How many electricians does it take to change a light bulb in California? None. There is no electricity in California. Ba-dum-bum!

Lame jokes are emerging about a state that can produce $450 million of raisins and 17 million gallons of wine a year but not enough wattage to power all those electric garage-door openers and hot tubs. But don’t blame only deregulation for California’s rolling blackouts, soaring energy costs, and bankrupt utilities. Certainly, don’t listen to the critics who say the state’s problems cast doubts on whether electric deregulation should proceed elsewhere.

What happened in California was a flawed experiment that wasn’t really deregulation at all. It was just a reshuffling that replaced traditional regulations with a set of worse ones.

Done right, deregulation can have enormous benefits for consumers and the economy. It can lead to lower electricity costs, promote conservation, improve reliability, and encourage innovation.

The basic problem in California was that the state forced its utilities to sell their power-generation plants and fill their electricity needs in a new spot market called the Power Exchange, or PX. Utilities were forbidden from setting up long-term contracts that would let them lock in prices for years to come.

When the cost of generating electricity rose as natural gas became more expensive, prices on the PX escalated beyond all imagination, and utilities had no alternative sources of power. (Government officials charge that some power generators also found ways to inflate prices on the PX.)

Meanwhile, the state capped the prices utilities could charge. So consumers had no incentive not to turn on all those lights, all the air conditioning, and all those computers.

This wasn’t deregulation. It was deranged.

Deregulation occurs only when prices are free to float, based on cost and competition. To make sure that happens, California and other states need to go back to the drawing board and design systems that follow four main principles:

The power-transmission system must have enough capacity so that electricity can flow freely between utilities over large areas. It isn’t enough to make sure that a state’s supply of power exceeds demand—that power has to be able to travel over the transmission grid and get to where it is needed, when it is needed.

That wasn’t the case in California, which created huge problems. There were times when the southern part of the state, for instance, had excess power but, because of an inadequate transmission grid, couldn’t send enough of it to the northern part to forestall rolling blackouts.

Utilities shouldn’t be required to sell their power plants. In most states, they aren’t. Even when people worry that utilities will have too much control of a market if they reach all the way from generation to the consumer, a modest number of rules can keep utilities in check. Forcing utilities to sell their plants creates a host of problems, because it separates generation from transmission. Each is useless without the other. The two parts of the process have to be coordinated to avoid wasting power.

Utilities must be allowed to negotiate the best contracts possible on behalf of their customers, whether through a spot market such as California’s or through long- and medium-term contracts negotiated directly with producers. This just makes sense. Utilities can’t have their hands tied.

Prices can’t be capped. Although states may want to do so to protect consumers, Californians learned the hard way that caps don’t work.

It is true that the electricity market has some tricky properties. Electricity is prone to temporary shortages, because of spikes in usage. Electricity can’t be made in advance and stored; it must be produced and delivered immediately to consumers as they need it. When demand exceeds supply, it isn’t easy to remedy the problem, because it takes years to build a power plant.

Still, if states follow these four principles, they will find that, despite all the negative feeling about deregulation, they can get all the benefits that led them to consider deregulation in the first place.

When demand picks up and consumer rates rise, companies will have the incentive to build more power plants, which will push prices back down. This will all happen far more smoothly and quickly than we have witnessed in recent months, as California wrestled with its power shortage.

When rates are high, customers will likely conserve energy much more than they do now. That can have an enormous effect on the whole power system. At times of peak demand, producing electricity literally can cost 100 times as much as the rate customers are charged because the capacity brought online to satisfy the demand is so expensive and inefficient. During such times, reducing demand by just 5% can lower prices as much as 55%. If consumers can be made to feel the true prices of producing power, they would have a real incentive to run the washing machine at night.

Deregulation also will free companies to pursue innovation in exciting technologies such as fuel cells, wind turbines, solar panels, and other systems that place the generation of electricity nearer the source of its consumption. So-called distributed generation turns out to be highly efficient. At the moment, considerable electricity is wasted, because power degrades about 30% when transmitted over long distances.

Putting choices into the hands of millions of people with checkbooks also will allow them to express their desire for a “green” electricity provider—one that uses solar-, air-, or water-powered generation systems. In Pennsylvania, 200,000 people recently signed up for green energy, even though that meant paying higher rates. Their combined electricity bills amount to $100 million a year, in just one state. It has been estimated that, in a deregulated America, the kind of people who drive Volvos and buy organic vegetables represent a $10 billion market for greener electricity in their homes. If given the opportunity, they gladly would pay to help preserve the environment. But they have to be given the opportunity.

Hartley is chief executive of Green Planet Partners, a marketing strategy consultancy focused on building brands that benefit the earth. Before Green Planet, Hartley was a founder of Green Mountain Energy, a successful deregulated electricity brand. He can be reached at khlmj@aol.com.