Power failures The Top 10 myths about the state

Power failures
The Top 10 myths about the state's electricity crisis

By Steven Greenhut and John Seiler

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 generatoring 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 problems.

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 companies.

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.

Davis and 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 legislative fix.

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.

Controller 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 markets. 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 vital good.

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 Clinton. 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."

Unfortunately, the 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.