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Jewish World Review April 5, 2001/ 12 Nissan, 5761

Larry Elder

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Consumer Reports


Burning furniture to keep the room warm

http://www.jewishworldreview.com -- AN "energy crisis" in California? Say it ain't so.

In 1996, California legislators deregulated the wholesale price of electricity. At the time, however, the legislature also agreed to fix retail prices -- the price consumers pay -- for a period of five years. At the time, this seemed like a good deal. Most predicted a decline in wholesale prices. Therefore, for a period of five years, utilities expected to reap fat profits before being fully tossed into the cold, cruel world known as the free market.

But, oh-oh, instead, wholesale prices went the other way. The California population growth, the unexpectedly high demand for energy sparked by rapid expansion of the computer industry, and the non-construction of power plants conspired to hike wholesale prices higher than most experts predicted.

The three major power suppliers in California -- Southern California Edison, Pacific Gas & Electric and San Diego Gas & Electric -- now teeter on the brink of bankruptcy. Remember, they cannot raise their prices in order to pay for increasingly expensive wholesale power. Again, rather than allow the utility companies to charge fair market prices, California's Democratic Gov. Gray Davis spends approximately $50 million a day of state reserves to buy wholesale power, and proposes to float billions of dollars in bonds to pay for future power purchases and to restore to the general fund money already spent.

Even the generally anti-free-market Los Angeles Times seemed concerned. Its senior economics editor, James Flanigan, said, "The bonded indebtedness of the state will grow by at least 80 percent to deal with a problem that did not exist even a year ago and would not exist now, were it not for the early political decision against rate increases, energy experts and economists say." Obviously, sooner or later somebody pays. And that somebody is California taxpayers and ratepayers.

Now what? Davis refuses to deal with the crisis in the most commonsensical, expeditious and fair way -- remove retail price caps. So this "crisis" reflects not a failure of deregulation, but of government.

Even Newsweek called California's crisis "man-made." "And then there's the California Nightmare," said Newsweek. "Its problems are largely man-made. More than any other state, experts say, California bungled its efforts to deregulate its electric utilities. Along with poor energy policy, California has a booming population that consumes ever more power."

Wholesale energy generation has been deregulated at the national level for five years. Across the country, 24 states have passed deregulation laws. In Texas, the law allows utilities to hike prices twice a year, thus avoiding the problems of California.

Sacramento Bee columnist Dan Walters says, "It's also evident that it would have been a relatively minor bump in the road had (Gov. Gray) Davis not frozen when the first indications of price spikes arose. Had Davis done what private utilities, power suppliers and others urged him to do then -- adjust power rates slightly and allow utilities to sign long-term contracts with energy brokers and generators -- the major crisis could have been averted."

California "progressives" share a good deal of blame for this so-called crisis. Power must be generated. This requires the construction of power plants, something not seen in California in any real sense for over 10 years. Environmental activists stopped the construction of power plants dead in their tracks. Joseph Perkins, San Diego Union-Tribune columnist, states, "Indeed, because California's liberals have so vehemently opposed construction of new power plants (on the grounds that they are injurious to the environment) and because they have held such inordinate sway with state regulatory agencies, no new power plants have been built in California over the past 10 years. Meanwhile, the state's electricity demand has grown 30 percent over that span."

Inevitably, some "consumer advocates" blame the utility companies for the entire problem. They "conspired" to hike prices, holding consumers under their thumb. After all, goes this thinking, utilities fail to invest properly, anticipate correctly, blah blah blah. But many "consumer advocates" assume a divine right to wake up, flip on a switch and get light -- all for a "reasonable" price. But make no mistake, life involves tradeoffs. The advocates' refusal to support power plant construction means less generating capacity, which means higher prices and fewer options for consumers. Duh.

No doubt, California's "cautious" Democratic governor read the polls showing darkened 2002 re-election prospects should angry voters see electricity price hikes. So he dawdles and spends $50 million of taxpayers' money a day, "purchasing" power at high wholesale prices and "reselling" it to consumers at low fixed-rate prices. My grandfather called this kind of thing "burning furniture to keep the room warm."

Price controls do not work. They merely temporarily postpone something that most of us eventually come to terms with -- there ain't no such thing as a free lunch.


JWR contributor Larry Elder is the author of the newly released, The Ten Things You Can't Say in America. (Proceeds from sales help fund JWR) Let him know what you think of his column by clicking here.

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© 2001, Creators Syndicate