The Electrical Deregulation Fiasco: Looking to Regulatory Federalism to Promote a Balance Between Markets and the Provision of Public Goods

Over the last thirty years, regulators have deregulated just about every regulated industry. In no industry has deregulation raised as much fear and concern as in electric power markets. Even before the Enron debacle, a crisis that is more about the failures of corporate than regulatory law, it was clear that something had gone seriously wrong in the turn towards deregulation of electric power. Recent events in California are illustrative. In early 2000, consumers in California, the first state to deregulate retail power markets on a mass scale, saw repeated months of power interruptions. Many utility customers experienced a risk of service shut off – some even had their service interrupted – forcing changes in daily routines to find access to electric power. Hospitals, nursing homes, and municipal utilities controlling sewage and water treatment facilities were forced to make choices affecting human safety when confronted with the prospect of power interruption. Small businesses, families, and large corporations incurred large costs. The consequences of California’s regulatory system were not limited to utility consumers. One of the state’s largest utilities, Pacific Gas & Electric (“PG&E”), declared bankruptcy on April 6, 2001, in part the result of the skyrocketing power procurement costs it has incurred in the deregulatory environment. Its reorganization is now before a federal bankruptcy court. Newspaper, television, and radio headlines overwhelmingly attributed the California power crisis to deregulation, or economic restructuring, of power markets to favor competitive markets over government regulation as a means for allocating power supply. Against the backdrop of such events, calls for a return to old-style regulation have abounded, often attributing the root cause of California’s energy woes to deregulation itself. Even regulators who are not inclined completely to abandon deregulation continue to struggle with refining the basic path of deregulatory policies, advocating deregulatory models that incorporate state participation in power procurement, price caps, or other regulatory safeguards in designing power markets.