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On the Lighter Side


Economic Lessons from the California Power Mess

by Donald A. Tevault


The current mess in California proves how important it is for everyone to have a good, solid understanding of basic economics. Indeed, one has to wonder if anyone at all in California has even the least bit of a grasp on this particular topic. Certainly, California's politicians don't. The voters don't either, or else they'd vote these rascals out of office.

Now understand, I'm not trying to be elitist. I'm not trying to say that everyone needs to be a great economics intellectual; I'm not saying that everyone needs to have the economics education that, say, a Milton Friedman or a Walter E. Williams would have. As it turns out, the most important economic principles are ones that anyone at all can understand. Here are the ones that pertain to the present situation in California:

  • When a product becomes scarce, but the demand for it remains high, then that product's price will increase.
  • When the price for that scarce product rises to a sufficient level, more producers will begin making that product. Also, demand for the product will fall, as consumers will tend to do with less of the product. Both of these phenomena will cause prices of this product to fall.
  • If producers and merchants are forced to sell a product for less than it cost them, then they probably won't be able to stay in business very long.
  • Chaos, frustration and/or misery always result when governments try to circumvent the above principles.
How did the California power mess come about?
  • To begin with, radical environmentalists have caused such onerous regulation of the state's power industry, that no new power plants have been built in quite a few years. Additionally, these same regulations have forced certain older power plants to shut down because they have reached the maximum amount of pollution that they are allowed to emit in a given year. Of course, there's nuclear power, which is clean, but unreasonable fears have caused the closure of several nuclear power plants.
  • Demand for power has grown, due to population growth, the Silicon Valley boom, etc.
  • Environmental regulations forced many producers to generate their power with natural gas, which is a more expensive fuel.
  • A hare-brained "deregulation" plan in California really screwed things up. To begin with, Big Power was forced to sell its generating facilities to independent producers, and become nothing more than distribution companies. These independent power producing companies were to then compete for consumers' business. Then, price controls were removed at the wholesale level, but kept in place for the retail level. The power distributors were thereby forced to begin selling power at a loss. This put the distributors in a dire financial strait. When the distributors turned to power producers outside of California to try to buy their power, these producers said, "We don't think so. How can we know that we'd ever get paid for it?" Only a federal order from the Clinton administration caused these companies to sell their power to the California distributors.
What's the solution?

It seems that Californians would have learned some important lessons from this fiasco. But, this situation is one that is wont to defy all logic. Rather than demand that the government get out of this mess, and let the free market sort things out as it would normally do, Californians are demanding yet more government involvement. They now demand that the California government seize control of their power industry. Now, for argument's sake, let's pretend that this really were a constitutionally viable option. What would be accomplished?

Let's say that the state of California were to seize ownership of the power industry. Sure, they could start selling power at reduced prices. But, someone would still have to pay for it. If they were to sell the power for less than it costs, then they would only have to subsidise their newly-obtained industry by raising taxes. The waste, fraud and inefficiencies that are endemic in any government-run program would cause the final cost to the consumer to be higher than it would otherwise be. So then, what is the solution?

The California government should get out of the way, and let the free market do its job. Sure, consumers would howl about higher power costs. But, that would only be temporary. Conservation measures would reduce demand, and a repeal of onerous regulations would allow more producers to come on line. Thus, the price of power would come down. And yeah, environmentalists would howl at the repeal of these regulations, but in a true free market, consumers could chose to give their power business to whoever provides clean power at the most reasonable price.

What about "renewable" power?

After the election, I found myself debating politics with a certain couple that I've known for some time. They're big time Gore supporters, in large part because of his stand on environmental issues. Out of the blue, with no previous mention of the topic, the wife asked me, "Well what's wrong with promoting solar power?" "Nothing", I said, "except that it's not yet economically viable. It costs more to produce electricity from solar cells than it does by other means." They were incredulous at my argument, and asked how that could possibly be. The reason is quite simple.

