What Comes Next?
Electricity deregulation has suddenly become a political hot potato. The hot summer of 2000 brought unexpectedly higher demand for power in California, with blackouts in the Bay Area, sharp spikes in the wholesale price of electricity, and a doubling of retail prices for customers of San Diego Gas & Electric, the first investor-owned utility to be fully deregulated. Retail prices for customers of other IOUs also may rise as the transitional rate ceilings under the state deregulation plan phase out by December 31, 2001. As a consequence, customers and government officials fought successfully this summer to cap wholesale spot prices, and some are demanding that deregulation be rescinded or at least substantially revised (Brooks, 2000; Smith, 2000; Vogel, 2000).
Throughout the crisis, DWP not only kept rates stable and continued to reduce debt, but it has earned substantial profits by selling electricity it generates to the California Independent System Operator. Whereas the IOUs sold off their generating facilities under the state deregulation plan, DWP still maintains substantial reserves. In August 2000, DWP persuaded the council to authorize selling its share in the Mohave coal-fired power plant in favor of a plan to upgrade cleaner generating plants within the L.A. basin. A recent opinion piece in the Los Angeles Times called DWP “The Unexpected Hero in a Deregulated Electricity Market” and recommended that the city “say ‘no’ to deregulation” (Erie and Phillips, 2000).
Is it necessary or desirable to deregulate electricity prices and permit direct access competition in Los Angeles? In the short run, the answer is clearly no. But in the longer run, if and when the wild price fluctuations observed this summer settle down and orderly electricity markets again become the norm, the question will arise again. We believe this is likely to occur in the 2002–2004 time frame as new generation capacity comes into service in California, and the IOUs and the California ISO gain more experience in stabilizing electricity mar-