SACRAMENTO, CA - It was a bizarre metamorphasis. There was Governor Gray Davis, the self-proclaimed fiscally responsible Democrat, giving a State of the State speech that sounded like a 1930s populist manifesto. Addressing California’s electricity crisis, Davis ranted against big business and big profits: “We have surrendered the decisions about where electricity is sold--and for how much--to private companies with only one objective: maximizing unheard of profits.” Echoing the socialistic solutions of the populists, Davis proposed a slew of government interventions. The governor’s speech, high on propaganda and low on elemental economic commonsense, was vintage Huey Long, minus the mesmerizing delivery.

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 power companies for possible racketeering and market manipulation. He also wants to expand government’s authority during power outages and proposes a government power authority that can buy and build new power plants. Finally, 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 electricity market. 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. Thus, when the current spot price of electricity began to soar, the utilities, hamstrung by a low government-controlled retail price, ran up a $12 billion debt. Davis said absolutely nothing about this debt and had no proposals as to how to deal with it. The low retail price also ensures continued high consumer demand that outstrips supply, causing shortages.

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. 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 in California versus one-third that time in Utah.

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 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.

- by Lance T. Izumi