- The Washington Times - Monday, January 29, 2001

No wonder Russia has had so much trouble getting its economy right. If the prosperous , sophisticated, high-tech, entrepreneurial state of California can so thoroughly bungle an effort to deregulate just one industry, why should we expect ex-communists to know how to deregulate a whole economy?

Virtually all of the old Soviet economy was under state control, creating enormous vested interests that resisted exposure to the competitive rigors of the marketplace. So Moscow settled for partial privatization, handing over control of state-owned companies to their corrupt managers, then subsidizing the inefficient production of poorly made products by levying confiscatory taxes on everybody else. The predictable result: falling standards of living, political turmoil and headlines blaming capitalism for the misery.

California was among the first states to try to deregulate the electricity business. Like Russia, however, California feared going cold turkey. It came up with a plan that deregulated only a small part of the power business the wholesale price of electricity purchased by utilities. Prices charged to the final customer remained capped, even as environmentally correct California was making it more and more difficult to gain approval for new generating plants. The predictable result: rolling blackouts, political turmoil and headlines blaming capitalism for the misery.

The new secretary of energy, Spencer Abraham, extended for two weeks the federal order requiring California's neighbors to continue selling it electricity. That gave Gov. Gray Davis and the Democratic legislature time to come up with a plan for solving the issue. So far, however, the plan seems to consist of plunging the state more deeply into the power business without taking the one step, giving consumers incentives to restrain demand for electricity, that would instantly resolve the problem.

As Federal Reserve Chairman Alan Greenspan noted in congressional testimony last week, Washington cannot hope to limit the potential damage to California. But if Washington provides a bailout that allows California to perpetuate its wrongheaded policies, that would only deepen the problem. The Bush administration should step smartly into this intellectual vacuum by forming a high-profile task force to study the underlying causes of the California mess and recommend some solutions.

The first step would be suspension and review of unduly burdensome environmental regulations at both the federal and state levels. The federal government also might offer some temporary aid to low-income Californians who would be hurt by adjustment to market pricing. In return, however, Washington should insist that any aid would be contingent on California proceeding with real deregulation. If California is a problem for the country now, wait until the state tries to build and operate electric generating plants of its own.

President Bush has pledged to open a portion of the Arctic National Wildlife Refuge to oil drilling, pointing out that caribou and other wildlife have adjusted quite nicely to North Slope exploration and development only a short distance away. This might improve the supply picture long-term, but short-term it will do little for California.

And it would provoke a bloody battle with environmentalists, who still wield consider able power in the closely divided Congress and will portray the move as a sop to Mr. Bush's and Dick Cheney's oil industry friends.

That is a battle for another day. California is the first major test of the administration's seriousness. It could do for Mr. Bush what the air traffic control strike did for Ronald Reagan. Thus the administration's focus should be on California's policy errors. If markets are allowed to work, California's crisis would abate with amazing rapidity, leaving everybody to wonder what all the yelling was about.

California also has handed the administration a golden opportunity to begin educating the public about the real-world costs of the Al Gore approach to energy issues no drilling for new energy sources anywhere, treaties that attempt to roll back energy use to pre-1990 levels, mindless regulations with minimal benefits. In fact, a cynic might suggest that this would be a good time to finally submit Al Gore's Kyoto Treaty to the Senate for ratification. Chastened by a Democratic state's reaction to a few brief blackouts, the Senate would probably vote it down by a huge margin. Then we could start having a serious discussion about climate and the environment.

More seriously, Mr. Bush should take a second look at some of his own campaign ideas for example, his white paper on energy, which pledged to reduce and cap utility-plant emissions of carbon dioxide. Analysts in his own camp confess it would add tens of billions in new costs to electricity generation in essence, a huge tax on the economy which would inhibit investment in newer and cleaner technology. Some 23 other states have been deregulating their electric industries with minimal disruptions because they recognized the need to let markets work. California should be pressed to follow their example, not resocialize its electric industry. California represents a failure of policy and ideas, not a failure of markets or deregulation. Recognizing that would have international, not just national, benefits.

Tom Bray is a columnist for the Detroit News.

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