How to Turn the Lights Back On

Monday, July 30, 2001

Although it may surprise many politicians, a few economic laws remain immutable. One of the most obvious and the most often ignored dictates that a price held below what supply and demand would prescribe will produce shortages, such as we see now causing rolling blackouts.

Unlike King Canute, who knew he couldn’t command the tides, King Gray Davis seems to believe that he can override the laws of economics. Apparently he thinks he can order both that the rates be kept down and that the lights be kept on. We all might wish for a world free from economics, bad weather, accidents, or deaths, but we must face reality. When Jimmy Carter imposed price controls on gasoline, we had shortages and long lines at the filling stations. When Ronald Reagan removed the controls, the lines disappeared and, within a short time, prices started falling.

Governor Davis’s solution—to have the taxpayer cover the difference between the market price and his promise to consumers—is a recipe for state bankruptcy. The only real solution is to deregulate fully, allowing rates for users to rise to cover the costs of buying power. Where this might cause hardship, the state should step in and provide help. "Electricity stamps" for those who might have to choose between food, medicine, or their power bill could make sense. In the short run, the state could provide up to a fixed dollar amount toward covering the utility bills for those on food stamps or otherwise in need. But it makes no sense to have the taxpayer subsidize the costs of electricity for all users.

Without more power, Silicon Valley may find itself a silicon desert.

Consumer advocates and others have recommended conservation to reduce demand for electric power. With the state keeping rates down, however, consumers have little incentive to conserve. Some civic-minded people may shut off their lights or turn down their furnaces, but with rising natural gas prices, many will choose to turn down their thermostats to reduce their gas bills and plug in their electric heaters to maintain their comfort.

Conservation is part of the answer. Higher electric prices will induce consumers to conserve, thus reducing demand, but supply must be addressed as well. While dismaying consumers, higher electric rates will also encourage suppliers to find new sources of energy. For a price, more power can be bought from elsewhere. In this emergency, environmental rules that limit electric power output should be temporarily lifted.

For the long run, we need more power. The state should move quickly to shorten the licensing procedures for new power plants. Environmental regulations should be reviewed to ensure that they are not unduly slowing the construction of new facilities. Although we would all prefer to avoid a power plant in our backyard, such facilities must be located somewhere, inevitably in someone’s backyard. Last November, the city of San Jose initially turned down a proposed power plant in Silicon Valley. Under mounting pressure, the city has reversed its original decision and the plant will be constructed. Local politicians seem to have finally realized that unless more power is found, Silicon Valley may find itself a silicon desert.

They may dismay consumers, but higher rates will encourage suppliers to find new sources of energy.

As has been shown time after time, the private market, when allowed to function, works much better than an overregulated industry. Moving the state into the middle of the electric market will only create a host of new problems. The state cannot build power plants faster, cheaper, or more efficiently than the private sector. The state cannot set prices better than the private sector. The state can, however, spend the taxpayer’s money faster than the taxpayer could. Other states, such as Pennsylvania, and other countries—England, for example—have made a success of electrical deregulation. California could too. But it must allow the market to work.