January 15, 2001
Turn Out the Lights
Government Takeover of the Electricity Industry Threatened in California
In a scene more reminiscent of Soviet Russia or Maoist China than America, central government bureaucrats, economic planners, regulators, and regional government officials met behind closed doors last week in Washington. The purpose of their meeting? To discuss a wholesale government takeover of California's electricity industry.
As frightening as this development may be to Americans who believe in free markets, it was not unexpected. California has faced severe energy shortages for more than a year. Residents and businesses in the state have seen dramatic increases in their monthly electric bills, with some paying 200% more than a year ago. Shortages and blackouts are threatened. In response to this crisis, California Governor Gray Davis has become an increasingly vocal proponent of an outright socialist energy system for the nation's largest state. He decided (not surprisingly) to go to the Feds for help, resulting in the meeting with Energy secretary Bill Richardson and Treasury secretary Larry Summers, among others.
California's woes are due in part to its tremendous population growth over the past decade. The influx of residents and businesses, particularly energy-intensive tech businesses, has greatly increased demand for electricity. The problem is that the California government has not allowed the construction of new power plants, in large part because of "environmentalists," citizens groups, and regulators hostile to property rights. The blatantly obvious result of high demand coupled with artificially low supply must be: high prices. Had the free market been allowed to operate, profit-seeking utility companies would have built new power plants to meet the demand and the situation would be very different today.
Governor Davis, seemingly oblivious to the real problem (his own government), has accused California's electricity companies of "price gouging," and called for stricter price controls. He even threatened (chillingly) to seize the assets of utility companies if they do not lower prices. Ultimately, he wants a new state agency to control the entire industry and even build new power plants if necessary! (new plants apparently are OK if the government builds them). Davis exhibits the classic bureaucratic cycle: first the government creates the crisis, which is blamed on the free market, and then more government is justified to fix the crisis.
Price controls will never work, because the laws of economics cannot be fooled. Price controls always result in shortages, because no rational business wants to produce something to sell at below-market rates. The California utility companies, which already are forced to sell to consumers at state-mandated prices, cannot do so forever. Their costs have increased dramatically; if they cannot raise prices they will be bankrupt. Utility companies outside the state simply refuse to sell to California because they can sell their power for a higher price elsewhere. This is why Governor Davis sought the meeting with Energy secretary Richardson. He wants the Feds to force utility companies in other states to sell energy to California. Unfortunately for Davis and Richardson, there are no laws (yet) forcing companies to stay in business forever while the government destroys them.
To politicians like Davis, only the government can save us. Like most politicians, he apparently accepts the myth that some goods and services are too vital to be left to the free market. However, it is precisely because energy is so vital that the government should not interfere in the electricity market. The operation of the market does not create a utopia, but it clearly would have prevented the California crisis. When the price rises in a free market, consumers simply use less energy (which supposedly is the goal of the "environmentalists"). When growth creates greater demand in a free market, the supply of energy increases to meet that demand. These simple principles, which are obvious to anyone studying basic economics, should be clear to the likes of Davis and Richardson. The likely explanation is that their true goal is the expansion of government power, without regard to the well-being of the people of California.