California Electric Crisis
Talking Points for
Free-Markets
William Westmiller
Past
Chair, CA Republican Liberty Caucus
• Price
controls didn’t work for Dick Nixon; they won’t work for Gray Davis.
1. Whenever government regulators disrupt the
connection between supply and demand, they create shortages, pain and suffering
for consumers.
• Deregulation
is the solution, not the problem.
2. Deregulation has only slightly reduced the
old monopolies on power generation, but the industry is still enslaved to
thousands of federal, state and local regulations.
• Consumers
are paying a huge price for short-sighted energy policies.
3. The problem is not high demand, but the
administrative barriers that stopped the development of new power sources in
California and across the country.
• Rather than
causing harm, profit is a fair reward for good future planning.
4. Investors deserve to be compensated when
they respond to consumer demands and take huge long-term risks to provide
energy to a growing economy.
• Economic
regulation is always a burden on consumers, not business.
5. There is no government action that can
improve consumer opportunities or prices. Regulation is just a process of
switching costs to benefit politically strong groups at the expense of the
average citizen.
• Progressive
conservation and environmental goals require free-market pricing.
6. The signals that market pricing offers
consumers is the best motive for making the most efficient use of energy.
Commentary:
California Scheming by Michael Lynch
Reason Foundation
The California Grinch by Jack Kemp
Jewish World Review
California Power Failure
by William Safire
New York Times
Stranded In Sacramento by Robert Michaels
CATO Foundation
they won’t work for Gray Davis.
1. Whenever government regulators disrupt the
connection between supply and demand, they create shortages, pain and suffering
for consumers.
a. Neither legislators, nor regulators, nor initiatives, can veto basic
economic laws.
When
electricity costs a dollar per kilowatt hour [kWh] to produce, no one can sell
it for 7-cents and survive. The “deregulation” legislation of 1996 [AB 1890]
carried just such a poison pill, requiring retail price freezes, even
reductions, in spite of contrary economic realities. However well informed and
advised, state regulators can't create
energy out of thin air. All costs must be paid by someone.
Under
the current regulatory scheme, the true costs of electricity have merely been
postponed by financial gimmicks that will spread the burden over the next three
to ten years. Bond issues and accounting credits can only increase the
financial costs of current and future energy supplies.
b. Short-sighted policies create long-term pain for consumers and
taxpayers.
When
a damaged natural gas pipeline [Arizona-California] last year caused a
reduction in supply, prices for the fuel that runs most electric generating
plants increased. The possibility of switching to alternate fuels was precluded
by state environmental regulations. As a result of rigid and ponderous rules,
California has become dependent on imported natural gas [85%] and electric
power generated in other states, making consumers the victims of seasonal
fluctuations and disruptions which are reflected in the short-term wholesale
cost of electricity.
The
major state utilities [San Diego Gas & Electric, Southern California
Edison, and Pacific Gas & Electric] have paid premium prices for prime-time
electric power to satisfy consumer demand that takes no account of those
prices. The accounting debt [$7-9 billion] will be paid by all consumers based
on their volume usage, rather than their prime time usage.
Subsidized
rates, differential class rates and cost-shifting to sales tax payers all work
against the best and most efficient distribution of electric energy.
Sources:
San Francisco Chronicle 01/03/01
San Diego Union-Tribune 01/06/01
• Deregulation
is the solution, not the problem.
2. Deregulation has only slightly reduced the
old monopolies on power generation, but the industry is still enslaved to
thousands of federal, state and local regulations.
a. Transition is always burdened by unknown risks and hazards.
The
“deregulation” process was started with the unanimous agreement of all members
of the state legislature [AB1890; 1996] to correct evident problems with the
California electric generation and distribution system. That political process
involved changes to more than a dozen sections of state law, requiring many
compromises and transitional steps that were both novel and risky. Of
necessity, the process included assumptions and judgments by legislators,
industry and regulators which were incorrect. Crystal balls are always in short
supply.
The
most substantive effect of the legislation was to distribute the monopoly of
the three major utilities over power generation. They were required to sell
most of their plants in exchange for a retail surcharges to recover losses
[”stranded costs”] from uneconomic plants. The utilities agreed to retail rate
ceilings, turned over their distribution assets [power lines] to a new state
bureaucracy, the Independent System Operator [ISO], and agreed to purchase all
electricity from a monopoly market, the
California Power Exchange [CalPX]. This “deregulation scheme” actually
increased the number of regulatory entities and market controls over
electricity.
The
California Energy Commission [CEC] retained all of its power over new
construction and the California Public Utilities Commission [CPUC] expanded its
governing power over the entire process. The Federal Energy Regulatory
Commission [FERC] jurisdiction over interstate transmission of power was unaffected
by the California legislation. In effect, the entire process revolved around a
re-regulation, rather than de-regulation of the industry.
b. All the King’s horses and all the King’s men cannot make electricity.
