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"Economic Idiocy
The Golden State struggles with the economy it deserves
By Thomas G. Donlan
While we observed Governor Gray Davis solving California's energy crisis last week, our thoughts turned to H.L. Mencken, who declared that a politician "is an animal that can sit on a fence while keeping both ears to the ground." He also named democracy as the system that lets the people say what it is they want, and then gives it to them, "good and hard."
Four years ago, the California Legislature decided that the people wanted lower electric bills, and that their wish was not impossible to achieve in a state with substantial surpluses of generating capacity and rates much higher than those of surrounding states.
So the lawmakers created a mockery of a market in electric power and labeled it deregulation. In practice, it managed supply and demand the way traffic lights manage cars and trucks at the intersection of Hollywood and Vine. Encouraged by consumer advocates, environmentalists and even the utilities' own lobbyists, the lawmakers unanimously imagined that the commands of an Independent System Operator would be so efficient that ratepayers could be guaranteed an immediate 10% reduction in electricity bills. And they thought utilities would make profits guaranteed to retire old debt. Rates were then frozen until 2002.
Surprise! Demand grew more rapidly than the legislature expected. On the supply side, meanwhile, California continued to impose restrictions on the operation of fossil fuel plants and let citizen opponents drag out the process of awarding permits for new plants and new transmission lines. The supply of electricity grew more slowly than demand.
To make matters much worse, the deregulation law required investor-owned utilities to sell most of their generating plants and deal with the new owners on the state-managed spot market. Last week, Davis got off the fence and declared that deregulation was a "colossal and dangerous failure." Indeed it is, though it is not deregulation. After paying down $17 billion of old debt, colossal losses became the new fate of the state's investor-owned utilities, which have paid $12 billion more for wholesale power than they have been allowed to charge their customers. Coincidentally, the state of California ran a $12 billion surplus in the last fiscal year. But Davis won't make the obvious connection that state government bungling cost innocent private companies $12 billion: Taxpayers ought to bail out the shareholders.
Instead, the governor proposed last week that the state step deeper into the market-and make a bigger mess. He blamed the problem on market manipulation and price-gouging, which he proposed to investigate and punish with criminal sanctions. Charges of price-gouging are an infallible sign that the person making the accusation is an economic idiot. Prices are supposed to go up when supplies are scarce, whether the market is for electricity or for taxicab service in a rainstorm. Using the power of the state to hold down electric rates is little better than theft, and will only prolong the problem.
Davis compounded this idiocy: He wants the feds to control wholesale prices, spreading the chaos beyond the state line. He also proposed that the state should create an authority that could break through the arduous permitting process and build new power plants on public land.
With powers like those, of course, the investor-owned utilities would not be in trouble. Had they been free to build their own generating facilities and free to choose how to balance power purchases between long-term contracts and a spot market, they would have attracted investment from around the world.
Texas removed power-plant site regulation in 1999 and scheduled the end of rate regulation for 2002. In a brief time, investors have poured more than $10 billion into the state to fund dozens of new plants that will increase the state's generating capacity by about 20%.
The California Legislature will soon convene in Sacramento for a special session to enact new energy laws. But repeal should be the order of the day. If California deregulated its electricity market for real, rates would rise, consumers would conserve, investors would build and the crisis would vanish as quickly as it appeared."
Regards, Don |
