Congress should not use the California legislation as a model. Despite months of intense advertising and promotional campaigns from third‐party marketers, only 38,000 consumers — less than 5 percent of the California ratepayers — have taken advantage of their ability to choose a different electricity company. Enron Corp. — the giant natural gas, electricity, and renewable energy conglomerate perhaps most responsible for the successful campaign to restructure the electricity industry — recently announced that their nearly decade‐long quest to enter the residential electricity market has turned to ash and that they would henceforth get out of the California market. Other would‐be utility competitors are expected to follow Enron’s lead, leaving California residential consumers back where they began at the beginning of this exercise. Soon, it appears that they will have nowhere to turn but to the very utilities that just a few months ago were written‐off as the relics of a by‐gone era of regulation and monopoly. What went wrong?
The short answer is that politicians rather than market forces designed the restructured California electricity system. Politicians, while paying lip service to deregulation and the magic of the market, could not bring themselves to simply let go of the industry. Reflecting the fear of both consumer activists and electric utilities that real markets would prove disastrous, the California legislature placed constraints on the restructured industry whose net effect was to stifle the very forces necessary to drive down California’s utility rates. Consumer choice thus became a meaningless exercise.
Utilities worried that in a free market most of their high‐cost nuclear and renewable sources of electricity would prove so uncompetitive that bankruptcy could result. The California legislature accordingly allowed utilities to impose a transition charge on customers who abandon their high‐priced power for the greener pastures of lower‐cost non‐utility power generators. Consumers, not utilities, would thus pay for those white elephants regardless of which company ratepayers choose to buy from.
Consumer activists worried that prices might rise in a free market. Thus, they lobbied successfully for a provision that froze retail rates at 1996 levels. As a result, customers who switch from a traditional utility to a new power marketer pay the wholesale price for power plus a delivery charge plus a variable “transition charge.” The sum of these charges cannot exceed the 1996 rate for electricity.
But since a rate freeze did not offer anything to consumers that they did not already have under the old regime, the legislature decided to mandate a 10 percent rate cut for all residential and small business customers. The legislature paid for this rate cut by selling 10‐year bonds issued by an off‐budget agency of the California State government.
The bonds are essentially another device to shift the costs of the uneconomic nuclear and renewable power from the utilities to the ratepayers, stretching out the payments over a longer period of time at slightly lower interest rates. Now, if all of us could refinance our VISA bills with state bonds over a longer period of time, our monthly payments would go down, but the total bill due would actually rise because we would be paying interest for a longer period of time. This sort of politically clever sleight‐of‐hand is costly not only for consumers but also for the economy as a whole. Capital that would have been used to finance new private investment is used instead to finance uneconomic power plants. Moreover, you don’t need to switch from a traditional utility to get the rate cut.
The net effect of California’s market meddling is to severely reduce the incentive for customers to switch companies. And because the benefits from switching for consumers in the politically designed system are low, the overwhelming majority of them have chosen to stick with the devil they know rather than switch to the devil they don’t.
What Congress should do is use its own legislation on intrastate trucking regulation as a model for electricity restructuring. Congress deregulated interstate trucking in 1980, but state regulation of intrastate trucking continued. The main effect of the continued state regulation was to restrict entry by new firms and raise the price of shipping for consumers. For example, a shipment of tobacco from Texas to Louisiana (125 miles) cost $450 in 1994 while the same shipment cost $750 to cover 85 miles within Texas.
The seeds for change in these cozy cartel arrangements were sown by a court case affecting Federal Express. California attempted to regulate Federal Express’s extensive truck operations within that state. Federal Express sued saying it was regulated under federal airline regulation. The initial judgement went against Federal Express, but the Ninth Circuit Court of Appeals overturned the California regulations in 1991, and the Supreme Court refused to hear the case letting the Appeals decision stand in the Ninth Circuit.