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Energy Wars
Jan. 12, 2001

By James L. Hirsen, J.D., Ph.D.
contributor to

The Golden State has an energy crisis on its hands, the likes of which it has never before had to face. As blame frantically searches for a dimly lit place to land, fingers are being pointed every which way. The public, needless to say, is not at all happy with the situation.

Governor Gray Davis is a man unaccustomed to taking blame. He is busy trying to toss the nasty little millstone into the lap of the private sector. And so far the strategy is working fairly well.

The experiment that purported to reduce the government-regulated monopoly on supplying power was described as "deregulation." But real deregulation would have resulted in genuine freedom with regard to the sale and consumption of power. This is not what happened.

In actuality, California's so-called deregulation plan ended up creating more of a highly managed market than an unencumbered one. According to its original design, the utility companies were required to sell off generating plants and buy electricity from a state-administered source. Instead of allowing competition from different power suppliers, utility companies were forced to pay each supplier the price demanded by the highest bidder. Basic principles of economics, such as supply and demand, were simply ignored in the overall scheme.

Meanwhile the economy was growing at an accelerated pace, and industrial power needs were rising in proportional amounts. The population of the state was increasing as well, which placed further power demands on utility suppliers.

To compound the problem, California's brand of deregulation failed to take into account the difficulty and expense involved in building new power plants, and regulations designed to improve air quality actually restricted production of energy in already existing facilities. Without construction of new plants or increased output from existing plants, the supply side suffered the inevitable strain.

Then there is the fact that older plants do not have the production capability of their modern counterparts. Old power plants, like old cars, spend more time in the shop. The proof of this axiom was in the Christmas pudding. In an untimely illustration, power plants representing 12,000 megawatts (25% of the state's total capacity for electrical production, enough for approximately 12 million homes) had to be shut down for repairs during the busy holiday season.

And how about trying to obtain a site or a permit to build a power plant in California? Well, it is nearly impossible. Amidst the unprecedented revolution in the 1990s, the number of power plants that were built in California was an alarming zero. Even though demand grew by 12% during the period from 1996 through 1999, according to the California Utilities Commission, supply grew by less than 2%. How hard was it to predict that with all of these factors in motion, demand would eventually overwhelm supply?

Now with the prompting of the left, blame is being shoved toward a convenient nemesis - capitalism. The opportunity to use this crisis as a wholesale license to derail the energy deregulation movement across the nation is just too irresistible. Advocates for swollen government see the failure of the California plan as their best chance to suppress any laissez-faire economic solutions. Half-truths and demagoguery are powerful weapons in their fight.

So where does California go from here? For certain, the answer is not to move back toward government run monopolies or to attempt to nationalize industries. Authentic deregulation is the proper course. It will require the government to remove its tentacles from the marketplace and permit a liberated economy to generate new approaches and remedies. This is the kind of solution that is an anathema to government central planners, but after countless rolling blackouts and relentless public outcry, they may be persuaded to see the proverbial light.

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James L. Hirsen, J.D., Ph.D.

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