Deregulation and the California Utilities


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"The verdict is in: California's experiment with energy deregulation is not just a mess; it's a certifiable failure, according to everyone from the state governor to the very utilities that initially backed the scheme." This is how Charles Feildman, CNN Correspondent, began his article on January 4, 2001, entitled "The California Power Quagmire." Has this happened with any other industry? How and why did this happen in California, and can it happen in other states? To understand what happened one must look at some simple and basic concepts in economics.


What really happened with deregulation and the California utilities? Did these people understand the Law of Supply and Demand? Did they understand what makes supply and demand shift? Did these people understand what happens when you place a price ceiling on a retail commodity when you can't control the wholesale price of that commodity? How could this have been prevented?


Before studying about deregulation and other economic concepts we need to review some important economic terms. Either use your textbook or go to AmosWeb and look up the definitions for the following concepts and terms: scarcity, regulations, markets, price, law of supply and demand, competition, market failure, economic systems, monopoly, incentives and government regulation. Once you understand these terms develop a crossword puzzle to give other students in your class to see if they understand these terms. To do this use the puzzle making web site. Find "puzzlemaker online", click on the kind of puzzle you want to create, and follow the directions to develop your own puzzle.

To understand why California suffered a number of rolling blackouts since January one must look to see how Califonia got into this situation. To do this you need to go to How California's Power Crisis Works page and the California Blackout page .

  1. What were the major reasons for the utilities crisis in California?
  2. Why did deregulation of California utilities play such an important part in causing the crisis?
  3. During the last five years how much has the consumption of power grown in California and what has caused this to happen? 
  4. What basic economic law was forgotten by those that passed the deregulation law? 

As you learn about the utilities crisis in California you might ask yourself whether your state has deregulated its utility industry or whether your state is in the process of deregulating its' utilities. To find out what is happening in your state go to  the EIA Electricity Map  and click on your state in the slide down menu.

  1. How many states have deregulation laws or orders in place? [23] Is your state one of the deregulated states?   If yes, in what manner has deregulation taken place? If no, has your state considered deregulation at any time?
  2. Compare your electricity rates to those in neighboring states and also to those in California.
[NOTE: There are a number of factors related to the causes of the California crisis. One of these is the lack of understanding the Law and Supply and Demand and what causes the demand or supply curve to shift. There are five nonprice reasons that can cause a shift in the demand curve. These are: 1) income, 2) price of related goods, 3) expectations about future prices, 4) population size, and 5) taste and preferences. As we see, the main reason that demand shifted an increase in population. Not only did the population of California increase; the technology industry also grew.]


Likewise there are factors that can cause a shift in supply. Yet, in California's cases there was not have been a shift in supply; therefore the supply of electricity remained constant. The major reason is that during the last 10 years there were no new power plants built in California. If there was a change it was because the major utilities sold many of their power plants to electricity wholesalers in 1996, when deregulation began. With deregulation the suppliers had few incentives to increase the supply of electricity.

Finally, one needs to understand the concept of price ceiling. Price ceiling is when the price of a good or service is set by someone and sellers are not allowed to charge more than that price. In this case, the price of electricity that could be charged to the consumers was frozen by the government until 2002. The problem arose when there was not a price ceiling placed on the wholesalers. There was no expectation of the increase in the wholesale price due to an increase in demand and where supply stayed constant, causing the price to purchase electricity to increase more than the ceiling price that was set by law.


The government made many mistakes in California when it deregulated the utilities industry. The major mistake made was that of regulating the price of electricity causing the market system to fail

Evaluation Activity

What have we learned from the mistakes make in California? Can California fix the problems that it created? Only time will tell.

Now that you have looked at the effects of deregulation of the utilities in California, review the articles on rent control and deregulation of the airlines industry and see if you can find some similarities and differences among these cases of deregulation.

Note: Now that you have looked at the effects of deregulation of the utilities in California, review the articles on rent control and deregulation of the airlines industry and see if you can find some similarities and differences among these cases of deregulation.

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Price Ceiling established in 1996


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Wholesale Price of Electricity in 1996


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Wholesale Price of Electricity in 2001


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Demand Curve of Electricity 1996



Demand Curve Shift of Electricity 2001




The best way to understand what takes place with rent control or the deregulation of the airlines industry is to graph out what happens when price ceilings are set and there are either increase or decreases in supply and demand.