The Free Market 19, no. 7 (July 2001)
The work of Adam Smith was truly epoch-making in the development of economic thought. In his An Inquiry into the Nature and Causes of the Wealth of Nations, which appeared in 1776, he explained the law of supply and demand:
“The market price of every particular commodity is regulated by the proportion between the quantity which is actually brought to market and the demand of those who are willing to pay the natural price of the commodity, or the whole value of the rent, labour, and profit, which must be paid in order to bring it thither.”
In the halls of the state government of California this simple principle apparently is as yet unknown. The supply-and-demand principle points to three ways of creating an energy crisis. One, legislators and regulators fix energy rates that do not allow for rent, labor, and profit to bring it thither. In modern terminology, they set energy prices below market prices. Two, legislators and regulators do not set rates but do prevent producers from meeting a growing demand by setting stringent emissions and zoning rules that cause the rates to soar until there will be a “rate crisis.” Three, legislators and regulators may do both-fix rates below the market and prevent the supply from adjusting to the demand-which is bound to create a double-pronged crisis. California political leaders chose the double-pronged approach. In 1996, California legislators unanimously passed a sixty-seven-page electricity-restructuring law. They called it “deregulation,” which, in typical political duplicity, meant re-regulation. It contained something for all the different players. The number of regulators was increased with the addition of two new quasi-governmental organizations-the Power Exchange (PX), which controls all transactions between utilities and electricity generators, and the Independent System Operator (Cal-ISO), which operates the electricity grid, purchases the needed power, and charges the utilities. Consumer groups got an immediate 10-percent rate cut and price caps at roughly the 1995 level.
Powerful environmental groups were reassured of stringent environmental rules and zoning restrictions. The utilities, finally, were given strong financial incentives to sell their fossil-fuel-fired power plants. They subsequently reduced the self-generated power from 72 percent to just 20 percent, purchasing the balance on the market. Fearing corporate collusion, the law prohibited long-term power contracts and made the spot market-the most volatile of all-the only market. While consumer rates were set by the government, wholesale prices were to be negotiated from minute to minute at the PX. With retail prices fixed at roughly 12.5 cents per kilowatt-hour and wholesale prices soon soaring to 40 cents or higher, the utilities’ losses mounted, approaching $15 billion, and forcing Pacific Gas & Electric (PG&E) to file for Chapter 11 protection on April 6. Adam Smith’s simple principle of “bringing it thither” would solve the crisis immediately. But it is unlikely that the politicos who created it are willing and ready to solve it. Their economic understanding obviously is gleaned from politics itself, that is, the plotting and scheming of those seeking personal power and position.
Facing a crisis, their primary concern is political survival; to admit their culpability and liability would be committing political suicide. Therefore, they rant and rave, always pointing toward the producers of energy. It is they who heartlessly, scandalously, viciously, and immorally conspire to create energy shortages in order to reap exorbitant profits.
Every utility law the California legislature passes and every decision the governor makes seems to compound the problem. With the utility companies in or near bankruptcy, the state now purchases electricity in the wholesale market for delivery to customers.
To pay for the power that it has already purchased, and to keep the lights on during the summer, the state of California is authorized to sell up to $12 billion in revenue-backed bonds. Future taxpayers will cover present losses. The legislature also created another power authority-the California Consumer Power and Conservation Financing Authority-which may issue bonds to build state power plants.
Moreover, it is preparing legislation that will authorize the state to issue more bonds to buy the transmission lines from the utilities. If the utilities refuse to sell, the governor threatened to use the power of eminent domain. In short, the state is taking over the electricity industry.
Whenever a food shortage descends on Cuba, Fidel Castro invariably raves about profiteers and laments about the weather. In the coming months the governor of California may sound like Fidel, holding forth about evil industrialists and bewailing the unbearably hot summer.
Hans F. Sennholz, professor emeritus of Grove City College, is an adjunct scholar of the Mises Institute. He received his Ph.D. under Mises’s direction. You may email him at hans@sennholz.com.
