California and Texas have approached electricity deregulation in very different ways. To allow consumers to choose among competing providers rather than buy power from the regulated monopoly utility serving their region, Texas is on course to deregulate its electric power industry beginning in mid-2001, just as California did in 1998. The Texas design, however, bears no resemblance to the complex California plan, which broke down last summer in the face of power shortages and soaring wholesale electricity prices.

The two largest California utilities—Pacific Gas and Electric Co. (PG&E) and Southern California Edison Co., which together serve about 25 million people—have been stung by a fivefold increase in wholesale prices since June. The two companies have spent an estimated $11 billion more on wholesale power than they were allowed to charge customers under California’s two-year-old deregulation plan. The Southern California Edison (SoCal Edison) utility can charge customers only $64 per megawatt hour for power delivered—far lower than the current spot-market price of $307.

The utilities have tapped out their credit lines. In early January SoCal Edison announced 1,450 layoffs over the next several months to conserve what is left of its cash. PG&E and SoCal Edison say they face insolvency if they cannot obtain more cash soon. Two credit-rating agencies cut their ratings to one step above noninvestment grade (junk) status. The stock prices of the two widely held companies have plummeted in recent weeks. No new plants have been built in California in the past 12 years (although five new power plants are under construction). Stringent environmental regulations make it too costly for private utilities to consider investment.

Under Texas’s plan, electricity rates can go up twice a year to reflect higher costs for producing power, including higher gas costs. The state is awash in power plants, and more are being built. Twenty-two new gas-fired generating plants have come on line since 1995, and 15 are under construction, with completion scheduled by the end of 2002. To speed plant construction, Texas cut away many of the regulations that had restricted plant location. If a plant meets state air-quality regulations—as modern gas-fired power plants do—it can be built. The new supply will ensure price competition.

California’s Governor Gray Davis has called the state’s power system deregulation "a dangerous and colossal failure" and threatened to seize the generator plants of wholesalers who cheat consumers or utilities. (Many of these wholesalers are out-of-state suppliers, rendering this threat idle). The governor has indicated that he wants to carve out a larger role for state government, reversing years of state deference to federal energy policies. He proposes to create a state power authority to construct power plants and overhaul the bidding system used to set prices in the state’s energy auction, to be controlled jointly by the state and more than two dozen municipal utilities. He also proposes expanding the governor’s emergency powers in the event of imminent power outages and giving the state attorney general $4 million to investigate and prosecute cases of market manipulation. He proposes making withholding electricity by generating companies a criminal act punishable by a prison term.

Davis has also called for cutting the red tape that has kept new power plants from being built and for committing public lands to that purpose "on the condition that energy be distributed solely in California." (Implementing such a condition would be difficult given that the state’s electric grid is interconnected with 10 other states, Canada, and Mexico. Interstate commerce law forbids the state from preventing companies from selling to other state markets. Indeed, without such a practice, California might be in even worse shape, since the state is a net importer of electricity.)