----- Original Message -----
Sent: Sunday, August 26, 2001 7:21 PM
Subject: EnLG 2001aug26 Top 10 myths about California's electricity
The Top 10 myths about the state's electricity
Power failures By Steven Greenhut and John
Seiler, Editorial writers
Orange County REGISTER Sunday, August 26,
|As the state's electricity crisis continues, abated only by
refreshingly cool weather that has reduced the use of air conditioning, it
has become painfully obvious that Gov. Gray Davis and the Legislature
haven't the foggiest idea about how to handle the problem. The only thing
officials know how to do is spin, spin, spin. Politicians are blaming
others as a way to avoid the voters' wrath. That self-preservation
strategy, combined with the left-wing economics embraced by politically
dominant Democrats in Sacramento, has unleashed a torrent of
misinformation about the crisis. |
As a result, many widely accepted
"truths" aren't true at all. Here's our list of the top 10 myths about
California's energy imbroglio:
The market is to blame.
Liberal politicians, sometimes aided by market-cynical reporters, have
endlessly repeated the mantra that California's experiment with
electricity deregulation sparked the electricity crisis. Yes, Assembly
Bill 1890, the 1996 deregulation law, and subsequent rulings by the Public
Utilities Commission helped create the problem.
But the state
didn't really deregulate the market and allow private companies to compete
with each other to provide consumers with electricity. Instead of
deregulating the industry, the state embraced an alternative re-regulation
scenario. Utilities were forced to sell off their power generating plants
and to buy their power at the highest going rate on the spot market.
The worst aspect: The price at which utilities bought wholesale
electricity was not regulated, but the price at which they sold
electricity to customers was capped. As it happened, wholesale prices rose
above retail caps. Buy high, sell low. No wonder the utilities are ailing!
Furthermore, state environmental regulations made it virtually
impossible to build new power plants to meet growing demand. Deregulation
wasn't deregulation at all, so it shouldn't shoulder the blame for current
Evil Texans "gouged" us. Gov. Davis charged,
"We're in a war with generators that are trying to bleed us dry. They're
trying to ship every dime out of our state and back to Houston, Texas." In
fact, Texans sold less than 10 percent of the power used in California.
Prices charged to Californians were $146 to $240 per megawatt hour for
energy bought from Texas and other states, but $292 from the Los Angeles
Department of Water and Power and $330 from the Sacramento Municipal
Utility District. The real "gouging" was done not by private firms, but by
city-run utilities who had excess power simply because they were exempt
from the restructuring provisions that applied to the regulated utility
Price controls work. They never have in 40
centuries of recorded history and they never will. Price controls always
limit production and discourage conservation, making matters worse. It was
continuing price controls from the 1996 restructuring law that turned a
short-term problem of high energy prices into the long-term disaster
caused by Gov. Davis' mismanagement. And it's the lack of federal price
controls - except for loose price caps to be imposed only during a severe
energy shortage - that are keeping the lights on now.
the Legislature "solved" the problem. As Sacramento Bee columnist Dan
Weintraub recently pointed out, Gov. Davis has declared victory over the
crisis so many times that it has strained credulity. The Legislature
continues to evade any real solution. Lawmakers remember the unforseen
disaster of the 1996 restructuring law, with complexities few of them
understand, so they are lukewarm about embracing any far-reaching
The current "hot" proposal - a Davis-backed
bailout plan for Southern California Edison - may not even meet the
company's needs. And many legislators would be happy enough if the utility
were forced into bankruptcy, which wouldn't harm consumers. Nothing has
been solved, although cooler weather has delayed the day of reckoning.
Secrecy is good. When he negotiated long-term contracts
with power generators, Gov. Davis said he needed to keep the deal-making
secret so as not to tip his hand. Turns out, the secrecy limited scrutiny
of the deals to Davis' small group of advisers, who ended up getting
rolled by the more-savvy private-sector negotiators.
