- The Washington Times - Monday, January 22, 2001

Deregulation has long been one of the favorite political scapegoats of the left. It is now being wrongly blamed by Democratic officials in California for that state's worsening electricity crisis.

Faced with electric power shortages, rolling blackouts and near-bankrupt utilities that energy analysts say have been caused by state price controls and a tangled, bureaucratic web of rules and regulations, Gov. Gray Davis is blaming the energy debacle on deregulation and "unfettered free markets."

Don't believe it.

"Davis is trying to turn a liability into a political asset by scapegoating a straw man that he's invented," says Marshall Wittmann, policy analyst at the Hudson Institute. "They say that necessity is the mother of invention, and this is a clear political case of that."

Though Mr. Davis' energy policies are in shambles, his blame-shifting ploy with the help of a compliant news media seems to be working, setting the stage for a virtual government takeover of the power industry. And it is having a negative effect on other states.

"California's electricity crisis is creating a backlash against deregulation of electricity, with some states putting their own plans for deregulation on hold while they study the mess in California," says Adrian Moore, energy analyst at the Reason Public Policy Institute in Los Angeles.

As for the claim that deregulation caused California's problems, nothing could be further from the truth.

"The market wasn't deregulated. It was derailed. The politicians could not have come up with a more stupid system," says Angela Antonelli, energy analyst at the Heritage Foundation. "The entire misperception is that California's electric utility industry was deregulated, and it wasn't."

Instead, California's 1996 reforms approved by Republican Gov. Pete Wilson restructured the industry, creating a network of new regulatory agencies and rules, including rigid price caps and other obstacles that have blocked new power plant construction.

Here's what those regulations did, according to Adrian Moore, who has carefully studied the roots of the California crisis:

• "Private utilities in the state were required to sell their electricity generation plants and to buy all their power in the newly created Power Exchange, a mandatory bidding pool where all sellers of electricity are paid the price of the … highest bidder."

• "Utilities were required to pay the high pool price and discouraged from entering into any long-term contracts for power or otherwise hedging against increasing prices."

• Caps were also placed on what utilities could charge. "The prices … were set at a level 10 percent below the pre-restructuring level."

• A state agency, the Independent System Operator, "took over operational control of the electricity transmission grid."

This restructuring, sold under the guise of deregulation, "did not free the electricity markets. This web of micromanagement did not even allow buyers and sellers to determine what, when or how they would trade. For consumers, nothing really changed," Adrian Moore said.

In the world of free markets, the best system for the allocation of all resources, the players are allowed to respond to changing circumstances by seeking out the cheapest source of supply and shifting to alternative sources when demand is high. But under California's centralized, regulated system, there is "no mechanism for change, no flexibility to shift prices or production, and no incentives for participants to be forward-looking," Adrian Moore said.

The result is that there has not been a new power plant in the state in 20 years, making a bad situation worse. Demand for electricity has shot up by more than 12 percent in the past four years in California, while the supply of power generation has increased by less than 2 percent.

Mr. Davis' response to the crisis has been more state regulation, believing that more government intervention is the only solution despite all of the evidence from energy crises of the past that price controls only end up restricting supply, not increasing it.

The answer to California's crisis is the creation of competitive energy markets in which price caps are lifted. This will lower demand and encourage conservation. Utilities must be set free to purchase power from whomever they can at the cheapest available prices. In the long term, the rules inhibiting new power plant construction need to be dismantled, and the industry should be encouraged to diversify its sources of energy.

The immediate result will be a temporary spike in electricity rates that will hurt lower-income people and small businesses the most. The state may have to assist them with short-term subsidies until supply and demand reach equilibrium. After all, the state created this mess in the first place.

Meanwhile, all eyes are on how Mr. Davis handles a crisis that could end his political career. He has a reputation for being a centrist Democrat, but that reputation will be destroyed if he tries to peddle more regulation as the answer to the state's energy crisis.

In an era of economic deregulation and privatization, Gray Davis is in danger of becoming "the new Jimmy Carter of the energy crisis," says Bob Bradley of the Institute for Energy Research in Houston. Mr. Carter's energy crisis of the late 1970s threatened the nation's economy until another California governor ended it in the 1980s through deregulation. His name was Ronald Reagan.


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