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  • Petr Zhilin

California's Deregulation Failure: The Case for Utility Reregulation

California faced blackouts in 2020 and near-blackouts in 2022, and electricity prices are now the third highest in the nation despite high natural gas reserves, widespread renewable usage, and numerous subsidies for energy sources. There are several explanations. Some say the issue is the overuse of renewables; others point at price gouging and manipulation. While these are fair arguments, the bigger slice of the problem pie is the structure of the current system.

With high power costs and oversupply in the 1990s in many US states and utilities with stranded assets, a solution was proposed to deregulate electricity. With the advent of the Reagan Revolution, from the 1980s-2000s many industries traditionally regulated by the government like airplanes, gas pipelines, and telephone lines were deregulated in accordance with free market values, after which these businesses had unprecedented growth and customer access increased.

Electric deregulation was similarly seen by many economists as a way to increase customer choice in purchasing electricity, preventing over or under production of electricity, and reducing prices for customers. As a result, throughout the 1980s and 90s, numerous countries and states deregulated their grids, such as the UK, Japan, and Australia.

California was looking into such systems ahead of order 2000; in 1994, the California Public Utilities Commission issued the “Blue Book,” in which it proposed that in a transition from 1997-2002, Californians could directly order electricity from their utility of choice.

The utilities conceptualized a system known as Poolco, which would involve the entire American West being in a “Pool” system centered around California - similar to that of the UK market where electricity was traded hourly and the cheapest producers would be the first bought to satisfy baseload demand, thus incentivizing cheaper production of electricity.

The final product was Assembly Bill 1890, which passed unanimously in the California State Legislature in 1996. This bill created a six-year plan from 1996-2002.

If the execution of the legislation worked, this bill would have revolutionized the electric market in California by reviving stagnant industry, introducing widespread usage of renewables, reducing utility debts, and lowering retail electricity costs by around 20 percent.

The optimism for deregulation crashed four years later, with blackouts affecting over 1.5 million customers in rolling blackouts that lasted from 2000-2001, which caused SoCal Edison and PG&E to acquire 10 billion dollars in debt. Their stocks were denigrated to junk status financially, and CAISO had to buy billions in overpriced electricity from other states to try to stop the rolling blackouts. These markets were unstable because of several key factors, which included the day-ahead market, real-time market, and lack of long term contracts.

By design, the big three were supposed to buy from the day-ahead market, but because of the fact that the floor price ended up being the price everyone had to buy at, this made it so that the average price for electricity was lower than what it cost to run most power stations.

One example of this effect is the now-defunct Enron corporation, which produced electricity trading strategies with names such as Death Star and Ricochet, with the former involving the company overscheduling electricity and then receiving money from the state for relieving congestion when it sent the electricity out of state and the latter involving selling electricity out of state and then selling it back in when demand was high while there were fewer options for electricity.

Additionally, utilities except for public ones like the LADWP and SMUD, were not allowed to make long term contracts with generators. There was an option to order electricity months in advance, but it was never used because of the fact that utilities increasingly relied on the real time market to secure electrical supplies rather than markets that focused on longer term investments.

This is also not to mention that even though residential customers were promised a retail supplier of electricity as a choice, because the existing utilities still owned the power lines in their service areas, there was no real incentive or difference in using it as that naturally made retail prices higher. As a result, the short term nature of the market and lack of responsibility involved throughout allowed for the disaster to happen.

Post-2005, California returned the Day-Ahead and Real-Time markets, however they allowed the utilities to buy from whatever suppliers they desired on these markets rather than confining transmission to the lowest possible cost and left a bit more wiggle room for contracts. In spite of these supposed improvements, California now has one of the highest electricity prices in the nation. This is primarily because of the State’s overreliance on natural gas and renewables.

The best option at this point is to reregulate the utilities and allow for increased collaboration between utilities and increases in independent generation. As has been shown over the past 20 years, deregulation not only failed in California but elsewhere in the US. Over the years, most of the deregulated US grid has seen supply shortages and blackouts, not only in California but in Texas in 2020 and PJM in 2023. The issues with the other “deregulated markets” that still work on the similar pool markets that California had pre-2001 had some issues:

- The short-term nature of the markets is open to manipulation and causes less reliable short term generators (like natural gas and renewables) to outprice traditionally more reliable and efficient power stations (like coal and nuclear) on short increments of time, and because of this, the grid becomes less efficient and more costly to maintain as the more reliable power stations retire due to market pressures.

- There is no incentive to build out infrastructure, as previously the vertically integrated utilities built it with an expected rate of return and therefore profited from it; utilities try to spend as little as possible on electricity to compete well on the markets and therefore try to avoid building capacity.

- No one is accountable due to the extremely deregulated nature of the markets, and all entities try to kick the can down the road for responsibility, meaning that a lot of the time the grid is underprepared for emergencies and shortages built up over time.

There is no other way to solve the grid’s current issues than to reregulate the utilities. Ever since the 1910s in which Samuel Insull convinced the US that regulation was the only way to make a private grid work, the great American grid continued to be an example and model for the world in the following 80 years in terms of reliability, efficiency, and low cost. Twenty years of deregulation, however, have led to an unstable, dysfunctional, and costly grid which likely will continue to fail.

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