How California Spread Its Electricity Shortage
by William Tucker

For six months, President George Bush, Jr., resisted
putting price controls on California electricity, saying they would only
make matters worse.  Finally, in June, the Federal Energy Regulatory
Commission (FERC) succumbed to public pressures and imposed wholesale
electricity price controls on the whole Western region. Two weeks later
there were blackouts in Las Vegas. "The perverse effect of price controls is
that they seem to have made things worse," complained Nevada officials.
Will George Bush get credit for resisting price controls? Will the Las Vegas
experience mean an end to federal intervention? Don't bet on it. The more
likely answer is -- more price controls and government regulation.
California's power problems arose not from natural disasters or bad weather
but from failing to build any major power plants since 1987. As a result,
the state is woefully short of electricity. The resulting price increase to
consumers would have been the first step in correcting the situation.   But
no politician wants to be responsible for a rate increase on his watch. So
the state tried to force the utilities to swallow the extra costs. This
quickly drove the utilities to bankruptcy. Next the state tried buying
electricity itself. No one knows exactly how much this has cost, but rumors
put it at about $8 billion. California taxpayers will pay the bill for
decades.  Finally, the solution became to spread the pain to other states.
The mechanism was price controls. California knew it couldn't get anywhere
by imposing price controls on its own wholesale electricity. That would
simply divert power to its neighbors. So the goal became to impose price
controls on the entire Western region. This would force Nevada, Arizona,
Oregon, Washington, and New Mexico to share the shortage.   In fact
California did one better. While persuading FERC to impose price controls on
the Western grid, state officials also persuaded FERC to insert a clause
saying that, in the event of a power emergency, the Golden State could pay
10 percent higher prices. This would divert emergency supplies into
California.  Sure enough, less than two weeks later, while enduring
112-degree temperatures, Las Vegas suffered rolling blackouts. More than
10,000 homes were without power for forty minutes. Casinos were forced to
douse lights and turn off air-conditioning. Meanwhile, California -- plagued
by the same weather -- dodged the bullet. "Why would power merchants sell to
us when they can get 10 percent more in California?" asked Paul Heagan, vice
president of Sierra Pacific Resources, which provides Las Vegas's
electricity.  Meanwhile, California crowed. "Please note that the energy
crisis has officially spread to a state not exactly noted for its
environmentalism or its antipathy to growth," announced the Riverside (Cal.)
Press-Enterprise.   Price controls have produced similarly perverse results
for 4,000 years. In Forty Centuries of Wage and Price Controls (1979),
Robert Schuettinger demonstrated how politicians and the public have never
given up the illusion that price controls can make things cheap and
plentiful. Hammurabi's Code, written in 1750 B.C., is basically a long list
of price controls. The Decline of the Roman Empire was sealed when the
Emperor Diocletian imposed price controls on the entire Roman economy. They
are history's longest running magic show.   By holding a price below market
level, price controls encourage consumers to demand more while encouraging
producers to produce less. The result is an economic "shortage." When the
government heeds producers and holds prices above their market level, the
result is the opposite -- an economic "surplus." Since the 1930s, Congress
has imposed agricultural price supports to help farmers. Ever hear the term
"farm surpluses?"  Yet no one ever gives up. Just a little more manipulation
will solve everything. "California and Nevada officials said they still have
faith that price limits can stabilize Western electricity markets,"
announced the San Francisco Chronicle two days later, "but that federal
regulators may have to tweak the system."   The other grand illusion is that
price controls are only "temporary." In fact, they inevitably create such
disruption that a frustrated public only demands more price controls.   New
York City's rent controls, imposed temporarily during World War II, are
still going strong. Paris still has rent controls from World War I.  After
40 centuries, why quit now?  William Tucker is a writer and columnist in New
York.  (Posted 7/10/01)