California energy crisis deepens

Published July 1, 2001

California continues to be plagued by a severe energy shortage, leading to higher prices and rolling blackouts. As the crisis deepens, state politicians face growing anger at home and stinging criticism from across the nation. Free-market environmentalists have pointed out the crisis would never have occurred if state government had not interfered with the free flow energy.

The state began experiencing rolling blackouts even earlier this spring than in 2000. Analysts predict the situation will worsen as summer heat spurs even more demand. “Any warm day from May to October—it doesn’t even have to be abnormally warm—California is going to be at risk for blackouts,” said Michael Zenker, director of Cambridge Energy Research Associates.

Zenker predicts California blackouts will number “in the hundreds of hours” before the summer is through. Last summer, the state experienced outages on 34 separate days.

The early spring blackouts this year “tend to indicate that the blackouts we’ll have as we get further into the summer will be deeper and more sustained,” added Zenker.

Troubles linked to false deregulation

The California energy problems have frequently been linked to the state’s 1996 “deregulation” of the energy industry. However, analysts point out that deregulation never really occurred; instead, the state mandated a partial overhaul of the system while maintaining significant state control over the industry. In fact, the state created many new controls, especially on the supply side.

“You can call an apple an orange, but that doesn’t make it an orange,” observed Jerry Taylor, director of natural resource studies at the Cato Institute.

Noted a January 8 Chicago Tribune editorial, “The California chaos doesn’t weaken the argument for deregulation. There is real deregulation and there is faux deregulation. Real deregulation means allowing market forces to work. California didn’t really trust the market to work.”

In a 1997 article published in the San Diego Union-Tribune, Taylor documented how California’s state government was giving only the appearance of deregulation. In the name of “deregulation,” the state was unilaterally dictating energy prices and assuming large-scale bureaucratic control of the energy grid.

“Unfortunately for ratepayers, the ill-considered regulatory enthusiasms of the past are protected indefinitely, which virtually guarantees that restructuring will not deliver the rate gains promised reformers,” observed Taylor.

Taylor’s 1997 article predicted the crisis that exists today. California’s false deregulation “not only prevents California from achieving the kind of rate reductions and service vitality that free markets in electricity would deliver, but it also threatens a second bailout of the electricity industry in a decade or so.” In fact, the state energy crisis occurred even sooner than Taylor predicted.

Taylor wasn’t alone in predicting California’s false deregulation debacle. Jim Johnston, an economist and policy analyst with The Heartland Institute, predicted the same result at The Future of Electricity, a 1997 conference co-sponsored by Heartland and Citizens for a Sound Economy. Johnston pointed out that continued state government control of the falsely deregulated market represented “tragic flaws” in the plan. Accordingly, he predicted California’s false deregulation would lead the state “into the abyss.”

Stated Johnston, “The state government there is going to appoint and regulate the independent service organization that is going to manage the grid in California. I think that’s going to be a significant problem. The ownership of the grid is going to remain in the hands of the utilities, but the grid is going to be managed by people who are part of the political process. I don’t believe that bodes well for reliability of the grid.” Added Johnston, “Non-owners do not take care of properties as well as owners do. Ask any landlord about that.”

“The best answer to these dilemmas is for the state to simply let go of the industry,” said Taylor. “No ratepayer bailout for utility losses. No public seizure of the energy grid. No more expensive subsidies. Simply tear down the laws protecting utilities from competition and let businesses have at it.

“If the last several decades have taught us anything,” he continued, “it is that the best regulator of markets is dynamic, free and open competition.”

Production stagnated in 1990s

Exacerbating regulation problems, the state has done little to increase production during the past decade, even though the state’s population has boomed. Noted the Chicago Tribune editorial, “California embarked on its experiment in 1996, apparently without considering the supply side. No new power plants have been built in that state in a decade.”

Vice President Dick Cheney reiterated the theme, to California Governor Gray Davis’ dismay, during a May 8 CNN interview. “What’s happened in California, I would argue, is they’ve taken the route of saying, ‘Well, we can conserve our way out of the problem. All we have to do is conserve; we don’t have to produce any more power.’

“So they haven’t built any electric power plants in the last 10 years in California, and today they’ve got rolling blackouts, because they don’t have enough electricity; they’ve got rising prices; they’ve got a whole complex of problems that are caused by relying only on conservation and not doing anything about the supply side of the equation.”

Davis responded by citing California’s “aggressive” efforts to build new power plants—although none has come online in the past 12 years.

Davis failing on pledge of more summer power

In an attempt to alleviate the state’s energy problems, Davis pledged emergency measures to produce an additional 5,000 megawatts of power, adding 8 percent to the state’s energy supply and enough to supply power to five million homes, by July 1. However, with no new power stations and the effects of a winter drought curtailing spring and summer hydro power, the governor’s pledge was doomed by mid-spring.

According to the California Energy Commission, the best Davis can now hope for is a September addition of only 3,600 megawatts of new power. By then, the peak summer energy demands will have already led to frequent and widespread blackouts.

“We’re still hopeful we can get as many megawatts online this summer as possible,” stated Davis spokesperson Roger Salazar, “but we understand there are issues involved in the siting and construction of new power plants.”

Davis and others are holding out hope that California consumers will conserve enough power to reduce the number of imminent blackouts. To this end, Davis has launched an $800 million campaign to promote energy conservation. Despite the campaign’s high cost, analysts doubt significant conservation will happen. Stated Michael Shames, head of the Utility Consumers Action Network, “I don’t think more (conservation) will happen. Markets move slowly when it comes to changing energy conservation patterns.”

While the state continues to search for answers to its energy crisis, summer is approaching and the days are only getting hotter.

For more information . . .

see The Future of Electricity, a collection of papers presented at a Heartland Institute conference in April 1997.

You can also search PolicyBot, Heartland’s free online research library, for over 140 utility deregulation-related reports. Point your Web browser to, click on the PolicyBot icon, and search for the topic/subtopic Regulation – Utility Deregulation.