Watching California Governor Gray Davis address the state’s electricity crisis in his January 8th State of the State speech was like watching black-and-white newsreel from the 1930s featuring populist demagogues inveighing against big business.

“We have surrendered the decisions about where electricity is sold—and for how much,” said Davis, “to private companies with only one objective: maximizing unheard of profits.”

In true 1930s style, Davis threatened government intervention at every opportunity. Indeed, the governor’s speech was vintage Huey Long, minus the mesmerizing delivery, and was high on propaganda and low on economic commonsense.

To combat “a dysfunctional energy market, driven by out-of-state energy companies and brokers,” Davis donned his red hat and promised, among other things, to hire 50 new government energy gendarmes “to monitor—and stand guard if necessary—at any facility suspected of deliberately withholding power from the grid.”

He wants the attorney general to investigate and prosecute power companies for “possible racketeering, market manipulation, price fixing, and other potential violations.” He also wants to “expand the authority available to the government in the event of imminent power outages.” He proposes a “California public power authority that can buy and build new power plants.”

Finally, with an attempt at bravado, he threatens, “if I have to use the power of eminent domain to prevent generators from driving consumers into the dark and utilities into bankruptcy—then that’s what I will do.”

The reality, though, is that government, not the market, is the cause of California’s power woes. Despite Davis’s slam against California’s 1996 “deregulation” of electricity, state government did not totally deregulate the pricing mechanism for electricity.

What Davis failed to say was that the price at 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.

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.

The difference between the high wholesale price of electricity and the low government-controlled retail price has caused a $12 billion debt for California’s utility companies. Davis said absolutely nothing about this debt and had no proposals as to how to deal with it, despite his general statement that he wouldn’t allow the utilities to go bankrupt. No wonder then that the verdict on Davis’s speech is that, despite his huffing and puffing, he continues to show no leadership in this crisis.

Davis did mention that since the early 1990s, not a single new power plant has been built in California. What he didn’t say was that 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.

Although Davis claimed that his administration has approved new power plants, he failed to say that, even after approval, government red tape prevents plants from being built quickly. Thus, for example, it can easily take five years or more for a clean natural-gas burning plant to be approved, built, and put on line.

Davis’s 1930s proposals will not solve the energy problems of 2001. To solve California’s power predicament, 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 Public Utilities Commission (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. That means that political leaders, like Davis, must be willing to stand up to the environmental lobby and local NIMBY-ites. It is a travesty that a power plant in Utah can be built in one-third the time it takes in California.

In his State of the State speech, Davis claimed that “we will meet this challenge and meet it quickly.” To meet the challenge, however, he is using the wrong weapons and the wrong strategy. Demagoguery is not leadership, and Davis’s likely failure will, unfortunately, have grave consequences for Californians and the economy.

Lance Izumi is a Senior Fellow in California Studies at the California-based Pacific Research Institute for Public Policy. He can be reached via email at lizumi@pacificresearch.org.