The
sixty-plus pages of legislation, hundreds of pages of rules, thousands of pages
of regulations, topped off by the individual judgements of tens of thousands of
regulators, cannot make a free market. There is no substitute for the
cumulative judgement of millions of consumers and businesses who make billions
of independent decisions about their economic future, every hour of every day of every year. Given a few
reasonable laws that protect honest and binding agreements, the free will of
the people will always optimize the use of valuable resources. Reducing the
role of government to the resolution of disputes and the punishment of
fraudulent transactions is the only contribution that coercion can make to an
efficient and beneficial economic system.
Sources:
California
Independent System Operator
California Public Utilities Commission
• Consumers
are paying a huge price for short-sighted energy policies.
3. The problem is not high demand, but the
administrative barriers that stopped the development of new power sources in
California and across the country.
a. Scarce resources in high demand are always high priced.
The
electric power market must always be a fluctuating blend of variable demand and
limited supply. Handicapping one of the most volatile markets with the most
ponderous regulations and pantheon of politically sensitive regulators is a
recipe for disaster.
The
presumption that mere words on paper can create “just, reasonable and low”
prices for electric power is nonsense. Putting price controls on retail and
wholesale transactions can only distort the reality of growing demand and
restricted supply, resulting in a truly “dysfunctional market”. When regulators
capped retail prices, they took no account of wholesale cost increases caused
by severe restrictions on the construction of new power plants at every level
of jurisdiction. In the two years since “deregulation” started, the California
Energy Commission [CEC] has approved only nine small plants while holding
dozens of others in abeyance. Adding this regulatory dissonance to the normally
long construction cycle for power generating plants virtually guarantees
long-term shortages and high prices.
b. Short-term volatility ensures long-term uncertainty.
One
of the most critical faults of the “deregulation” scheme was to first require
or exempt power generators from participating in a short-term hour-by-hour
market controlled by the rules of the monopoly California Power Exchange
[CalPX]. As a legislative creation, the Exchange practically forbids the
long-term contracting that would provide a stable financial environment for
long-term plant development and construction. Rather than freeing the market
for new financial instruments that offset risks, the state scheme foreshortens
trading activity that would enhance market entry. By requiring the largest
utilities to subscribe -- and exempting municipal utilities from the obligation
-- the legislation practically invites financial bankruptcy, diminishing supply
and profligate consumption.
Federal regulators [FERC] have refused to
impose wholesale price controls, a “remedy” favored by the California Executive
Branch, which would only distribute the injury and burdens to a national set of
consumers.
The
two remaining utilities under price controls [Edison & Pacific] say they
have satisfied the diversification requirements for the elimination of price
controls. State regulators could take months to audit those claims, leaving the
utilities with more billions of dollars in debt, even with CPUC approval of a
temporary surcharge on consumers.
Sources:
San
Francisco Chronicle, 01/03/01
Orange
County Register, 01/05/01
4. Investors deserve to be compensated when
they respond to consumer demands and take huge long-term risks to provide
energy to a growing economy.
a. Companies who participated in deregulation sales over the past two
years have not had larger profits than those which ignored them.
Companies
who bought power plants [Reliant Energy Inc., NRG Energy Inc., Dynegy, and Duke
Energy] had smaller profit increases in the last quarter of 2000 than those
utilities that did not buy plants under the deregulation agreement. All but one
of the plants were located outside California and came under the jurisdiction
of federal, rather than state, regulations.
Many
of the generating plants that were sold had purchase prices far beyond [up to 2
½ times] the book value of those plants, which had been carried on the utility
accounts with no depreciation of outmoded equipment. That benefited the balance
sheets of the state utilities [San Diego Gas & Electric, Southern
California Edison, and Pacific Gas & Electric], which are not allowed to
make a larger profit than regulators find “reasonable”.
These
new investors in California generating capacity are national businesses which
respond to demands from everywhere across the nation. Their profit margins in
California are not significantly different than other areas of the nation which
they serve.
b. Prices, not profits, must increase when demand exceeds supply.
San
Diego Gas and Electric sold one-half of its generating capacity last year,
gaining temporary freedom from the artificial rate freeze imposed by state
bureaucrats. Their prices increased when
natural gas supplies were disrupted [Arizona-California pipeline
explosion], increasing the costs of electric generation. Through no fault of
their own, the San Diego utility was burdened with another “temporary” rate
freeze, pending a regulatory audit.
The
anticipated increases in consumer prices for the other two distributors
[Southern California Edison and Pacific Gas & Electric] are not profit
increases. In fact, the two utilities will still be operating at a significant
loss. Price increases that should have been applied during peak demand times
have been spread over three years with a state loan, which their consumers will
be obliged to pay through higher prices over the life of the bond.
Sources:
Union-Tribune
Publishing Co. 12/17/2000
The Orange
County Register 12/17/00
• Economic
regulation is always a burden on consumers, not business.
