Blackouts. Bankrupt utilities. Higher bills. No doubt about it, California's energy crisis has engulfed electricity deregulation in scandal. But chaos in the Golden State isn't deregulation's full story. The concept, first introduced in England in 1990, has worked elsewhere. Pennsylvanians now pay less per kilowatt than they used to, and 23 other states are deregulating in hope of driving the price of electric power down. But how, exactly, does it work?
OK, it may sound strange, but think of electricity as pizza. Under deregulation, this is a typical model of how the industry changes...
What went wrong
Many factors contributed to deregulation's failure in California:
*In the '90s, demand for power grew, but utilities built no major plants.
*It was a halfway plan. Wholesale prices were deregulated, but the state, expecting prices to fall, capped retail rates. Now the price mismatch risks bankrupting utilities.
*The state did not let utilities sign long-term contracts with power suppliers; they bought power on volatile spot and daily markets, allowing suppliers to push prices up.
*Aging long-distance transmission lines strained distribution from north to south.
*The natural-gas price tripled last year.
*Low rainfall cut hydroelectricity supply.
*Most power plants are more than 30 years old; some went offline for repairs.
Who's doing it right
Pennsylvania and California each began deregulating electricity in 1996, but that's where the comparison ends. Pennsylvania is winning notice for how deregulation can work. The reasons:
*Pennsylvania had a surplus of available electricity.
*Utilities did not have to sell off their power plants (which they were required to do in California).
*The plan allowed utilities to sign long-term contracts with energy suppliers, ensuring stable prices.
*Consumers shopped for a utility, spurring competition.
Deregulation saved Pennsylvanians $3 billion since 1998. The UK and Australia have seen similar success. In all cases, many consumers switched utilities - nearly 20 percent of Britons, compared with 1 percent of eligible Californians.
Where we're going
Are California-like crises likely for the rest of the nation? Probably not. Energy generation is projected to surge over the next four years, outstripping new demand by 48,500 megawatts, according to an industry-group estimate.
One possible hangup: transmission lines. Distribution bottlenecks may mean that, even if power is plentiful, utilities could have trouble sending it where it's needed. Few incentives exist to build new lines. New York State, in particular, might have 'shortages' this summer for this reason.
Electricity prices are not expected to rise much. On average, US consumers may pay 8.4 cents per kilowatt-hour by 2002, compared with 8.2 cents in 2000.
(c) Copyright 2001. The Christian Science Publishing Society