- The Washington Times - Wednesday, January 10, 2001

It wasn't easy, but after 25 years of effort by politicians and environmentalists (with an assist by private utility executives looking for some government bailouts) California The Golden State is running short of electricity. California's two biggest utilities, Southern California Edison and Pacific Gas and Electric (staples of pension fund portfolios for generations of Californians), have announced they may soon go bankrupt. Their bond rating has fallen from AAA to one step above junk bond level. Bank of America, one of their major creditors, has seen its stock price drop precipitously.
Silicon Valley computer companies, which can lose hundreds of millions of dollars during even a brief rolling blackout, are buying up every diesel generator they can find in the country in order to avoid such catastrophic power losses. There is now a five month backlog for the much desired $400,000 Peterson 2 megawatt Caterpillar generator. More than three-fourths of those Silicon Valley companies believe they have a moderate or high risk of being blacked out this summer.
According to the Wall Street Journal, because of the size of the California economy ($1.2 trillion GDP per year), if California's energy crisis depresses its economy, it could measurably add to a declining national economy.
Earlier this week, California's Democratic Gov. Gray Davis called the current electricity marketing scheme "a colossal and dangerous failure" and vowed that "the time has come to take control of our own energy destiny." The trouble is, they have already taken control and made a hash of it.
Virtually every media outlet blames this calamitous state of affairs on "the deregulation of the electricity market" in California. CNN reports that "California's experiment with energy deregulation is not just a mess; its a certifiable failure." The vaunted New York Times' economic columnist, Paul Krugman, wrote in December that "California's blind faith in markets has led to an electricity shortage so severe that the governor has turned off the lights of the official Christmas Tree."
This week, Mr. Krugman has taken his argument one step further. Arguing that the federal government should institute a "temporary and partial reregulation" of the California energy market, "But George W. Bush doesn't just have an ideological attachment to free markets; he has close personal ties to some of the companies that are making such huge profits in California right now." Expect to see Mr. Krugman's twisted logic and almost libelous statement about the president-elect repeated continuously by Democratic senators and congressmen over the next several weeks.
But free markets and deregulation have nothing to do with the California energy scheme. As Michael Lynch of Reason Magazine explained recently: "Despite numerous claims to the contrary, the California electricity market wasn't deregulated. It was restructured by state politicians." In 1996, the California State Legislature entered into a grand scheme with big energy users, the private utilities, environmental and consumer groups.
The utilities had to sell off their power plants but got to write off the costs of bad prior investments. They were also given a provision of the law called "competitive transition charges," which had the effect of increasing their profits, while tending to keep out new competitors. At the heart of the scheme was the law that retail prices were fixed by the government, but wholesale prices would be subject to the market. This isn't a free market, its a governmentally rigged market. And, as always happens when regulators try to out think the marketplace, the inexorable forces of supply and demand defeat the most complexly constructed schemes.
The crisis was brought on when market wholesale prices of natural gas skyrocketed to as much as one hundred times the retail prices the utilities are permitted to charge. California's robust economy created greater demand for electricity, but no new supply. And the reason California has been hit so hard is that for 25 years environmental extremists have forced the closure of atomic energy plants and insisted on excessive reliance on always more expensive natural gas for electricity generation. In the last 20 years no net new power has been brought online.
So now California has been trying to buy electricity out of state, but those sellers are hesitant to sell to utilities that may go bankrupt. Thus, the inevitable call for Washington to step in and mandate price controls around the country to bail out California, which has foolishly distorted its own energy market.
With 25 states in the process of moving to genuine energy deregulation (Pennsylvania has successfully and popularly brought on line such genuine deregulation), it is vital that liberal ideologues and news outlets not succeed in their effort to mischaracterize the California fiasco as a failed free market. It is merely one more lamentable example of an overregulated and rigged market failing both the consumers and the investors. E-mail: [email protected]

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