What is the Real Problem?

Steven Miller

For several years, Northeastern Nevada leaders have been explaining to state lawmakers, the public utility commission (PUC) and the Guinn administration why the deregulatory green light should be given to the proposed Ruby Gas Pipeline and power plant project.

The region’s businessmen and elected officials have pointed out that the economic health of much of rural Nevada is increasingly at risk, dependent on a mining industry that is progressively being driven from America.

Those same leaders have also shown how the Ruby natural gas pipeline would make a major economic difference throughout the northern section of the state, allowing new commercial and industrial development that would sustain the region’s communities.

Thus there was cheering in the north in 1997 when legislation was passed allowing the state public utility commission to essentially custom-fit deregulation for any section of the state, on almost any phase-in schedule. The law—intended to take effect before the end of 1999—seemed made to order for the Ruby Gas Pipeline and power plant project. Whatever the complications in Southern Nevada or the Truckee Meadows, Northeastern Nevada would be able to move ahead, and its communities and families could begin building a new future for the region.

Up the hill, down the hill

It did not happen. Instead, this session—four years after the enabling legislation was passed—state lawmakers entirely repealed that legislation. Then, just a few weeks later, they reversed themselves again, condescending for the moment to allow a smidgen of rationality back into the state’s energy scene. But just a smidgen—while certain large energy users will be released from their chains to Nevada’s state-imposed energy monopolies, the pols agreed to again block any freedom of choice, and the benefits of market competition, for average Nevada ratepayers.

What is going on here? What makes Nevada politicians act like obsessive-compulsives —marching frenetically up the hill, then down the hill, then up the hill again?

Publicly, most Nevada politicians and regulators, when pressed for an answer, wave their arms in the direction of the California energy debacle. But the mess in our neighbor to the west resulted from the failure of lawmakers there to honestly deregulate that market. California’s meltdown is actually a powerful argument why Nevada politicians and regulators should have tried to speed up deregulation. In states that did, like Pennsylvania, new energy supplies flowed in, rates dropped 30 percent and ratepayers’ satisfaction with their service rose to record-high levels.

Repeating Mistakes

The “California” excuse also fails for another reason: Congratulating themselves all the while, Silver State pols are repeating one of the worst errors out of La-La Land—a mandatory requirement that the state’s energy utilities buy a huge proportion of their power from purveyors of politically correct renewable or “green” energy—regardless of the cost. A similar rule was a major factor in setting up the California debacle: That state’s pols—smugly ignoring market forces—imposed such a mandate years ago, making Californians pay on average 50 percent more for electricity than other Americans. In that situation, more and more users fled from the state system, reducing revenues to the already financially weak state utilities. Why were they already weak? In large part because of earlier, similarly politically based decisions—including disastrously expensive investments in renewable energy. And of course the system’s basis—decades as government-protected monopolies—was the one most likely to inculcate managerial mediocrity.

And it’s from this perspective, ironically, that California does indeed explain a great deal about the real problem in Nevada. It also illuminates the chronic timidity that politicians so often demonstrate when it comes to reforming the monopolistic status quo.

The Iron Triangle

The fact is, the entire rising momentum for freedom of energy choice that has been sweeping Europe and America constitutes a real crisis for three quite powerful interest groups. They are the firms that have long been granted monopoly privileges, the government regulators and the politicians. Forming what analysts of government call a change-resistant “Iron Triangle,” the three groups have powerful incentives to keep ratepayers from escaping the state-run monopolies. For the utility companies it’s the legally instituted sweetheart deal that shields them from competition. For the regulators, it’s their jobs, their importance and their lucrative post-retirement consultancies. For the political class, it is clout.

When electricity is a state-regulated monopoly, politicians gain enormous power. They can frighten ratepayers with dire predictions, and then “protect” them from the big bad utility companies. They can frighten the utilities with teasing support for “unreasonable” ratepayer stinginess, then switch and protect the poor utilities with “reasonable” rate increases. They can interfere in the marketplace almost at will, to impose whatever politically correct rules of the moment they want. Last session, for example, Assembly Democrats—using grossly erroneous predictions of average Nevada power bills—forced into law an explicitly socialist gas and electricity tax on average ratepayers. The utility monopolies are being required to take the heat and collect it.

