Ilana Mercer, February 2, 2001

Debate over the deregulation of power markets always begins with a reference to that bete noire of deregulation, the State of California. This is all the more reason to dispel the notion that the California energy market was in any way decontrolled. On the contrary, there was only a hint of deregulation in the state-managed 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-controlled power exchange, which, in turn, set the daily power prices. In this false 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. Because these were the only plants permitted, natural gas prices soon soared. The growth in population and economic development in California during the 1990s further contributed to a dramatic increase in demand for power. Retail prices, however, remained capped. With voters-cum-ratepayers being strategically shielded from the real scarcity that prices ought to reflect, shortages were inevitable. Clearly, a hybrid market, not a free market, caused the implosion in the Golden State.

With the Federal Energy Regulatory Commission (FERC) pushing forward in an effort to ostensibly deregulate energy markets, there is a renewed concern that it may be deja vu all over again, especially if market principles continue to be applied to what is still, root and branch, a government operation. 

The FERC fully intends to restructure U.S. electricity transmission networks. The first sally in this scheme is to dispossess the utilities of operational control over their power lines and make them answer to independent regional transmission organizations. Local politicians, especially in the South and West, have voiced concerns that this measure will allow their utilities’ relatively cheaper power to be sent outside the region, forcing their electricity rates up.

California’s crisis justifies their concerns. While Californians have a perfect right to return to the Dark Ages, they are not entitled to expect residents of enlightened states to pay for their energy-averse policies. Which is what happened: Californian environmental fundamentalism led to policies that rejected diversification in energy supply. Other states were then forced by central planners to subsidize this folly.

In addition to casting doubt on whether the FERC is really moving to free up markets, this “deregulation” impetus raises the issue of states’ rights. The powerful federal regulator’s alleged quest to create a competitive wholesale market involves “equal access,” namely the distribution of energy from the have to the have-not states, a process that not only rewards states whose regulations prevent diversification in energy supply, but also overrides state authority.

While power outages coincide like clockwork with regulated power markets, there are unfortunately no shortages in visceral, anti-intellectual arguments. 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 dim debate, out of the woodwork has emerged a new, more sinister breed of regulator. He portrays himself as a market enthusiast, with a difference; his is a middle of the road, genteel “free” market, better suited to what is referred to in administrative circles as the consumer’s special relationship with electricity.

But this is 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 possibly be left to bureaucrats whose bungling is rewarded with increased budgets; who fob bankruptcy onto taxpayers; whose incentives for making profits and avoiding losses are weak at best, and who regularly override the consumers’ vote with political expedients?

Such middle of the road interventionism leads directly to socialism, warned economist Ludwig von Mises. Interventionism, and in particular price control, eventually causes a failure to bring supply and demand into balance through the price system. When politicians make a commodity cheaper, when they fix prices below market level, the result is increased demand and shortages. The irony of price controls typical of the regulated market is that they stifle incentives to produce, causing higher prices in the long run. What’s more, if demand continues to rise, chronic shortages ensue, and the legislator is then forced to step in and begin fixing prices of labor and materials, and so on eventually 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 errors, 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 relay in an unhampered market, and will invariably fail in guiding producers to meet consumer demand.

Electricity is best entrusted to fully free markets. Only private enterprise raises initial capital voluntarily and applies careful entrepreneurial forethought to all endeavors. Left to their devices, entrepreneurs will, in the long run and in response to price signals, build more capacity—electricity-generating plants—and prices will inevitably fall. Only entrepreneurs in competition with one another have the incentive to satisfy the customer, on whom they depend for their very survival.

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. The road to socializing the means of production is paved with interventionism.

   A version of this column appeared in The Ottawa Citizen
   February 2, 2001

CATEGORIES: Economy, Energy, Free Markets, Regulation, Socialism

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