New State Regulations During ‘Deregulation’ are the Cause of California’s Energy Crisis

by | Jun 10, 2001

The attacks against deregulation of the California power industry by the enemies of capitalism are attacks against a straw man. Deregulation means that government removes onerous regulations that violate the rights of producers and consumers to trade freely (markets do not need nonobjective regulations to control traders, but objective laws to protect rights). California never […]

The attacks against deregulation of the California power industry by the enemies of capitalism are attacks against a straw man. Deregulation means that government removes onerous regulations that violate the rights of producers and consumers to trade freely (markets do not need nonobjective regulations to control traders, but objective laws to protect rights).

California never properly deregulated the power industry by instituting free-markets, but merely changed the regulations under which producers and consumers were forced to operate. California’s 1996 “de-regulation” bill imposed a plethora of new anti-capitalist edicts upon California’s power distributors that crippled their ability to adapt to market conditions.

Government regulations prevented power distributors, like Pacific Gas and Electric (PG&E) and Southern California Edison (SCE) from creating their own power plants to produce power more cheaply. Instead, they were forced to sell what power plants they had and then forced to buy back the power from those same plants at higher rates. According to ivory tower academics, this was necessary to prevent so-called “monopolistic” effects like “vertical integration” and “market power.” In reality, it prevented efficiency improvenents from such integration and provided artificial “market power” for the power generators at the expense of power distributors like PG&E who were outlawed from building cheaper “vertical” alternatives.

Regulators also stopped PG&E and SCE from entering long-term contracts to protect themselves from future increases in the price of power. Under a free-market business are allowed to contract for a whole year at a fixed rate, and thus “hedge,” or protect themselves against possible price increases. California’s “deregulation” regulations called this “anti-competitive,” and outlawed this common market practice used by electric companies in other states and countries. (It seems that the socialist minded regulators, didn’t want the insurance companies to make a profit for assuming the risk of potential rising prices.)

As their wholesale buying rates skyrocketed, power distributors, like PG&E and SCE, were forcibly prevented from increasing the retail rates they charged to consumers (these were frozen at 1996 rates), as oil prices rose thanks to the Clinton Administration’s restrictions on oil production in the U.S. Thanks to the “rate freezes” power distributors had to charge their consumers 6.5 cents per kilowatt-hour, even if their wholesale rates from power generators were ten times the retail rate. How could any business operate under such a setup, let alone survive?

To make matters worse, power suppliers were prevented from building new power plants, thanks to California’s technology haters, the environmentalists, who cried “Not in my back yard”, and the socialist bureaucrats who made their whims into law. With no new power plants being built, California’s power producers had less competition for power production, allowing producers to charge higher rates to distributors–and producers had little choice, but to raise prices, as the spot price for natural gas in Southern California skyrocketed over 500% from the year before.

How did power suppliers get stuck on natural gas? Wasn’t their some kind of alternative that power suppliers could diversify to? Thanks to environmental regulations they were stopped from diversifying into nuclear power. Writes David Holcberg, ” [The San Onofre] nuclear plant was completed in 1984, and also had its cost driven up by environmentalist litigation, from $1.3 billion to $4.3 billion. Businessmen quickly realized that such high and unpredictable costs made construction of nuclear power plants financially impractical, and no entrepreneur has dared build another nuclear plant in California…” [Why Greens Are to Blame for Blackouts, January 21, 2001]

Even today, in the midst of the crisis, power suppliers are still hampered. Today, businessmen must beg the “California Energy Commission” for permission to build new plants.

What did the government “suggest”? Unfeasible, “politically correct” forms of energy–from solar to windmills. Environmentalists, who were “experts” in “science”, but not in production, told businessmen that these technologies would somehow work, if only the businessmen were not so greedy and sacrificed more of their own profits for the “common good.” To make the businessmen overcome their greed, all the government would have to do is to pass the laws to “guide”–i.e., force– businessmen in the “politically correct” direction. Though such “laws” did not result in more energy, they did result in more bankruptcies. (If environmentalists think solar power is the solution why don’t they put their own life savings where their mouths are? Observe that Ralph Nader puts his money in Cisco.)

Given the business environment created by government bureaucrats, what company would dare to spend billions of dollars on a power plant, only to have the government walk in at any moment with a battery of new regulations? The result writes the LA Times is that “no new major power plants have been built in California in the last 10 years, mostly because no utility or private energy firm wanted to make such a massive investment without knowing how deregulation would unfold.” [How State’s Consumers Lost With Electricity Deregulation, Saturday, December 9, 2000]

Now dear reader, by what stretch of the imagination does any honest person conflate all these measures with deregulation? Clearly when we have calls for more government regulation of the energy industry, we are not dealing with honesty.

