E D I T O R I A L

DEREGULATION

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

time?

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

failure.”

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

losses.

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

bankruptcy.”

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

‘CRISIS.”

**EMPHASIS ADDED**

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