Kathleen Connell and UCI professor Peter Navarro argued recently that the
Davis shroud of secrecy has unnecessarily saddled taxpayers with billions
of dollars in unneeded expenses related to his poorly negotiated deals. In
other words, the secrecy itself led to higher electricity prices than
would otherwise have resulted. California ratepayers will pay for the
Davis miscue over and over again.
The state should buy the
power grid. Under a proposal Gov. Davis was pushing, the grid was
supposed to be swapped for a bailout of the utilities. It would have meant
the state would own the power lines, much as in a socialist country,
though the utilities still would run the lines. Reports suggest that the
grid needs billions of dollars in upgrades, meaning that taxpayers would
inherit a huge liability. This was a shockingly bad idea that even the
governor's fellow Democrats in the Legislature rejected.
Important resources like electricity need state ownership.
Apparently forgetting the experience of the Soviet bloc, many
Californians have accepted the idea that resources as important as
electricity should be controlled by the government. Yet governments are
notoriously bad at maintaining infrastructure, as a recent Register story
about crumbling government-controlled sewer systems reinforces.
Governments also are bad at customer service - think Department of Motor
Vehicles - and are inefficient as well. If the "government should control
resources" thesis were true, then government should be responsible for
food production and sales, as well as the provision of medical care, jobs
and everything else of importance. Have we forgetten the lessons of the
past 80 years?
The beauty of the marketplace is the lack of
centralized, bureaucratic control frees individuals to find economic
niches and fill them. Only a free market could provide the glories of the
U.S.-style grocery store with shelf after shelf of reasonably priced
delicacies, a point often raised by advocates of free
Compare that to Soviet-era stores run by "all knowing"
central planners. The shelves were mostly empty, and people stood for
hours to buy whatever the officials were selling that day. The economics
of electricity aren't all that different from the economics of any other
The feds are the problem. We've never liked
federal regulation of energy, but since the Reagan administration the
Federal Energy Regulatory Commission has generally been oriented toward
pushing more free-market mechanisms in energy, even under President
The feds did not craft the 1996 California restructuring.
Nor did they foolishly limit consumer electricity prices as worldwide
wholesale energy prices soared, causing the bankruptcy of PG&E and the
near-bankruptcy of Edison; it was the Davis administration that did that.
Nor did the feds entice Gov. Davis into secrecy and centralization that
will cost Californians up to $43 billion over the next decade as the bills
come due for the long-term contracts his adminstration signed.
Conservation saved us. If anything "saved" us this summer,
it was the cool weather. (So much for "global warming.") There has been
only one really scorching day statewide, July 3, and clouds rolled in from
the Pacific in the afternoon and cooled us off just as blackouts were
about to strike (and did strike in Nevada).
Certainly, some people
heeded government hectoring and reduced electricity use. But the
conservation that did take place was largely attributable to the large
price hikes - and threats of price hikes - that were finally allowed
earlier in the summer. The key to true conservation is accurate price
signals, not taxpayer-funded public service announcements that pressure
people into using less electricity for the good of the collective.
Re-regulation is the answer. In other states and other
countries, true deregulation has led to falling electricity prices as
competition heats up. Edison International CEO John Bryson told us that
his company wants to pull out of the deregulated British market because
competition there has rendered wafer-thin profit margins. A re-regulated
or government controlled market will only assure high, long-term
electricity prices in California, large bureaucracies and less choice.
The world is moving in the other direction, which will ultimately
make California a less competitive place to do business if it continues to
embrace a government-heavy model.
As the great economics
journalist Henry Hazlitt explained, "The art of economics consists in
looking not merely at the immediate but at the longer effects of any act
or policy; it consists in tracing the consequences of that policy not
merely for one group but for all groups."
electrical crisis has resulted in the type of short-term, non-market-based
thinking that Hazlitt warned against - thinking that could create
dangerous consequences ahead. Californians need to recognize the
misinformation for what it is, and insist on the economic truths that will
provide a real solution to what ails the state's electricity market. And
they need to hold accountable the politicians who brought this mess upon
us - and who continue to peddle lies, innuendoes and myths rather than the
truth about the crisis.
Steven Greenhut and John Seiler are Orange
County Register Editorial writers