Dim Bulbs in the Golden State


The good ideas keep pouring out of the Golden State, where an electricity crisis threatens to, among other things, turn off the juice-hungry grow-lights that keep Californians (and other Americans) well-supplied with medical marijuana. The latest brainstorm: Have the state purchase California's privately owned power grid and some 32,000 miles of power lines, the better to transport whatever electricity government and utility officials can scrape together from both in-state and out-of-state sources. Gov. Gray Davis calls the plan "a big part" of the state's electricity solution.

How exactly? Recall the real problem vexing the state: It's not price gougers from out-of-state. Nor is it fickle federal regulators, who despite the most earnest of pleas, refuse to play Robin Hood by stealing from utilities in states with energy to burn and delivering it to needy California.

The Golden State's core problem is really quite simple. In addition to producing such movies as Dr. T and the Women and Castaway and being three hours behind New York, it's short of electricity and needs to buy a lot of it on the open market. More precisely—since commodities are never actually under-supplied, but only under-supplied at a given price—California is short of electricity at the price for which the state allows it to be sold to consumers.

"They are on a full-bore Cuban-style recovery plan," says the Cato Institute's director of natural resources, Jerry Taylor, who speaks for many when he adds, "The takeover doesn't address any of the problems. It doesn't add supply. It doesn't reduce demand. It just shuffles who owns what. It's a thinly disguised bailout for the utilities, no doubt about it."

Actually, according to the chief booster of a bailout plan pending in the state senate, Democrat John Burton, the solution is a thinly disguised hot dog stand. "I give you a dollar, you give me a hot dog," is how Burton described the public-sector takeover.

At least one of his Senate colleagues, Republican Tom McClintock, isn't buying it. "The current proposal would force consumers to buy the utilities' transmission lines at several times their book value, plus interest, and then give them to the state as a gift," says McClintock. He estimates that Burton's hot dog stand will stick each individual ratepayer with a $1,300 bill but do nothing to increase the state's power supply. "The ratepayers end up with the tab while the state ends up with a power lines. A more accurate description of the deal would be, 'You give me $1,300 and I'll give my friend a hot dog.' This kind of transaction usually requires a gun."

California's electricity crisis stems from many mistakes and miscalculations by elected officials, regulators, and utility executives, who, after all, liked the system just fine when it was delivering huge and protected profits. At the root of it all, however, are price controls. "It's a price control story," says Cato's Taylor, who notes that almost the entire run-up in wholesale prices can be attributed to skyrocketing natural gas prices, the main input for California's electricity, and low water supply, which reduced the supply of hydroelectric power. "The blackouts were caused by retail price controls that encouraged ratepayers to ignore the supply crisis and consume electricity that just wasn't there."

Some in Sacramento understand this, even if they treat the issue delicately. "Having capped retail prices, the state has denied consumers the information they need to make their consumption decisions," says McClintock, showing that at least one California politician has internalized a key insight of Nobel Laureate economist F.A. Hayek. Hayek understood, that, next to sewing circles and faculty lounges, market prices are the world's quickest conveyors of information. "I think rate payers are entitled to accurate information about costs of power so that they can make good decisions," says McClintock.

McClintock's idea, one backed by Taylor and others clear thinkers, is to free retail prices so they can rise to true market levels. Then the state can use the billions it is currently shelling out on power (and may soon spend to buy the grid) to subsidize the small minority of Californians that truly needs help. Most consumers, faced with paying the actual cost of electricity, will conserve it until more power comes on line. Utilities will once again have cash flow, and the crisis will slip away as quietly as last year's shortage of PalmPilots and aisle seats on airplanes.

Power costs a lot of money—especially in California, where it is produced with natural gas–and somebody has to pay for it. The feds seem unwilling to shift California's costs to the U.S. taxpayer, or to foist more than a minimal amount of costs on non-California based generators. (The feds are shifting some to out-of-state providers, by requiring them to deliver to the state even though they're not getting paid promptly; the feds have also put a "soft" wholesale price cap, whatever that means, on power purchased by the state). So Californians are going to have to take most of the hit. The only question is whether it will be the ratepayers paying the cost of the power they actually use, or the taxpayers, who'll send in their money every payday. "When the state buys power for 70 cents and sells it for 7 cents, it's true you only see 7 cents on your utility bill," says McClintock. "But you still have 63 cents on your tax bill."

Markets only work when prices reflect costs, so people can chose among scarce resources and activities: What's worth more to you, watching TV while surfing the Internet and listening to the latest Eminem CD in the comfort of your air-conditioned home, or taking to the hills for a low-wattage weekend of camping under the stars? Politics, however, works best when prices don't reflect costs, and the costs are buried in some undifferentiated lump of human toil called the state budget, which can then be characterized as a hot dog stand. This allows politicians to take credit for providing good stuff, such as cheap electricity or a power grid, while never 'fessing up to the goodies' true costs.

The argument for lifting the price caps and moving to the radical system of forcing people to pay for the resources they use is bolstered not only by economics, but also by justice. When the state buys power with general tax revenue, the family that conserves subsidizes those that don't. In a state where businesses use most of the power but individuals pay most of the taxes, individuals subsidize business when the taxpayers pick up the tab. That hardly seems fair now, does it?