Feb. 2001 Vol. 222 No. 2  Editorial

Thomas R. Wright, Jr.,  Publisher

Thawing in the dark

California’s current troubles with electrical power shortages have prompted an "I told you so" or two from folks in the oil and gas industry. And we’ve also heard a verbal version of the old bumper stickers that were popular in the oil patch back in the 1970s. But back then, those expletives deleted who were advised to freeze in the dark were mostly the politicians and regulators in Washington D.C. and big city consumers along the East Coast who wanted to punish the oil industry for rising gasoline prices.

This time around, it’s the Left Coast politicians who are being jeered. And rightfully so, because they completely bungled power deregulation in California. Not surprisingly, the politicians are trying to lay blame elsewhere, with California Governor Gray Davis leading the chorus. Davis blames deregulation for the current power crisis, and warned that his state’s problem is a harbinger of things to come, not only in electricity markets, but in other industries throughout the economy.

However, Jerry Taylor and Peter Van Doren of the CATO Institute say the California power crisis is not an example of what happens when businessmen are running important industries. Instead, they say, "It’s a story of what happens when politicians try to manage competition and impose their visions of a market." In a memorandum titled, "California Screaming . . . About Electricity Deregulation," Taylor and Van Doren note that if deregulation means less – not more – political control over an industry, then California’s electrical market hasn’t been deregulated. Here are four reasons why:

• The state forced the electricity companies to sell their power to independent investors and to become power distributors.
• The state assumed total day-to-day control of the utilities’ power grid to make sure they couldn’t abuse their market power.
• Next, the state required new owners of the divested power plants to sell their juice to a state-managed power pool. The price of that power is set by a daily spot market run by (guess who?) the state. Electricity companies that wanted to compete for the state’s consumer business had to buy their electricity from this pool, and the price charged them was equal to the highest price received by any electricity generator in the daily state-managed spot market.
• Finally, regardless of what they pay for power in the wholesale market, no company can charge a consumer more than $0.065/kWh (6.5 cents per kilowatt hour). That price can’t change until the company has paid off its share of the bailout the state gave the electricity companies in order to accept this new regulatory scheme.

Considering all of the above, Taylor, et al., ask the following hard questions: "What kind of ‘deregulation’ imposes rigid government dictates on how industries should organize themselves? What sort of ‘deregulation’ keeps fixed prices on retail providers? What kind of ‘deregulation’ requires retailers to buy power through a state-run central exchange? And what brand of ‘deregulation’ forbids retailers from buying electricity more than one day ahead?"

Skyrocketing gas price didn’t help. Although bad "deregulation" thinking caused much of the California crisis, Taylor and Van Doren say there were other circumstances that led to the five-fold increase in electricity costs. The primary culprit in their opinion was the high price of natural gas, which since November, has risen 600% above the 1998 – 1999 average. And because 90% of the marginal cost of gas-fired electricity is fuel cost, the marginal cost of electricity would have to spike from $0.03/kWh to above $0.15/kWh to cover costs.

The bottom line, according to Taylor, is since the state is so heavily dependent upon gas during periods of peak demand, consumers would be facing the same unpleasant conditions of high electricity prices and blackouts even if the old regulatory rules were in place.

Neither did NIMBY. California’s problems were made worse by the state’s long-term hostility to new power plants. The CATO authors say that since 1996, electricity demand in California grew by 12%, while supply grew by 1%. "Every time you turned around over the past two decades, state regulators were discouraging new construction, arguing that renewable energy would pick up the slack – that negawatts (eco-activist jargon for subsidized energy conservation) – was preferable to megawatts. They also preached that minimizing new air emissions was more important than generating new electricity, and in general facilitating the transformation of the NIMBY (not in my backyard) mentality into a unified BANANA (build absolutely nothing anywhere near anybody) army."

Supposedly, Governor Davis has vowed to do whatever it takes to build new generating capacity in his state. Taylor and Van Doren view this as a "belated acknowledgment that the Naderites have held the state hostage for too long." But they think the guv’s threats to seize control of power plants and throw company managers in jail "guarantees that few private investors will risk entering the new market."

Meanwhile, on the other coast. The Washington Times’ John McCaslin notes that Washingtonians are always crying that they face "taxation without representation." But a new study shows the city received a whopping $24-billion cash infusion from American taxpayers in 1998, even though its residents paid only $1.9 billion in federal income taxes. In other words, the relatively small city in terms of population gets $12 back for every $1 residents pay in taxes.

This is by far the most "lopsided" balance of payments, compared with any of the 50 states, says the National Taxpayers Union Foundation, which conducted the nonpartisan study.

While on the subject of D.C., there have been many descriptions of the Beltway that surrounds the city. We particularly like the following: