Commentary
In 1929, almost a century ago, the great economist Ludwig von Mises published “A Critique of Interventionism.” It’s written in plain language and is free online. He described how government intervention in the free market isn’t socialism but eventually “leads to socialism because government intervention is not only superfluous and useless, but also harmful. ... It lowers labor productivity and redirects production along lines of political command, rather than consumer satisfaction.”
He died in 1973 at the good old age of 92 and was the teacher of Friedrich von Hayek, who won the Nobel Prize in Economics in 1974.
I bring up Mises because he could have been writing about California’s electricity market, which has been dysfunctional for three decades and well could end up entirely run by the California government. That’s actually what was called for in a June 2 editorial in the Los Angeles Times titled, “Californians don’t have to accept skyrocketing electric bills. Here’s how to fight back.”
The way to fight back?
“Customers of publicly owned utilities such as the Los Angeles Department of Water and Power pay lower electric rates in large part because a profit margin isn’t part of the equation,” the article reads. “Gov. Gavin Newsom threatened to take over the troubled PG&E during its last bankruptcy if it didn’t become a more responsible utility. Ultimately, the governor struck an oversight deal. But a public takeover is still worth exploring to protect Californians from unaffordable rates.”
The internal link for “is still worth exploring” clicks to a 2019 L.A. Times editorial: “We’ve reached a point where public ownership of PG&E shouldn’t just be on the table, it should be actively explored by state and local officials. While Newsom has hinted he would open to public takeover of the utility and has raged about its ‘corporate greed,’ he has also said he wants to see as many bidders for ownership as possible, including from other profit-making entities. Although it’s good for him to consider all approaches and all bidders, public ownership shouldn’t get short shrift in the process.”
The first obvious hurdle to “public ownership”—socialism—is the Fifth Amendment, which concludes, “nor shall private property be taken for public use, without just compensation.” Here are the valuations of the state’s two largest private utilities:
Where is the state of California supposed to get that kind of money? Float a bond? The state treasurer lists California’s current state bond indebtedness at
$71.7 billion. And they’ve only started issuing the $6.4 billion in new bonds for
Proposition 1, which voters passed on March 5. In sum, a state takeover would effectively nearly triple state bond indebtedness.
California’s Electricity Reform Collapse
Instead of looking to the supposed price gouging by the private utilities, as the L.A. Times demands, it’s worth remembering the state’s own follies from the past three decades, during which I’ve written against all the anti-market attempts at restructuring. For those who want to read the details, a good history of the early years is “
The History of Electricity Restructuring in California” from 2002 by Carl Blumstein, L.S. Friedman, and R.J. Green.
The attempt at “deregulation” the authors begin with is Assembly Bill 1890, which California Gov. Pete Wilson signed in 1996. It’s worth adding something they left out: 1996 was the only year in the past five decades in which Republicans controlled a house of the Legislature, in that case the Assembly under Republican Speaker Curt Pringle, later Anaheim’s mayor. Mr. Wilson was also a Republican. So this was a Republican attempt at “privatization,” with cooperation from California Senate Democrats.
AB 1890 set up the California Power Exchange (PX), which, according to the 2002 paper, “was required to operate an hour-by-hour spot market, in which generators could sell and retailers could buy power. ... The new markets began operation for April 1, 1998. This was three months behind the original start date, but it had not proved possible to create the necessary computer systems in time.” It seems every computer system the state sets up has problems. “The PX ran quite smoothly, with low prices.”
Then, disaster struck.
“Late in the spring of 2000, California’s new electricity market began to collapse,” the paper reads. “In May, the average PX price was $50/MWh, higher than any previous month. There were also numerous price spikes. ... By the end of January, the collapse was complete. Blackouts occurred on eight days during the winter and spring even though demand was far below the summer peak. The Power Exchange suspended operations, and the CAISO [California Independent System Operator), SCE, and PG&E were all insolvent.”
For some reason, the study didn’t mention California Gov. Gray Davis’s role in this crisis. I remember in October 2000, he actually took a month off to “study” the problem. Then he panicked and signed contracts for up to 20 years for natural gas at the height of the market price.
In June 2002, Witold Henisz of the Wharton School at the University of Pennsylvania described the damage: “Wholesale energy prices shot up tenfold and supply shortages forced repeated rolling blackouts. The crisis forced the state’s biggest utility, Pacific Gas and Electric, into bankruptcy and pushed another, Southern California Edison, to the brink. In desperation, California Gov. Gray Davis signed long-term contracts for $48 billion worth of power—prices two to three times today’s [2002] market rate.”
But some of the contracts had to be paid for up to 20 years.
Mr. Davis’s mistakes were part of what led to his recall in 2002 and replacement by California Gov. Arnold Schwarzenegger.
Schwarzenegger’s AB 32 Disaster
In his first two years in office, 2003–05, Mr. Schwarzenegger governed reasonably, cutting taxes and restraining spending. Then, in November 2005, voters rejected his plank of
reform initiatives, such as banning using union dues for political campaign initiatives. He then flipped from conservative to liberal as he headed to his November 2006 reelection, which he won.
His signature legislation was Assembly Bill 32, the Global Warming Solutions Act of 2006, still in effect. Among its mandates:
“It is the intent of the Legislature that the State Air Resources Board consult with the Public Utilities Commission in the development of emissions reduction measures, including limits on emissions of greenhouse gases applied to electricity and natural gas providers regulated by the Public Utilities Commission in order to ensure that electricity and natural gas providers are not required to meet duplicative or inconsistent regulatory requirements.
“It is the intent of the Legislature that the State Air Resources Board design emissions reduction measures to meet the statewide emissions limits for greenhouse gases established pursuant to this division in a manner that minimizes costs and maximizes benefits for California’s economy, improves and modernizes California’s energy infrastructure and maintains electric system reliability, maximizes additional environmental and economic co-benefits for California, and complements the state’s efforts to improve air quality.”
You can see the duality problem there: The state is supposed to limit “greenhouses gases” for electricity production while maintaining “electric system reliability.” It’s hard enough for private companies—or, for that matter, socialist government enterprises—to maintain one government dictate. But two dictates make it doubly difficult, even impossible.
Renewable Energy and EV Mandates
Next, throw in renewable mandates, such as
this from December 2022: “The California Air Resources Board today approved the final proposed 2022 Scoping Plan, a world-leading roadmap to address climate change that cuts greenhouse gas emissions by 85% and achieves carbon neutrality in 2045. The 2022 Scoping Plan provides a detailed sector-by-sector roadmap to guide the world’s fourth-largest economy away from its current dependance [sic] on petroleum and fossil gas to clean and renewable energy resources and zero-emission vehicles.”
Renewable energy, such as wind and solar, requires expensive new power lines on top of the existing power lines. The zero-emission vehicle mandate is for 100 percent new cars to be zero-emission by 2035.
And now AI—artificial intelligence—is developing rapidly in Silicon Valley, which leads the world in this area, and requires even more electric juice every year.
Finally, there’s the latest attempt at reforming sky-high electricity rates, which I wrote about last week in “New California Electricity Scheme Promotes ‘Equity,’ ‘Clean Energy Transition.’” It’s only going to make matters worse.
It has been three decades of folly and disaster. No wonder for March, the Energy Information Agency pegged California’s average residential rate at 32.47 cents per kilowatt hour, the second-highest in the nation. North Dakota’s was the lowest at 10.44 cents.
In a future article, I’ll discuss some free-market remedies to restore to California a sensible electricity market and lower prices for consumers.