Solar cells have a finite life. Amortize the cost of the cells over their expected life span, and you'll find that-- for the average homeowner--they'll never pay for themselves by way of reduced outlays to the power company. A couple of weeks after this debate, I happened to be shopping in the B. Dalton bookstore, and saw the January, 2001 issue of Mother Earth News on display. Its banner headline on the top of the cover was, "Ultimate Buys in SOLAR POWER". I bought the magazine, and found that the article reinforces my argument. On page 69, the article states that by 1994, the cost of solar generated electricity had fallen to $5 per watt. It goes on to say: "Regrettably, prices have not fallen appreciably since then, and as a result the domestic solar electric industry is experiencing a midlife crisis as it approaches its 50th birthday." The author then explains how the German and Japanese governments are sponsoring the installation of solar cells in their respective countries, and laments that the U. S. government is not doing the same thing. But again, we must remember that the government doesn't truly pay for anything. If government in this country--either at the state level or the federal level--were to sponsor large scale programs to promote solar cell production of electricity, the consumer would still be paying for overpriced power by way of increased taxation. (The author points out that the U. S. government also provides incentives to the fossil fuel industries, which artificially deflate the costs of fossil fuels. What he doesn't point out, though, is that excessive regulations on the fossil fuel industries have helped cause fossil fuel prices to be higher than they otherwise would be.)

Where then, can solar fit into a true free market economy? With the current state of solar technology, it can only fit into a niche market. For folks who choose to build homes far off the beaten path, solar technology can often be cheaper than having the power grid extended to the new house. And, if the free market were allowed to work in power-starved California, power prices would likely rise enough to make solar a viable option for homeowners.

Other forms of "renewable" energy have been tried in California. But, none have shown much promise of providing plentiful, reliable, reasonably priced power.

The Big Question

One now has to wonder; will the good folks in California learn from the error of their ways? Come next election, will the voters of California vote in folks who know how to let the free market work? Considering the current clamor for more government interference, I'm not holding my breath.

See also:

  • California's Enemy: The State
    From rolling blackouts to water shortages, California's troubles result from regulation, says Thomas DiLorenzo
  • Brown and Out in Beverly Hills
    Energy Secretary Spence Abraham should tell California to get its act together.
    Wall Street Journal Op-Ed
  • cover Setting the World Ablaze : Washington, Adams, Jefferson and the American Revolution
    Setting the World Ablaze is the story of the three men who, perhaps more than any others, helped bring the United States into being: George Washington, John Adams, and Thomas Jefferson. Weaving their three life stories into one narrative, John E. Ferling delivers a genuine and intimate illustration of them and, in doing so, gives us a new understanding of the passion and uncertainty of the struggle to form a new nation.
  • California's Energy Crisis Produces Rolling Blackouts
    Californians braced themselves Wednesday for rolling blackouts, to last between one and two hours and possibly stretch into Thursday. It marked the latest chapter in the worsening energy crisis in the nation's biggest state.
    By Roberta L. Barth
  • Energy Wars
    The Golden State has an energy crisis on its hands, the likes of which it has never before had to face. As blame frantically searches for a dimly lit place to land, fingers are being pointed every which way. The public, needless to say, is not at all happy with the situation.
    by Dr. James Hirsen
  • Davis in the Dock
    The California power crisis is a sobering story of what happens when politicians attempt to manage competition and impose their vision of what a market should look like.
    by Jerry Taylor
  • As the Lights Go Out in California
    If Gov. Davis continues on his current course, the citizens of California may soon be, quite literally, in the dark.
    by Jeff Sandefer
  • Rate Hikes and Political Jeopardy in the Golden State
    California's Public Utilities Commission agreed Thursday to temporarily boost consumer electric rates by nine percent, to help solve the state's energy crisis. California's two largest utilities, Pacific Gas and Electric Co. and Southern California Edison Co., claim to have lost $9 billion during the past year because of a deregulated marketplace that sent the wholesale cost of electricity skyrocketing.
    By Roberta L. Barth
  • California Screaming, Under Government Blows
    Production and price controls, not deregulation, are the cause of the state's energy miseries, writes George Reisman.

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