Wielding this kind of clout in the darkness of the state capitol, and appointing and “guiding” the regulators, career politicians have to be feared. Not only must the utility companies kneel, but also any large enterprise that needs new power or some modification of current regulations. Carrying clubs of such power, the career pols find red carpeting rolled out everywhere before them. Huge campaign contributions—and “campaign contributions”—become routine. Life is sweet.

Transferring Wealth

So it was not surprising that, in California, to save the juicy essentials of their system, the pols, regulators and power monopolies hatched a scheme and got it enacted into law. They called it “managed competition.” Its real nature, however, had been identified almost immediately. Back in 1997 Jerry Taylor, of the free-market Cato Institute, wrote:

While the advocates of California’s electricity restructuring are wearing the garb and makeup of Adam Smith, they are in truth ¼ political cross-dressers selling higher taxes and more regulation under the guise of “competition.”

Taylor, director of natural resource studies for Cato, noted that the enabling California law had been written to transfer an estimated $28 billion from ratepayers to the electric monopolies:

That $28 billion bailout—to be collected from ratepayers through a new surcharge on electricity transmission—is nothing less than a naked transfer of wealth from Californians to electricity companies. And why? Because the electricity companies possess a great deal of lobbying power and few Californians understand or care enough about electricity regulation to know when their pockets are being picked.

This is the key to the Iron Triangle’s game of government-effected wealth-transfer—the lack of ratepayer awareness. From the standpoint of the insiders, it is an especially nifty feature of state-run electricity monopolies that they keep their victims in the dark: Because no alternative providers are allowed to bid for the business of ratepayers, the latter never hear from their friends or neighbors about the great savings they’re getting from the new, competing electricity provider. Thus, most consumers never see the extent to which the system is giving them a hosing.

'Protecting consumers'
— via exploitive laws

This pattern was set when “Progressive” ideology—the New World’s “pragmatic” version of command-and-control socialism—achieved regulatory power in the early part of the last century, then was consolidated during the Great Depression. According to the script written then and still played out monotonously today, any shiver of apprehension among energy consumers is treated by the politicians like pure gold. Rushing to the media, they give off great quantities of reassuring (if economically incoherent) noises about “protecting the consumers of this state.” Yet at the same time what those elected officials actually produce are government schemes that damage their consumer-constituents. The damage occurs through laws that establish state energy monopolies—or, if those monopolies are already in place, hinder their removal. The collusion of regulators, politicians and the monopoly firms keeps the public in the dark.

In Northern Nevada, however, circumstances have placed large numbers of people in a unique position. It is a vantage point that has allowed them to clearly see the regional costs—the lost jobs and shrinking communities—levied by a state government that only begrudgingly can be weaned from its affection for inefficient monopoly over your right to make your own market choices.

All regions of the Silver State and virtually every power consumer are suffering the afflictions of this system. But the full dimensions of what is being lost to the state economy and the larger community will not surface until Nevada’s state-imposed electricity monopolies are finally escorted to the door, allowed to fend for themselves—and required to do so.

The Iron Triangle’s hidden taxes on all Silver State ratepayers must be removed. A genuinely free market in energy is the only way that will happen.

Steven Miller

Senior Vice President, Nevada Journal Managing Editor

Steven Miller is Nevada Journal Managing Editor, Emeritus, and has been with the Institute since 1997.

Steven graduated cum laude with a B.A. in Philosophy from Claremont Men’s College (now Claremont McKenna). Before joining NPRI, Steven worked as a news reporter in California and Nevada, and a political cartoonist in Nevada, Hawaii and North Carolina. For 10 years he ran a successful commercial illustration studio in New York City, then for five years worked at First Boston Credit Suisse in New York as a technical analyst. After returning to Nevada in 1991, Steven worked as an investigative reporter before joining NPRI.