How California Spread Its Electricity Shortage by William Tucker

For six months, President George Bush, Jr., resisted putting price controls on California electricity, saying they would only make matters worse.

Finally, in June, the Federal Energy Regulatory Commission (FERC) succumbed to public pressures and imposed wholesale electricity price controls on the whole Western region. Two weeks later there were blackouts in Las Vegas. "The perverse effect of price controls is that they seem to have made things worse," complained Nevada officials.

Will George Bush get credit for resisting price controls? Will the Las Vegas experience mean an end to federal intervention? Don't bet on it. The more likely answer is -- more price controls and government regulation.

California's power problems arose not from natural disasters or bad weather but from failing to build any major power plants since 1987. As a result, the state is woefully short of electricity. The resulting price increase to consumers would have been the first step in correcting the situation.

But no politician wants to be responsible for a rate increase on his watch. So the state tried to force the utilities to swallow the extra costs. This quickly drove the utilities to bankruptcy. Next the state tried buying electricity itself. No one knows exactly how much this has cost, but rumors put it at about $8 billion. California taxpayers will pay the bill for decades.

Finally, the solution became to spread the pain to other states. The mechanism was price controls. California knew it couldn't get anywhere by imposing price controls on its own wholesale electricity. That would simply divert power to its neighbors. So the goal became to impose price controls on the entire Western region. This would force Nevada, Arizona, Oregon, Washington, and New Mexico to share the shortage.

In fact California did one better. While persuading FERC to impose price controls on the Western grid, state officials also persuaded FERC to insert a clause saying that, in the event of a power emergency, the Golden State could pay 10 percent higher prices. This would divert emergency supplies into California.

Sure enough, less than two weeks later, while enduring 112-degree temperatures, Las Vegas suffered rolling blackouts. More than 10,000 homes were without power for forty minutes. Casinos were forced to douse lights and turn off air-conditioning. Meanwhile, California -- plagued by the same weather -- dodged the bullet. "Why would power merchants sell to us when they can get 10 percent more in California?" asked Paul Heagan, vice president of Sierra Pacific Resources, which provides Las Vegas's electricity.

Meanwhile, California crowed. "Please note that the energy crisis has officially spread to a state not exactly noted for its environmentalism or its antipathy to growth," announced the Riverside (Cal.) Press-Enterprise.

Price controls have produced similarly perverse results for 4,000 years. In Forty Centuries of Wage and Price Controls (1979), Robert Schuettinger demonstrated how politicians and the public have never given up the illusion that price controls can make things cheap and plentiful. Hammurabi's Code, written in 1750 B.C., is basically a long list of price controls. The Decline of the Roman Empire was sealed when the Emperor Diocletian imposed price controls on the entire Roman economy. They are history's longest running magic show.

By holding a price below market level, price controls encourage consumers to demand more while encouraging producers to produce less. The result is an economic "shortage." When the government heeds producers and holds prices above their market level, the result is the opposite -- an economic "surplus." Since the 1930s, Congress has imposed agricultural price supports to help farmers. Ever hear the term "farm surpluses?"

Yet no one ever gives up. Just a little more manipulation will solve everything. "California and Nevada officials said they still have faith that price limits can stabilize Western electricity markets," announced the San Francisco Chronicle two days later, "but that federal regulators may have to tweak the system."

The other grand illusion is that price controls are only "temporary." In fact, they inevitably create such disruption that a frustrated public only demands more price controls.

New York City's rent controls, imposed temporarily during World War II, are still going strong. Paris still has rent controls from World War I.

After 40 centuries, why quit now?

http://www.spectator.org/special/special010710.htm

-- Martin Thompson (mthom1927@aol.com), July 12, 2001