The debate over the future of the regulated power markets in California and Canada proved that, in the words of Alberta’s energy minister, "bureaucrats cannot be relied on to downsize themselves."

First it is necessary to dispel the notion that the California power market was in any way decontrolled, on the contrary; there was only a hint of deregulation in the state-controlled electricity wholesale market California implemented in 1998. Not only had the state forced the electricity companies to sell their power plants to independent investors, but the new owners were compelled to sell electricity to the state-managed power exchange, which, in turn, set the daily power prices. In this ersatz free market, utilities were prohibited from entering long-term contracts with electricity producers and had to buy power on a daily basis.

Californians and their politicians have a fetish with natural gas plants, which are expensive and relatively unprofitable. Environmental fundamentalism led to policies that rejected diversification in energy supply. Because only natural gas power plants were allowed to operate, natural gas prices soon soared. The growth in population and economic development in California further contributed to a dramatic increase in demand for power. Retail prices, however, remained regulated. With voters-cum-ratepayers being strategically shielded from the real scarcity that prices reflect, shortages were inevitable.

It is precisely this kind of hybrid market that caused the implosion in California. And it's deja vu all over again. All the indications are that Ontario and Alberta are following the path of managed markets. The mother monopoly, Ontario Hydro, may no longer exist, but, for its progeny, Hydro One and Ontario Power Generation, it’s business as usual. The utilities continue to have free access to taxpayers’ funds, which they use with glee. Rent seeking by industry has already commenced, and subsidies at the expense of the taxpayer are the order of the day. The Independent Electricity Market Operator, an arm of the government, will be in the wings to run the wholesale market.

Like California, Ontario is attempting to apply market principles to what is, root and branch, a government operation.

Shortages, unfortunately, have not developed in the kind of visceral, anti-intellectual arguments being floated about. Government messes up in California, and the foot soldiers for the Total State cite the mess as proof for the need for yet more government intervention; a disaster that is a culmination of decades of regulation is blamed on markets that were never allowed to work.

To further obfuscate the issue, out of the woodwork has emerged a new, more sinister breed of regulator. The various Canadian utilities portray themselves as market enthusiasts, with a difference. Theirs is ostensibly a middle of the road, genteel "free" market, with carefully placed "market" incentives balanced by bureaucratic benevolence.

They allege that this model is better suited to what they refer to as the consumer’s special relationship with electricity, a non sequitur if ever there was one, since the claim supports just as well the exact opposite argument: So crucial is our need for it, how can electricity be possibly left to bureaucrats whose bungling is rewarded with increased budgets; who fob bankruptcy onto the taxpayer; whose imperatives for making profits and avoiding loses are weak at best, and who regularly override the consumer’s vote with political expedients? How, furthermore, can this precious commodity be left to those so lacking in scruples, that they would use expropriation through taxes for their unvetted projects?

In 1940, economist Ludwig von Mises warned that middle of the road interventionism invariably leads to socialism. Interventionism, and in particular price control, must eventually cause a failure to bring supply and demand into balance through the price system. When politicians make a commodity cheaper so as to procure votes; when they fix prices below market level, the result is an increased demand and scarcity. If demand continues to rise, chronic shortages will ensue, and the legislator will then step in and begin fixing prices of labor and materials at every stage of production.

Our state-mediated utilities may be able to buy and sell on the free market. But, unlike private firms, they need not respond to profit and loss signals. So long as they have taxpayer funds to make good their losses, these hydra-headed creatures have the option to produce at a loss. Thus, in a market in which the state has a hand, prices will never fully convey the information they convey in an unhampered market. They will not guide producers to meet consumer demands in the same way the free market does. Electricity, then, is best entrusted to private enterprise. Only private enterprise raises initial capital voluntarily. And only private enterprise has to apply careful entrepreneurial forethought to all endeavors if it is to satisfy the customer, on whose survival it depends.

California’s Governor Gray Davis wanted to fully nationalize the grid. He threatened to sue power companies—even jail their managers—for not selling their juice below market value. He sought to ban power producers from exporting electricity to other states. Theft of private property was also on Gray's agenda, as he threatened to use "eminent domain" to seize power plants. Ludwig von Mises was right. Interventionism leads to socialism and its attendant tyranny.

©2001 By Ilana Mercer

A version of this column appeared in The Ottawa Citizen

February 2