California’s destined-to-fail restructuring of its electricity market has sent politicians in the Golden State scurrying for cover. As costs soar and blackouts roll across their state, officials are making patently false statements and demanding that neighboring states clean up the mess California’s central planners created. Leading the charge is Governor Gray Davis, who has chosen to obscure the real causes of his state’s power debacle. His dangerous demands and irresponsible rhetoric are sending ripple effects across America. “What's happening here could potentially create a national backlash against deregulation,” says Adrian Moore of the Reason Public Policy Institute, a Los Angeles-based think tank. The crisis is also having a much more direct impact on the residents of the Golden State’s neighbors. Already, utility customers throughout the West are paying higher bills. As governors from throughout the West meet today to discuss the crisis, they should make it clear to Davis that their citizens will not be sacrificed for his state’s folly.
The Nutshell Version
California’s electricity crisis is now a well-known story that generates daily coverage by the national media. Last year the state’s utilities were hit with skyrocketing energy costs, expenses which they cannot pass along to their customers due to state-imposed price caps. (As a result, the collective debt of the state’s utilities now nears $13 billion.) In addition, California’s appetite for electricity has become voracious in recent years, as a result of an economic boom, population growth and the state’s surging high-tech sector. From 1996 to 1999, electricity demand grew by 12 percent in California. But during those same years, the state’s power supply grew by less than 2 percent. Couple that tepid growth with the twin terrors of a huge spike in the cost of natural gas and unusual weather throughout the West, and it’s easy to see why blackouts have come to the Golden State.
Deregulation, California Style
Davis has blamed California’s crisis on a 1996 law which restructured the generation and sale of electricity in the state. While the governor, foes of the free market and ignorant media figures continue to refer to the restructuring scheme as “deregulation,” the description hardly applies. Under the law, the state’s utilities were required to sell their generating facilities, freeze the rates they charge retail customers and buy and sell electricity only through a quasi-government agency. “California designed the world’s most complicated market that people said would not work well and which they’ve been trying to fix ever since,” says Paul Joskow, director of the Center for Energy and Environmental Policy Research at the Massachusetts Institute of Technology. The state’s longstanding—and militant—resistance to the construction of new power plants is also a factor. So when potential entrants into this “deregulated” electricity market considered doing business in California, they saw a state with a warped and government-dominated power exchange as well and a populace and political establishment infested with a serious case of NIMBY-itis. While Davis has characterized deregulation as a “colossal and dangerous failure,” in California, it’s clear that the state is actually suffering from too much regulation, not too little.
California’s Bad-Neighbor Policy
As the Wall Street Journal’s Robert Gavin wrote last week, “California’s energy crisis is spilling over into other Western states, driving up their power bills, throwing people out of work and threatening to ruin one of the region’s economic advantages: low energy costs.” In December, outgoing U.S. Department of Energy Secretary Bill Richardson ordered out-of-state generators to sell electricity to California “at just and reasonable rates.” (The Bush administration will terminate this order of February 7.) The mandate has hit California’s neighbors in the wallet. “When California catches a cold,” said Colorado Governor Bill Owens, “the rest of the West sneezes.” In Nevada, both natural-gas and electricity rates will rise sharply. (In addition, a coal-fired power plant in Laughlin has been allowed to increase the amount of pollution it releases, in order to send more electricity to California.) In Arizona and New Mexico, 2,350 miners might be laid off due soaring energy costs. In Utah, a major utility is asking for an 11 percent rate hike. But the Pacific Northwest has been hurt the most. The area’s hydroelectric systems have been tapped by California at a time when water levels in the region are low. Idaho Governor Dirk Kempthorne summarizes his state’s situation: “Our snowpack is just 50 percent of what it normally is, and we are being told to drain our reservoirs and ship power off to another state. That’s not a smart energy policy as far as I’m concerned.” The Golden State’s power grab has also placed salmon populations in danger. “We are really at risk of having the state of California and its energy problems drag the rest of us down with it,” Oregon Governor John Kitzhaber told the New York Times in December. Oregon Senator Gordon H. Smith goes even further: “Frankly, I think my state is being set up—and I include Washington State—to be an energy farm for California.”
But gobbling up power from out-of-state electricity generators isn’t enough for Davis. He wants the Federal Energy Regulatory Commission to place a price cap on power throughout the entire West. This would send a disastrous signal to generation companies looking to market to the region’s growing number of customers. It’s not like generators have no other places to expand—true deregulation experiments in Texas and the Northeast offer ample opportunities for them.
It’s difficult to understate the seriousness of California’s electricity crisis. Bankrupt utilities and frustrated customers are just the first symptoms of a disease that could turn lethal, hobbling the largest state’s economy and dragging down economic activity in neighboring states—all at a time when the nation itself may already be in a recession. It will take political courage for California’s officials to fix their Rube Goldberg-like restructuring scheme. Doing what must be done will no doubt incite the anger of every ratepayer in the state, not to mention the massive political machine of the state’s radical environmentalists.
Gray Davis was not California’s chief executive when the state’s electricity-restructuring scheme got underway, but the central-planning ideology which he incorrectly believes will free California from its crisis will instead worsen the problem, and extend the economic pain Western states are already feeling. A bizarre, pseudo-market more reminiscent of socialism than of capitalism got Californians into their electricity mess. Even more market-warping tinkering by government will not liberate them from their bind. Western governors, lawmakers and power regulators should speak with one voice regarding California’s electricity-restructuring debacle. They should make it clear to Davis that their citizens are more important than his political ambition.