California's pricey mistake: power on the cheap

One of my favorite questions on the final exam in my Business and Government course is: "Does the government deregulate as badly as it regulates?" The current California "deregulation" experience provides a compelling basis for answering "yes!"

Unfortunately, much of the writing on this subject is a search for villains. At least, as viewed from afar, there seems to be no single villain. Rather, the electricity fiasco in California is more in the nature of Murphy's Law: Everything that could go wrong did - and all at once. Surely, the evidence of ignorance on the part of virtually everyone involved is overwhelming.

To begin with, the state legislators badly need a course in basic economics. Since when is putting a lid on prices a cornerstone of deregulation? A price cap is perhaps the single most powerful regulatory action one can take. Apparently, officials feared that the voters would support long-term restructuring of the utility business only if they saw an immediate gain in terms of a 10 percent reduction in rates. Of course such a price cut hardly promotes conservation. It is a signal to use more energy.

To compound the problem, California electric companies were prohibited from entering into long-term contracts for purchasing power. Again, such interference with ordinary business decisionmaking is hardly deregulation. It must be recognized for what it is: the involvement in the energy business on the part of folks who wanted to show the voters they were doing something, even if they did not understand what that was (no long-term contracts meant no hedging against future wholesale price rises, which have come with a vengeance).

Sadly, there is more to this tale. Over the past decade, not a single new electric generating plant of any consequence has been built in California, even though the economy was booming. To some degree, we can blame the leaders of the energy business for being shortsighted. Indeed, when the deregulation law was enacted, the expectation was not a power shortage, but a glut. However, environmental groups in the state are not without blame. California enjoys a well-earned reputation for having some of the most stringent environmental laws and regulations in the US. The regulatory hurdles facing anyone daring to build a new generating plant in the state are awesome.

The citizens of California should not escape blame either. The "not in my backyard" syndrome is virulent in the state, constituting a further barrier to constructing a new energy facility. The citizens of San Jose, the capital of the Silicon Valley, recently voted down a new power plant.

For the rest of the nation, it should be useful to try to learn some lessons from California. It may be too early to come to firm conclusions, but here is a start. There is a continuing need to make choices. The consumers of electricity can't have it all - low rates, booming usage, no long-term commitments, no personal inconvenience, and pristine environmental goals. In California, there was no margin for mistakes - and the one item never in short supply was human error. But the booby prize should go to the state lawmakers who, in the name of deregulation, created the most convoluted market for electricity ever devised.

Murray Weidenbaum is a scholar in residence at the Jones Graduate School of Management at Rice University.

(c) Copyright 2001. The Christian Science Publishing Society