Investor’s Business Daily 1/9/2001
E D I T O R I A L
CALIFORNIA’S SELF-MADE CRISIS
With Christmas lights still gleaming across California two weeks after
the holiday, Gov. Gray Davis threatened to take over the state’s
electricity market. What’s next? Is he going to make the trains run on
In his annual address to the state Legislature Monday night, Davis
focused on California’s power troubles. He was quite candid. The 1996
deregulation of the power market, he said, is “a dangerous and colossal
We’d like to politely correct the governor: The real “dangerous and
colossal failure” is the state’s PARTIAL deregulation.
California’s power “crisis” is the bipartisan fruit of the state’s
attempt to free the market. THE WHOLESALE MARKET WAS DEREGULATED, BUT
THE RETAIL MARKET WASN’T. Power generators can sell at prices that
reflect supply and demand while utilities are limited by the state to
what they can charge customers. WITH CAPS ON RATES, USERS HAVE NO
INCENTIVE TO CONSERVE. Demand increases follow artificially low prices.
It hasn’t helped that prices for natural gas, used to fuel power plants
across the state, have increased. Nor have the high regulatory hurdles
of building new plants made the situation better.
Meanwhile, WITH DEMAND GROWING, WHOLESALERS HIT UTILITIES WITH RATE
INCREASES — A FIVEFOLD HIKE SINCE JUNE. BUT UTILITIES CAN’T PASS THE
RATE INCREASES ON TO RETAIL CUSTOMERS, who don’t feel the effects of the
shortage until the lights go out. The utilities end up with massive
Pacific Gas & Electric and Southern California Edison, which serve
roughly 25 million, have lost $9 billion. Rate hikes of 7% to 15%
approved last week by the state Public Utilities Commission fall into
the too-little-too-late class.
It’s better, though, than Davis’ feebly urging Californians to cut usage
by 7%. Consumers understand one thing best: the hard reality of prices.
What the state needs is a free power market. When supply dwindles in a
free market, sellers force buyers to conserve by increasing prices. The
computer market, for instance, is about as free as markets get — and it
doesn’t suffer shortages. IF CALIFORNIA HAD A TRULY OPEN POWER MARKET,
THIS CRISIS WOULD HAVE BEEN AVERTED. SAD THAT SO MANY EITHER FAIL TO
UNDERSTAND OR SIMPLY REJECT THIS ECONOMIC TRUTH.
The heart of Davis’ plan has no room for the free market. He wants to
create a state authority that would buy and build power plants. And HE’S
READY TO COMMIT $1 BILLION IN TAXPAYERS’ CASH TO SOLVE THE CRISIS — A
CRISIS OF THE STATE’S MAKING.
Davis would also add 50 new inspectors “to monitor — and stand guard if
necessary — at any facility suspected of deliberately withholding power
from the grid”; “make it a criminal act to deliberately withhold power
from the grid — if it results in imminent threat to public health or
safety”; and be willing to “use the power of eminent domain to prevent
generators from driving consumers into the dark and utilities into
Clearly, Davis wants the keys to the power plants. But that won t solve
the problem. Price controls will create the same shortages, no matter
who owns the plants.
Common sense? SINCE THE GOVERNMENT IS THE AUTHOR OF THE STATE’S POWER
PROBLEMS, IT’S OBVIOUS TO SERIOUS-MINDED FOLKS THAT MORE GOVERNMENT
ISN’T THE ANSWER. SADLY, THAT SORT OF COMMON SENSE ISN’T IN EVIDENCE.
Economic sense? That won’t get in Davis’ way, either. He isn’t willing
to take the political risk of doing what is right — full deregulation —
because doing so will lead to higher rates. It would take a politician
of rare courage to take that step. Davis, though, is no Jimmy Carter or
Ronald Reagan, who deregulated markets even though they knew prices
would first spike before falling under free-market pressure.
YET PUNDITS ARE HAILING THE DAVIS PLAN AS BOLD. THAT’S TRUE --
GOVERNMENT TAKEOVERS OF INDUSTRY ARE ALWAYS BOLD. BUT IT’S NOT THE
ANSWER. And for all its boldness, few courts will sanction its
interference with interstate commerce.
Investors reached the same conclusion, sending shares of Pacific Gas &
Electric and Southern California Edison down another 5%-7% on Tuesday.
To repeat, prices will spike —and we understand the reluctance of
politicians to attach themselves to such pocketbook pain. Still, these
pols could soften the blow to the needy with taxpayer dollars — not an
indefensible use of the state’s $5 billion surplus.
But in the long run, ONLY A FREE MARKET CAN SOLVE CALIFORNIA’S POWER
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