It is the government regulations that are responsible for this energy crisis, yet, observe who takes the blame: property rights, free-markets, and laissez-faire capitalism. If America’s computer industry operated under the same regulations foisted upon California’s power industry as “deregulation,” we would be using our fingers to do mathematical calculations!

***

The solution to California power crisis is not more government intervention, but freedom for America’s businessmen. We need a separation between economics and politics, just like we have a separation between government and religion.

The key to satisfying California’s increasing demand for energy is to leave businessmen free to increase their supply, free to build and operate their own grids, free to invent and use alternatives to a centralized power grid, and free to charge the rates that the free-market will let them, while leaving consumers free to find the lowest rates they can, or free to unite as producers and build and operate their own power plants. Californians need freedom from California fascism.

What about conservation of energy? In a free-market, rising prices act as an incentive for consumers to consume less power. More importantly, if rising prices result in higher profits for power producers, then these “above average” profits will attract a slew of new investors who will move their capital from less-profitable industries, into the more profitable power industry. Over time, these new suppliers will increase supply and push rates down.

Unfortunately, thanks to the wrenches thrown into the market’s gears by California’s altruistic bureaucrats, these vital market signals were never allowed to occur, as the retail price of electricity to consumers remained fixed by their laws.

Observe the hypocrisy here: the opponents of deregulation in their role as environmentalists demand that producers be prevented from building new plants to increase supply, and then the same people in their role as socialists demand that prices to consumers should not be permitted rise to help conserve that supply, and then in their role as fascists they seek to take over control of companies by regulating them. It seems that many Californians have an awful case of wanting to eat their power while having it too.

In principle government’s role, in the the power industry or any industry for that matter, should be not to regulate, but to govern: to protect property rights, enforce contracts, and to punish those who violate those contracts, or commit fraud. These are the same principles that make California’s computer industry the envy of the world. It is these same principles that will make California’s power industry attain the same status. Alas, in the state of California, the ability to think in principles is not a requirement for getting elected to public office, regurgitating socialist rhetoric taught in Californian universities is.

Who are the winners in the California energy crisis? The “winners” are the anti-capitalist environmentalists who want to rid man from the scourge of electricity and “go back to nature”, the “crony-capitalist” power suppliers who were granted powers that they could not dream of earning in a free-market, and the government bureaucrats who get to enlarge their political power by declaring martial law due to the emergency crisis–a crisis created by those same power-lusting bureaucrats.

In another sense, the power distributors are getting what they deserve: as it was the lobbyists of these “Orren Boyle” businessmen who opposed real deregulation. Writes the Economist: on why California power system was not deregulated: “It would have been possible, as a long-term aim, simply to abolish the old monopoly protections and dismantle the command-and-control apparatus. The utilities rejected that because it would have left them with lots of uneconomic power-generating capacity acquired under the good old days of the previous regime; they wanted compensation for those ‘stranded assets’. Organizations claiming to represent the interests of consumers rejected it as well because they wanted implicit subsidies to particular groups to continue (which meant keeping the cost hidden) and because they feared the untrammeled monopoly power of the liberated suppliers.” [When the lights go out, The Economist, Jan 18th 2001]

If there is a lesson to be learned from the California energy crisis is that when government attempts to “fix” small, alleged, short term “problems” in any market by rigging the results in favor of some particular interest group–whether that groups represents producers or consumers–it will only lead to greater, real, long-term problems. Sadly for most Californians, Governor Gray Davis hasn’t learned this most important lesson of political economy. Quoting from the California Governor’s past State of the State the Address, “But if I have to use the power of eminent domain to prevent generators from driving consumers into the dark and our utilities into bankruptcy, then that’s exactly what I will do.” In other words, California’s Castro wants to imitate his Cuban el compadre by stealing the power generators from the men who built them, much like the villains in Atlas Shrugged nationalized Hank Reardan’s Miracle Metal production plants.

Even worse Davis demands that the Federal government institute California-style price controls upon power wholesalers outside of California to alleviate California’s problems. The utter monstrosity of such a totalitarian proposal is so obvious, that it is not worthy of discussion. Thankfully, the Bush administration holds Davis’ inane proposal with the same contempt.

Soviet-style rationing, “back to nature,” and socialist “mixed economy” controls are not the answer to California’s energy crisis; production, industrialization, and laissez-faire capitalism are. Alas, the anti-Capitalists in our universities, media, and government–of which Governor Davis is a drop in the bucket–have not learned this basic American lesson. Perhaps if they paid more attention to Ayn Rand’s theory of capitalism and less attention to Karl Marx, they would know this.

Mark Da Cunha is the editor of Capitalism Magazine and creator of capitalism.org.

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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