended to halt their efforts as a result of the ongoing energy debacle in California. Governments around the world are also rethinking their plans to deregulate. A reasonable reaction, given the severity of California's crisis? Yes, except that California's energy deregulation was anything but. In an Orwellian irony, it actually increased the amount of regulation and enlarged the regulatory complex. Since the passage of legislation that supposedly deregulated California's energy markets in 1996, the crew of regulatory bodies that oversee the state's energy markets and the state legislature have imposed an average of one regulatory change every three weeks. And these were no minor alterations; many involved adjustments to retail and wholesale pricing or to environmental requirements. Each one changed the return that power suppliers could expect on an investment in energy generation facilities. Small wonder that no new power plants have been built in the state in the past decade, even as demand was steadily rising. California's energy markets now actually have more than a dozen regulatory bodies watching over them, including the California Public Utilities Commission, the California Energy Commission (CEC), and numerous Air Quality Management Districts. No single organization is ultimately in charge and held accountable. For example, the CEC, which oversees the permitting process for energy companies that want to build large power plants in California, follows a very basic roadmap, but many smaller state and local authorities have the ability to drag out or block the process. Local officials, all too easily swayed by activist single-interest citizens' groups focusing, for example, on the environment, endangered species, or the quality of life, frequently move to block projects. Yet they do not bear responsibility for the consequences of their actions--in this case, a fundamental shortage of supply. Consider what happened in San Diego last summer. From the time local retail prices started running up--one of the first clear signs of the crisis to come--the utility industry was bombarded by 16 legislative bills, 35 legislative amendments, and a torrent of regulatory changes. The result has been an atmosphere of great uncertainty compounded by the fact that utility commissions cannot bind themselves in the future, so a deal is never really a deal. Another consequence is the fact that obtaining a permit to construct an energy production facility in California takes more than twice as long as it does in many other US states and costs far more. Indeed, the total cost of going through the process in California can be 20 times higher than in Texas (and 50 times higher than in Brazil). Some deregulation. Finding the right regulatory focus Through our work for the Bay Area Economic Forum, a partnership of local governments and businesses in San Francisco and Silicon Valley, we have come to believe that an arduous permitting process and greater oversight are not necessary to protect California's sensitive environment. Other markets have standards that are as strict or stricter, but the companies and regulators within these markets can move more swiftly and with greater certainty. Take Canada, a country that has tougher environmental standards, on the whole, than most parts of the United States but still plays host to natural-resource-based industries, including chemicals, mining, oil and gas, power, and pulp and paper. Although these industries are major contributors to air and water pollution, they have shown that they can adapt to tougher regulation and are willing to make large investments to comply with stringent standards because they know that the rules are not going to change days after they invest millions. …

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