Massive rate hikes leading to $400 August electricity bills in San Diego and extensive blackouts in San Francisco have made utility deregulation look like a mistake. However, the real mistake lies not with utility deregulation per se but with its incomplete execution.

Witness the independent system operator’s (ISO) poor response to this summer’s minor energy crises. The ISO is a government-created agency commissioned to manage the transmission of electricity along the majority of California’s power lines. In other words, it’s a non-profit institution called on to do the job of the market.

When price spikes pauperized San Diego and blackouts darkened San Francisco, the ISO rightly assessed the problem as a matter of an increased demand outstripping a limited supply. The ISO’s solution, implemented for the short-term in August and renewed indefinitely on October 27th, was to impose limits on the prices that electricity generators can charge electric utilities for power. The reason: If the utilities can purchase energy at lower cost, then they will sell it to the consumer more cheaply.

This response works adequately in the short term, but does absolutely nothing to fix the problem in the long run. In fact, it makes electricity more scarce and expensive in the long run.

By capping the price that generators may sell their electricity at $250 per megawatt hour, the ISO’s proposal would make California a market that no sane generator would enter. Why sell electricity in California for, at most, $250 per megawatt hour, when you can sell it in New York for up to $1300 per megawatt hour?

The ISO’s price caps are a case of a remedy that is far worse than the disease. If prices are limited at $250, then no new generators will enter the California market, and there will be no increase in competition to naturally bring down prices. Suddenly the price caps -- a measure meant to correct the problem in the short term -- have become an indefinitely lasting necessity.

Through its October 27th decision, the ISO has made these price caps a regular part of our electricity market; a tactic that was supposed to ease the transition into deregulation has quickly become a path to re-regulation.

Another problem with this strategy is that if no one wants to build new power plants in California, then we will be stuck with our old ones.

As technology advances, power plants become cheaper and cleaner. Thus, states that attract the construction of new power plants will reap the benefits of cheaper, more environmentally-friendly electricity. However, because of the ISO’s shortsightedness, Californians will be left behind with antiquated power plants to match our antiquated price control scheme.

The ISO’s faulty call for price caps indicates that California’s electricity market would be better served if we eliminated what Robert Michaels of the Cato Institute calls "an institution whose structure invites inefficiency and inconsistency." Rather than grant the ISO dominance over electricity transmission, we should open electrical transmission to the free market, thereby encouraging the development of new transmission capacity.

San Diego was not deprived of energy because electrical generators could not handle the demand, but rather because decades-old transmission lines were being asked to handle a load they were never designed to carry. The shortage was a problem of transmission, not of generation.

How would California’s electricity needs be met without the ISO? Elimination of the ISO would create a service vacuum that numerous firms would spring up and fill. The opportunity to make money by transmitting electricity would induce electricity providers to build transmission lines, or upgrade existing ones, thereby enlarging California’s transmission capacity. Events like the one in San Diego would occur far less often because private-sector investment -- funded by fresh investment and re-invested profit -- would induce firms to create transmission lines capable of powering a wired, 21st century San Diego.

The decision to deregulate electricity generation was a good one for Californians. It has opened a path to lower prices, like the 15 percent first-year decline in prices and continual decline Great Britain has seen since it deregulated in 1991. Additionally, Californians can reap the benefits of greater efficiency, such as cleaner, cheaper energy. However, with half-hearted stabs at deregulation we may never reach the benefits that lie at the end of this path.

Sacramento needs to eliminate the ISO and establish a free market in electrical transmission to match our free market in electrical generation.