What is the lesson to
take from the California electricity crisis?
Some suggest markets need more regulation so energy companies from Texas
cannot collude to manipulate markets and extract profit from California. The truth is that California regulators and
legislators set an electricity price ceiling as well as environmental
regulations that created the high wholesale price. The shortage of electricity was due to poor
government policy.
During the crisis in
California utilities had to pay over $.25 per kilowatt hour for electricity and
then had to sale it for $.07. Clearly
the politicians had little background or interest in the business. Their regulatory structure illustrates the
pitfalls of government involvement in the electricity business.
The same California
lawmakers that created the crisis then confiscated the property of the utility
company as collateral for paying the $12 billion debt created by the regulated
price scheme. It should be clear that the
electric industry in California was never deregulated and now is partly
nationalized by the state government. Taxpayers
will have to pay the bill.
For the past 75
years, states in the US have granted monopoly status to electric utility
companies. No other firm could generate,
transmit, distribute, or sell electricity inside their franchise area. The history is that during the early 1900s
competing electric companies grew tired of local municipality taxes and
petitioned state governments for monopoly franchises. State politicians were happy to oblige in
return for regular state tax revenue on the profits.
Public service commissions regulate these utility monopolies and aim to
make them behave like efficient competitive firms. The utilities have been inefficient but with
abundant energy sources the price of electricity has remained low. Energy sources are now becoming scarce,
energy prices are rising, and the energy industry will assume increased
importance. Lawmakers and local politicians
with little idea about the energy industry are in now the political process of
“restructuring.”
Part of the proposed
restructuring is “retail competition” that would allow electricity customers to
choose suppliers. Customers in high
price states such as California, New York, and Florida would like to buy from
suppliers other than their local utilities.
With retail competition, however, electricity producers will also be
free to choose customers. Neighboring
low cost suppliers will choose to sell to customers in high price states. The result in the low price states will be
higher prices.
California and
Alabama present opposite cases.
California effectively imports most of the electricity exported from Washington,
Oregon, Utah, Arizona, Montana, Wyoming, and New Mexico, not to mention Canada
and Mexico. This interconnected region
has been forced by the federal government to increase exports to
Meanwhile, halfway
around the world OPEC leaders decide whether to loosen or tighten the world oil
supply. A higher price of oil climbs
induces people to demand other types of energy and all energy prices rise. As oil is depleted over the coming decades,
its price will continue to rise and at an increasing rate. Welcome to the future of the energy markets
where the only certainty is that someone will have to pay the bill.
The push to
restructure arises from rising energy prices and increasing energy
scarcity. Energy comes in various raw
forms. Oil and coal remain the
fundamental energy sources but they both cause air pollution when burned. Aside from the ambiguities of global warming,
fossil fuel pollution definitely causes serious local problems. There are ample supplies of coal, still the
main fuel for electricity, but pollution concerns may limit coal burning or
require expensive scrubbing. Either way,
get ready for higher electricity prices.
Natural gas is a
popular fossil fuel because it burns cleanly.
Natural gas from the
Nuclear reactors run
on cheap uranium fuel but the radioactive waste creates a problem. Nuclear generators are getting older and no
new ones are planned due to regulations on industry. There are $13 billion of mothballed nuclear
plants in the Tennessee Valley Authority, sitting idle due to ambiguous
regulations. Hydroelectricity has been a
reliable energy source but there is no discussion of building new dams due to
environmental concerns.
Be wary of proposed
government solutions to the pending energy shortage. Any energy “plan” would be doomed to
failure. Consider for instance the oil
tariffs of the 1950s designed to keep domestic oil fields in operation but
amounting to a policy of draining America first. Remember also the price caps on gasoline
during the OPEC oil embargoes of the 1970s and the long lines at the gas
pump. As for energy subsidies, do we
really want government officials deciding which potential energy sources to
develop? Experienced market
professionals with profits at stake would do a much better job.
There are thousands of people working in the competitive
energy industries trying to innovate and develop more efficient electricity and
energy systems. Innovation will lead to
alternative energy sources and efficiency as long as markets remain competitive
and patents are respected. The main
requirements of competition are reliable price signals to ensure the payback
for long term research and development.
Competition will work
in the electricity market just as it does in every market. As consumers face higher prices they will
economize. To ensure the future of
energy, all markets should be deregulated.
Electricity prices ultimately depend on investment. California has not invested due to government
regulations, accounting for their energy crisis.
Electricity prices
will continue to rise as energy sources become scarce and generation switches
to more expensive backstop resources. Final
consumers will have to pay these higher prices for the market system to
work. Economics and history teach there
is no feasible system other than the market system to produce and distribute
energy.