The Pew Charitable Trusts

Pundits who predicted Y2K would be a nightmare for the computer industry picked the wrong business. Instead, 2000 turned out to be a trying year for the electric power industry as utility deregulation produced a stream of high-profile snafus ranging from price spikes to tax revenue dips to power outages.

In Oregon and Montana, businesses were forced to lay off workers to cope with rising power costs. New York City residents saw their bills rise 30 percent over the year before. Electric bills also soared in Maine and Massachusetts, two more states that had embraced electric utility deregulation.

The policy cost New Jersey $234 million in lost utility taxes and led to a $1 billion drop in the value of the South Texas Project nuclear plant, which provides power to Austin, the capital of Texas.

California Experiences Severe Power Crisis

But California was the poster child of a well-intentioned policy gone awry. In mid-December, the federal government was forced to intervene after the Independent System Operator, the organization created to run the state's power supply system, declared that energy reserves had slipped below five percent of total energy.

Using emergency powers, U.S. Energy Secretary Bill Richardson signed an order that forced power producers across the West to make electricity available to California in the event of a supply crunch.

In his State of the State address this month, California Gov. Graycalled the state's four-year old experiment with electric utility deregulation a "colossal and dangerous failure." He said the policy had resulted in "legalized highway robbery" and offered a detailed plan to deal with the situation."There is no easy solution. But if I have to use the power of eminent domain to prevent generators from driving consumers into the darkand utilities into bankruptcy - then that's what I will do," Davis told state legislators.

"We now know the rose has thorns," says Matthew Brown, an energy specialist with the National Association of State Legislatures. "People need to understand that there are some risks they need to be aware of."

The concept behind deregulation is this: when monopolistic utilities are introduced to competition from competing power generation companies, that should lead to lower electricity costs.

Twenty-four states have embraced the policy to one degree or another. They are Arizona, Arkansas, California, Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Michigan, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Texas, Virginia and West Virginia.

However, the number of states that have actually implemented the policy is much smaller, and includes California, Pennsylvania, New York, Rhode Island, Maine and Massachusetts. Despite California's staggering problems, Texas lawmakers planned to press ahead on electric deregulation this year. Legislative leaders said that Texas, unlike California, was self-sufficient in power and had enough generating capacity for the foreseeable future.

Pennsylvania is a state where deregulation has flourished. Not only did the transition from utility monopolies unfold smoothly, but consumers have seen 5- to 10-percent price decreases as a result of the program.

In addition, utilities and power generating companies have found that the Keystone State's program allows them to be profitable.

How California Got In Trouble

In 1998, the average wholesale price of electricity in California was $12 a megawatt hour. That skyrocketed to $120 a megawatt hour last summer and peaked as high as $200 in November.

Things got so bad in the San Diego area that California Attorney General Bill Lockyer called for an investigation into electricity prices.

"San Diego should charge tuition for this class, `Botched Deregulation 101,' says Michael Shames, executive director of the Utility Consumers Action Network. "Other states would be stupid not to look at us and then let this situation repeat itself."Before restructuring its electric power scheme, California was a state where demand for electricity was double the national average, yet no major new generating capacity had been built for a decade, says Bill Brier of the Edison Electric Institute.

"When you deregulate into a market where there's an obvious problem, then there are price spikes," says Brier, whose organization represents investor-owned utilities providing 75 percent of the country's electricity.

Utilities aren't entirely off the hook in California, Brier concedes.

"I think over time our industry probably deserves some criticism, in the sense that we haven't been as entirely reliable as we'd like to be," he says.

Because states buy and swap power over a national electricity grid, California's turmoil is causing pain in other states. Residents of Arizona have been especially hard hit, having to deal with escalating electricity prices in their state caused by extreme demand in California.

California's deregulation debacle has had a chilling effect on states other than Texas thinking about restructuring their electric utility markets.

Nevada was scheduled to rollout its program last March 1, but postponed the debut in order to give deregulation closer scrutiny. Alabama, which has the 13th lowest retail electric utility costs in the nation, has decided that restructuring its electric industry just isn't worth the trouble.

The average retail cost of electricity in Alabama is 5.5 cents per kilowatt hour, compared to the 6.8 cents per kilowatt hour that is the U.S. national average, according to the U.S. Department of Energy.

"Deregulation in this state and in this country today is irrevocably premature," Alabama Public Service Commission President Jim Sullivan said in October.

Likewise, Mississippi's Public Service Commission announced that it opposes opening the state's retail electricity markets to competition.

Vermont officials have urged that state to go slow on deregulation, based on what has happened in other states. Officials in Washington and New Mexico have issued similar warnings.

In Iowa's statehouse, legislation to bring restructuring to that state died for the third year in a row.

The nation's largest electric utilities even jumped on the anti-deregulation bandwagon, by secretly lobbying Congress to stop restructuring in its tracks, theWashington Post revealed.

Not even federal and state regulatory bodies have been immune to finger pointing and squabbling following well-publicized deregulation snafus.

A time when states, the electric industry and regulators are looking askance at deregulation might be the perfect opportunity for federal lawmakers to address the issue, says NASUCA's Charles Acquard.

"We need to fix the wholesale market, because it has major problems related to transmission and power generation problems," Acquard says. "That's where Congress can act to help the states."

However, he says the furor associated with electric utility deregulation in 2000 make Congress unlikely to enter the fray.

This year, states will have plenty to ponder regarding the issue of electric market restructuring, says Matthew Brown of NCSL. "The experience in California says loud and clear that there is a need for a planning function," Brown says. "How do you institutionalize that function? How do you find ways to make sure the market is doing what it needs to do to ensure a reliable system? "And if it's not doing that, what kind of backstop do you have to make sure that juice continues to flow at a reasonable price?"

This article was taken from Stateline.org's new publication, "State of the States 2000." To order a freecopy of this 56-page booklet , email your postal mailing address to managing editor@stateline.org.