by Lance T. Izumi, Fellow in California Studies
Pacific Research Institute
January 9, 2001

Announcer lead: Time for Perspectives. Lance Izumi says that government, not the market, has caused California's energy crisis.

A recent New York Times article blamed California’s energy crisis on the state's supposed “blind faith in markets.” Many politicians in Sacramento are repeating this refrain, with some calling for government takeover of the power industry. Trouble is, government, not the market, caused this crisis in the first place.

Contrary to popular myth, state government did not totally deregulate the pricing mechanism for electricity. The price which utilities could buy electricity was deregulated, but government capped the price at which utilities could sell that power to consumers. Also, until recently, government regulators prevented the utilities from signing long-term contracts to buy electricity at stable prices. Thus, when the current spot price of electricity began to soar, the utilities faced bankruptcy with skyrocketing wholesale prices, but a low government-controlled retail price. The low retail price also ensures continued high consumer demand that outstrips supply causing shortages.

Government not only messed up the pricing mechanism for electricity, it also ensured that California wouldn’t have enough in-state produced power. Since the early 1990s, not a single new power plant has been built in California. Because of complex government regulations on design, construction and siting, and the opposition of environmental groups, it takes longer to build new power plants in California than elsewhere. Thus, for example, a clean natural-gas burning plant can easily take four years or more to build.

To solve California’s power woes, government must get out of the way of a market-oriented solution to this crisis. In the short run, the retail price of electricity charged to consumers must be allowed to rise to cover a more representative part of the wholesale cost utilities pay for that electricity. Allowing only relatively minor retail price increases, as Gov. Davis and the PUC support, simply guarantees blackouts at slightly higher prices. In the long term, government obstacles to the building of more power plants must be removed so that we can increase the supply of electricity to meet demand and eventually to lower prices.

With a perspective, I’m Lance Izumi.

Lance Izumi is the Director of Center for School Reform at the California-based Pacific Research Institute for Public Policy. He can be reached via email at lizumi@pacificresearch.org.