MEDIA MUSIC: Media Watch - Worst of both worlds: regulating deregulation

Lots of producers, competitive pricing - a free market economy is what America is all about, right? But poor old California is having a tough time at the moment, with the lights about to go out all over the place.

Lots of producers, competitive pricing - a free market economy is what America is all about, right? But poor old California is having a tough time at the moment, with the lights about to go out all over the place.

Lots of producers, competitive pricing - a free market economy is what America is all about, right? But poor old California is having a tough time at the moment, with the lights about to go out all over the place.

The state was one of the first to deregulate its electricity industry back in 1996.

Just a few years ago it was touting the benefits of deregulation, but now activist groups are up in arms because of the electricity crisis in California.

Utilities are on the verge of bankruptcy, stuck with price caps on what they can charge to customers. A lack of supply has driven wholesale prices higher and higher; rolling blackouts threaten most of the state while sky high electricity bills plague other areas. While some blame utilities and energy wholesalers, many agree the real culprit is a system that combines the worst of capitalism and government control.

The majority of media reports concluded that utilities cannot be expected to maintain losses incurred by price caps on what they can charge to customers, while paying market rates to electricity wholesalers. Utilities are begging for relief through price caps on wholesalers. 'What we can't do is keep hemorrhaging money,' warned Edison VP Tom Higgins (USA Today, January 10).

These price caps have some journalists wondering why so much regulation is needed to achieve a fair market price. Many analysts say the problem isn't deregulation, but a 'faux deregulation' system that combines 'the worst of free market principles and command-and-control regulation.'

Some blame politics. In Business Week (January 8), consultant Lawrence Makovich stated, 'It was a crisis by design. Legislators created a power shortage.' While the politicians criticize wholesalers of price gouging, generators such as Enron cry foul, noting they were simply working within the system created by the California legislature.

California's failure has resulted in the media reporting widespread dissatisfaction with deregulation across the country, as politicians from New Mexico to Georgia wring their hands about their own local industries. Fearing either blackouts or exorbitant prices for electricity, media reports reflect that public opinion has shifted against deregulation since 1996, when California's deregulation plan was able to unanimously pass through the legislature.

Business publications have focused on the financial effects of the crisis being felt across the country. Not only are companies like SoCal Edison and Pacific Gas & Electric suffering, but so are the creditors that stand to lose if these companies go bankrupt. Bank of America has seen its stock price fall as bond rating agencies downgrade the utilities to near junk bond status.

California Governor Gray Davis has tried to appease the populace by getting out the message that he will not let the utilities fail. 'I reject the irresponsible notion that we can afford to allow our major utilities to go bankrupt. Our fate is tied to their fate' (Chicago Tribune, January 9). Consumer activists blame utilities and wholesalers for creating the supply problem, suspecting that the utilities are exaggerating their financial problems.

Few can argue that Davis is not being hurt politically by the crisis.

As The San Diego Union-Tribune (January 7) wrote, 'The three elements of the political nightmare - utility bankruptcy, threats to the overall economy and ratepayer anger - are in the face of Davis, the legislature and just about anyone else with the word 'incumbent' attached to his or her name.'



- Evaluation and analysis by CARMA International. Media Watch can be found at www.carma.com.



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