Investor’s Business Daily, January 01, 2001

The power shortages being billed as the latest “energy crisis” provide an opportunity for a basic lesson in economics, in which facts dispel hysteria and fanaticism, commodities currently in oversupply.

Witness Paul Krugman in the New York Times decrying a “blind faith in markets” as the cause for the current shortages, rising bills, and threat of blackouts and brownouts, a view shared by Ralph Nader and a legion of vocal activists. But as Pepperdine University economist George Reisman points out, this view is not only wrong but also in direct opposition to the facts.

The crisis is not with the market but with government and regulation. Immigration, a booming economy, and the widespread use of computers have increased the demand for power nationwide. According to the California Utilities Commission, demand grew 12 percent in the Golden State from 1996 to 1999. Unfortunately, suppliers have not been allowed to meet that demand in a rational manner. Supply increased by only two percent during the same period. The reason, as professor Reisman points out, is a deconstructionist policy based largely on environmental fanaticism.

Efficient delivery of electric power does not occur naturally. Contrary to the fundamentalist pantheism that has become a kind of national religion; windmills and solar power cannot provide our growing needs. These needs require generating plants of considerable capacity. Vocal environmentalists and their allies in the media have been very effective at demonizing these plants, even ones producing hydroelectric and geothermal power, as a threat to “the planet.”

No new nuclear or coal-fired power plants have been sited during the past two decades. Worse, plants using coal, oil, or nuclear power have been taken off line. This is like shutting down several grocery-store chains and forbidding farmers to grow corn and potatoes, then blaming merchants and the market for the inevitable food shortages and price increases.

Professor Reisman accurately points out what the media and politicians seldom mention, that virtually all the new plants that have been sited in California are fueled by natural gas. These plants are more expensive to operate and have increased the demand and price, for natural gas. California’s inadequate pipeline system compounds the problem.

In addition to restricting supply, the government has imposed price controls on electricity. Taken together, these factors are an absolute prescription for shortages and high prices. Half-baked attempts at deregulation made the situation worse.

Lawrence Makovich of Cambridge Energy Research Advisers was on target when he told Business Week, “It was a crisis by design. Legislators created a power shortage.”

Richard Gordon, professor emeritus of economics at Penn State, notes that instead of the sweeping deregulation that was applied to the transportation industry, the model for electricity was that of the telecommunications industry, in which utilities are treated like telephone companies. In return for access to their transmission and distribution grid, they receive greater pricing flexibility.

Last summer, price controls remained in force in California but were removed from San Diego County and southern Orange County. This opened up one small area to competition from other companies which themselves were in need of additional power to avoid the very shortages which find their source in government regulations. This is what critics decry as a “free market” in electric power. It is nothing of the kind.

A free market in electric power would provide true choice and competition, leading to lower prices and better service, just as it has in every other area where it has been allowed to work. In Pennsylvania, it also works in electric power. Lower prices and better service everywhere will require the immediate siting of new plants and the reactivation of others. That will take political will. Policymakers should recognize the need for trade-offs. More urgently, they need to remove the line-item veto on plant construction currently held by militant eco-activists and affluent groups such as the Sierra Club. Neither group is elected by the public.

If there is blind faith at work, it is in regulation, not the market. Until reformers adopt true free-market principles, there will be shortages and high prices. Willful ignorance and hysteria can make a lot of noise but, as Californians are learning the hard way, cannot generate electric power.

Sally Pipes is the President and CEO of the Pacific Research Institute, a California-based think tank. She can be reached via email at spipes@pacificresearch.org.