5. There is no government action that can
improve consumer opportunities or prices. Regulation is just a process of
switching costs to benefit politically strong groups at the expense of the
average citizen.
a. Government creates nothing; at best it can prevent destruction.
The
production of electric energy is an economic enterprise. Assets are allocated
to the construction of generating plants based on a wide range of long-term
estimates of consumer demand. Businesses do not build generating facilities in
the expectation that there will be no reason for its operation. The intent is
that long-term construction costs and operational expenses will be paid, and
that investors will be compensated, through the sale of electric power.
When
governments disrupt and infringe on those economic decisions, the excess costs
and risks are passed on to taxpayers or added to the bills of consumers.
There’s nowhere else for those costs to go. When bureaucrats act, consumers and
taxpayers pay. When price controls are imposed, the ceilings are almost always
set to compensate businesses for those regulatory and excess costs. The
illusion that prices are lower is credited to government and the actual costs
are blamed on the corporations that distribute the bills.
b. Government “investments” are always uneconomic.
One
of the “solutions” offered by Governor Gray Davis is the construction of new
plants or the rehabilitation of old plants at state expense. Of course, “state
expense” is taxpayer dollars. Such projects are certain to be the least
efficient and most expensive response to electric shortages. Absent the
interests of scrupulous financial investors, state bureaucrats have no
incentive to diminish or optimize costs. Although the pay all the bills,
taxpayers have no direct voice in the allocation of their financial resources.
Not only is a government “investment” protected from any cost considerations,
but it can also ignore the demand curves that generate income. It can build
generating plants that have no market justification for operation.
At best, government “investment” may be capable of evading the most onerous restrictions of other government regulators. Whatever benefits might be derived from expedited approvals and generous exceptions to current laws, consumers and taxpayers will pay huge premiums for the inefficiency, patronage and corruption that accompanies government projects.
Municipal
Departments of Water and Power [DWP] currently supply about 20% of the total
California electric market. Because they are exempted from state regulation by
provisions of the California Constitution, these publicly owned utilities have
been the primary cause of the extreme wholesale price fluctuations that are
passed on to other utility consumers. By purchasing electricity from
out-of-state government generators [Washington’s Bonneville Power
Administration] at a low price, then reselling it on the controlled market at
premium spot prices, these utilities have made huge “windfall profits”, at the
expense of all other consumers.
Sources:
• Progressive
conservation and environmental goals require free-market pricing.
6. The signals that market pricing offers
consumers is the best motive for making the most efficient use of energy.
a. Conservation is a decision, not a “civic duty”.
While
“benevolent government” has encouraged the idea of conservation as a public
duty, it has only succeeded in transferring higher costs to the most
conscientious and efficient consumers. The “tragedy of the commons” flows from
the fact that anything which is perceived as “free” is always consumed to the
highest degree possible. When everyone “owns” an asset, no one has an interest in
preserving its future value. By removing the consequences of prolific use from
any one person and ascribing the responsibility to everyone, resources are
certain to be used in the least efficient and most destructive ways. Electrical
energy is not exempt.
In
a free market transaction, prices are the guide to every seller and buyer of
the fluctuating demands on limited supplies. When wholesale and retail prices
offer no message about the value of consumption, the resources are
automatically in jeopardy.
In
the California electric markets, retail prices are confined to arbitrary
ceilings which have no relation to value or the fluctuations of demand.
Consumers have no messages that would govern their conduct, hour-to-hour or day
to day. Demand peaks and ebbs without regard to supply and there are no rewards
or benefits to conservation. No amount of political indoctrination can avoid
the inevitable, chaotic and anarchic over-consumption of those resources.
b. Human well-being is the only environmental issue.
Most human beings value parks, open
spaces and natural habitats, to say nothing of pristine air and water. However,
those are not the only “precious things” contributing to everyone’s well-being.
Food, shelter and comfort probably rank higher in nearly everyone’s life
priorities. However, some aesthetic values compete with the domestic values for
resources. Comfort requires heating and cooling energy. Power plants, oil wells
and mining that makes that comfort possible may not be the most attractive or
even the best use of any particular location. Arbitrating those tradeoffs
through the exercise of political power always works to the detriment of those
without political influence. In most cases, that’s the common man with limited
resources and little time. The only means of putting everyone on an equal
standing is pricing. Natural amenities need to be acquired and maintained in a
fair and equal competition with other human values and life priorities.
Injury
is not a negotiable commodity. When any conduct causes demonstrable harm, that
conduct should be punished and restitution applied. Those industrial and
extraction activities that make electric energy possible can and must be done
without endangering the health of even one person. Pollution should be
classified the same as any other criminal assault, but most environmental
regulations take no account of personal injury. Government bureaucrats accuse,
try and convict businesses of alleged pollution without the presumption of
innocence or any evidence of harm, at the expense of consumers and taxpayers.
Objective tort reforms that grant every citizen equal protection from abuse are
the only remedies to true environmental pollution.
01/10/01
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