Electric Blues in La-La Land: Don't Blame Deregulation

The New York Times, "Week in Review" , January 13, 2001

CALIFORNIANS are facing electricity blackouts, and the state's investor-owned utilities warned they are about to go bankrupt. Electricity-dependent industries, notably in Silicon Valley, are scrambling to buy generators. Consumers are up in arms over rising prices and disrupted service.

How did something as basic, and previously reliable, as electricity become such a problem? The shorthand answer is ''deregulation.''

''We have lost control over our own power,'' declared Gov. Gray Davis in his State of the State address last week. ''We have surrendered the decisions about where electricity is sold -- and for how much -- to private companies with only one objective: maximizing unheard-of profits.'' Railing against ''out-of-state profiteers,'' the governor warned he might seize power plants by eminent domain.

Mr. Gray's oratory marked a sharp departure from his image as a careful, even boring, moderate. But it was in keeping with much of the initial reaction to the California crisis. In a typical take, Robert Scheer, a liberal columnist for The Los Angeles Times, declared the mess a sign that ''capitalism is falling apart.''

Not so fast, say economists and advocates of open markets.

''Calling the California electricity market 'deregulated' completely changes the meaning of the term,'' says Clifford Winston, an economist at the Brookings Institution. California changed its regulatory scheme, he said. It didn't free its electricity market.

Though it was called deregulation, the bill the legislature passed in 1996 was the size of a city phone directory, according to a report at the time, and it was extremely complex.

The law cut consumer rates by 10 percent and established future price caps. It made utilities sell their power plants. It dictated that electricity be bought and sold only in a single spot market. And it banned all separately negotiated contracts, including long-term deals for lower prices, between power producers and utilities.

In a 1993 journal article, Dr. Winston defined deregulation as ''the state's withdrawal of its legal powers to direct the economic conduct (pricing, entry, and exit) of nongovernmental bodies.'' By that measure, the California scheme doesn't even come close, he says. Neither, he says, do recent efforts to overhaul telecommunications regulation.

Far from deregulating, California's new regime evokes the regulatory mindset of the ''rational reformers'' of the early 20th century.

Amid rapid technological and business evolution, they promised ''kinetic change made stable,'' writes John M. Jordan, a historian, in his book ''Machine-Age Ideology: Social Engineering and American Liberalism, 1911-1939'' (University of North Carolina, 1994). Controlling economic transactions through technocratic oversight rather than unpredictable markets was the primary means to that goal.

SIMILARLY, Steve Peace, the Democratic state senator who pushed the utility bill through the California legislature, declared when it passed that the goal was to ''bring stability to the system,'' while lowering costs for all consumers.

He wanted, he said, to avoid the ''kind of horror stories we saw in the telecommunications restructuring'' -- the breakup of Ma Bell -- ''where it took 20 years to make the transition and there were a lot of dislocations that occurred in the process.''

This emphasis on stability and predictability is incompatible with real deregulation, since unregulated markets inevitably bring surprises, good and bad. No one knew the airlines would develop hub-and-spoke systems (which offer more destinations, but inconvenience some travelers) or frequent flier programs. No one anticipated the way trucking deregulation would combine with precision-timed inventory practices and other logistical innovations to revolutionize the flow of goods.

Trucking and airline deregulation (with the exception of landing-slot controls) pass Dr. Winston's test. In those cases, the government really did get out of the market.

Veterans of those deregulations say one sign California's power plan wasn't the real thing was that it assumed knowledge of the future. ''When they did this thing in California, they were thinking that they were in this world that would stretch out to infinity of falling prices,'' says Christopher DeMuth, president of the American Enterprise Institute and administrator of regulatory affairs at the Office of Management and Budget during the Reagan administration. Capping consumer prices looked like ''a sop that wouldn't make much difference,'' he says. But when demand for power rose sharply as supplies fell, that cap ''made all the difference in the world.''

True deregulation is rare for the same reason that the rational reformers almost never achieved truly disinterested technocracy. Political pressures inevitably intervene. The earlier reformers learned from experience, writes Dr. Jordan, that ''there was no 'superpolitical' place to escape the logic of politics.''

And economists who have worked to deregulate industries note that there is always a struggle with advocates who want to turn ''deregulation'' into a more beneficial form of regulation.

Californians, though some of them may not realize it, are now learning that lesson the hard way.