7.2 The Impact of Monopoly

l THE IMPACT OF MONOPOLY, CONTINUED APPLICATION ______ Date _______ 23. Circle the word in the cartoon indicating that the cottage represents a monopoly. 24. Why are similar properties unlikely to be available? 25. What kind of monopoly does the cottage represent? Why? Name _________________________ NCEE STUDENT ACTIVITIES CHAPTER 7 Regulation and Deregulation Much government regulation in the 20th century focused on overseeing and controlling the activities of industries that provided important public services. On occasion, the U.S. government has stepped in and broken up companies that were deemed monopolies or near monopolies. In other instances, though, officials have allowed these entities to exist but under regulations aimed at protecting smaller competitors and consumers. In the 1970s, a trend began toward deregulation, reducing or eliminating government oversight or control of business behavior. The idea was that competition would result in lower prices for consumers. In deregulated industries, government reduced regulations to the minimum. For the most part, only those regulations that ensured public safety were retained. Public utilities were not deregulated initially. Utilities were considered natural monopolies, markets in which it would be inefficient to have more than one company providing a product or service. In most states, generating electricity was handled by one company that was subject to considerable government regulation. Some larger states were served by more than one provider, but they all were heavily regulated. This began to change in 1996, when the state of California enacted a measure to deregulate much of its electricity industry. At the time, many Californians felt that consumers were suffering at the hands of the relatively few power companies operating in the state. The deregulation was intended to open the industry up to greater competition. Unfortunately, the way the deregulation was handled led to major energy problems. THE CALIFORNIA •JUICE' CAPER Governor Pete Wilson and many others in public office in California believed that the electricity industry was taking advantage of customers by charging prices that were too high. The deregulation law was intended to encourage more competition, which would bring down prices for consumers. However, other factors got in the way of that outcome. The response of California's major utility companies to the deregulation law was to sell many of their power plants to a few electricity wholesalers. These wholesalers, however, did not have much incentive to increase their supply. At the same time, California's power needs were actually growing by about 6 percent a year. Some of the growth was tied to the blossoming of many high-tech companies in northern California, which both used power in their plants and also attracted a growing population which further increased power consumption. That growth and the high demand for electricity raised the prices the utility companies had to pay the wholesalers for power. The utility companies then found themselves in a bind. While the prices they paid were deregulated, and driven up by high demand, the prices they could charge their customers were i-till controllerl by the government. As a result. they ended up having to sell the power for less than they paid for it, and they accumulated billions of dollars of debt. This level of debt made out-of-state energy companies, who supplied about a quarter of California's energy, reluctant to do business with the California utilities for fear that they would not be paid. On top of that, California received out-of-state energy supplies from the Pacific Northwest, which depended on hydroelectricity. A shortage of rain and snow there reduced that region's power output. Further, there had been no new power plants built in California for a number of years. - . Name Date _________ Chapter 7 CONTINUED The combination of deregulation with these other factors led to a power crisis. California experienced major power shortages from 1996 to 2001, especially in the summers. To deal with the problem temporarily, so-called rolling blackouts, in which large portions of the state lost power on a rotating basis, were implemented. Conservation efforts helped to reduce demand for electricity, and long-term contracts with power generators helped to increase supply. The crisis came to an end in the early 2000s. Despite California's experience with deregulation, many other states continued moving to deregulate their electricity industries. ANALYZING THE CALIFORNIA POWER CRISIS Use the information above to answer the following questions. For questions 1 through 4, write your answers in the spaces provided. For question 5, write your answer on the blank pages. 1. What were the major reasons for the utilities crisis in California? 2. How did the deregulation of California utilities contribute to the crisis? 3. From 1996 to 2001, how much had the consumption of power grown in California, and what caused this to happen? 4. Which basic economic law was forgotten or ignored by those who passed the deregulation bill?