The debate over the future of the regulated power
markets in California and Canada proved that, in the words of Alberta’s energy
minister, "bureaucrats cannot be relied on to downsize themselves."
First it is necessary to dispel the notion that
the California power market was in any way decontrolled, on the contrary; there
was only a hint of deregulation in the state-controlled electricity wholesale
market California implemented in 1998. Not only had the state forced the
electricity companies to sell their power plants to independent investors, but
the new owners were compelled to sell electricity to the state-managed power
exchange, which, in turn, set the daily power prices. In this ersatz free
market, utilities were prohibited from entering long-term contracts with
electricity producers and had to buy power on a daily basis.
Californians and their politicians have a fetish
with natural gas plants, which are expensive and relatively unprofitable.
Environmental fundamentalism led to policies that rejected diversification in
energy supply. Because only natural gas power plants were allowed to operate,
natural gas prices soon soared. The growth in population and economic
development in California further contributed to a dramatic increase in demand
for power. Retail prices, however, remained regulated. With
voters-cum-ratepayers being strategically shielded from the real scarcity that
prices reflect, shortages were inevitable.
It is precisely this kind of hybrid market that
caused the implosion in California. And it's deja vu all over again. All the
indications are that Ontario and Alberta are following the path of managed
markets. The mother monopoly, Ontario Hydro, may no longer exist, but, for its
progeny, Hydro One and Ontario Power Generation, it’s business as usual. The
utilities continue to have free access to taxpayers’ funds, which they use with
glee. Rent seeking by industry has already commenced, and subsidies at the
expense of the taxpayer are the order of the day. The Independent Electricity
Market Operator, an arm of the government, will be in the wings to run the
Ontario is attempting to apply
market principles to what is, root and branch, a government operation.
Shortages, unfortunately, have not developed in
the kind of visceral, anti-intellectual arguments being floated about.
Government messes up in California, and the foot soldiers for the Total State cite the mess as proof for
the need for yet more government intervention; a disaster that is a culmination
of decades of regulation is blamed on markets that were never allowed to work.
To further obfuscate the issue, out of the
woodwork has emerged a new, more sinister breed of regulator. The various
Canadian utilities portray themselves as market enthusiasts, with a difference.
Theirs is ostensibly a middle of the road, genteel "free" market, with carefully
placed "market" incentives balanced by bureaucratic benevolence.
They allege that this model is better suited to
what they refer to as the consumer’s special relationship with electricity, a
non sequitur if ever there was one, since the claim supports just as well the
exact opposite argument: So crucial is our need for it, how can electricity be
possibly left to bureaucrats whose bungling is rewarded with increased budgets;
who fob bankruptcy onto the taxpayer; whose imperatives for making profits and
avoiding loses are weak at best, and who regularly override the consumer’s vote
with political expedients? How, furthermore, can this precious commodity be left
to those so lacking in scruples, that they would use expropriation through taxes
for their unvetted projects?
In 1940, economist Ludwig von Mises warned that
middle of the road interventionism invariably leads to socialism.
Interventionism, and in particular price control, must eventually cause a
failure to bring supply and demand into balance through the price system. When
politicians make a commodity cheaper so as to procure votes; when they fix
prices below market level, the result is an increased demand and scarcity. If
demand continues to rise, chronic shortages will ensue, and the legislator will
then step in and begin fixing prices of labor and materials at every stage of
Our state-mediated utilities may be able to buy
and sell on the free market. But, unlike private firms, they need not respond to
profit and loss signals. So long as they have taxpayer funds to make good their
losses, these hydra-headed creatures have the option to produce at a loss. Thus,
in a market in which the state has a hand, prices will never fully convey the
information they convey in an unhampered market. They will not guide producers
to meet consumer demands in the same way the free market does. Electricity,
then, is best entrusted to private enterprise. Only private enterprise raises
initial capital voluntarily. And only private enterprise has to apply careful
entrepreneurial forethought to all endeavors if it is to satisfy the customer,
on whose survival it depends.
California’s Governor Gray Davis wanted to fully
nationalize the grid. He threatened to sue power companies—even jail their
managers—for not selling their juice below market value. He sought to ban power
producers from exporting electricity to other states. Theft of private property
was also on Gray's agenda, as he threatened to use "eminent domain" to seize
power plants. Ludwig von Mises was right. Interventionism leads to socialism and
its attendant tyranny.
©2001 By Ilana Mercer
A version of this column appeared in
The Ottawa Citizen