Government is cause of California power problems, not solution

By DAVID MOON, Moon Capital Management
January 21, 2001

Gathered around a huge conference table in the Ronald Reagan Building in downtown Los Angeles a few days ago, a group of state and federal governmental officials made a declaration the building's namesake would have found laughable, if not for the gravity of the situation. These bureaucrats, working on the California energy crisis, declared, 'we're from the government and we're here to help.' Whether as California governor or U.S. president, Reagan would have known that the government is actually the root of the current California energy problem; not a long-term solution.

Current California governor, Gray Davis, addressed his state legislature and blamed the crisis on the 1996 deregulation of the power market. That argument is flawed in several ways. The California power market was never really deregulated. The wholesale portion of the power market was somewhat deregulated, allowing a more free reign in what utility wholesalers could charge for the power they provide to local utility companies. The local companies, however, remained limited (regulated) in what they could charge their customers. This was a simple recipe for disaster.

Wholesaler deregulation allowed the wholesale price for California electricity to increase, while the state still capped the retail prices charged to the consumers. The heavy regulatory burden in the state makes it difficult to build new power plants, so the supply of power is practically limited. Fixed supplies, combined with steady increases in demand and increasing wholesale prices squeezed the retailers, who could not increase the prices they charge consumers.

If the power markets were truly deregulated and the retailers could increase their prices, a couple of things would happen. As the price of electricity increases, it becomes more economically feasible to meet the high regulatory hurdles to build new power plants. With more profit to be made, the private sector would build new plants and provide more capacity. With profit capped by the government, there is no incentive to create more product.

Higher retail prices also force consumers to self-ration. People and businesses have to decide if their electricity uses justify the new, higher prices. Is this logic insensitive? Perhaps, but consider the alternative. When the supply is limited, unrestrained demand will cause eventual shortages. That is what is happening in California today. These shortages were caused by the government ' and now the government wants to step in and solve the situation. Someone help us, please. Governor Davis wants the state to become the de facto wholesaler, buying energy at these high prices and selling it to the retailers at lower prices. At the same time, he plans to urge residents to cut their electricity demand by 7 to 10 percent. The best way to 'urge' consumer to reduce their usage is to let the market urge them.

Davis recommends that the Federal Energy Regulatory Commission impose wholesale price controls. Do they ever learn? Price controls were a part of the original cause of this problem. California senator Diane Feinstein, plans to propose legislation giving the U.S. energy secretary the authority to freeze wholesale prices if there is 'unjust pricing.' Who decides if pricing is 'unjust?'

These are the problems when government tries to control an industry. These government agencies seem to only want more power ' political, not electric. Sadly, the people who run California and these federal energy agencies may actually believe that they are the solution and not the problem. Whatever their motivations, none of Ronald Reagan's market-based solutions rubbed off during the meeting.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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