February 7, 2001

How Not to Privatize the Power Grid
by Ilana Mercer

George Stigler, Nobel Prize laureate in economics summarized well the impetus behind regulation: Regulation exists in the interest and the support of those who are regulated. He might have added that regulations are bread and butter for bureaucrats and their operatives. If anything, 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".

But let us first dispel the notion that the California power market was in any way decontrolled, on the contrary:

There was a vestige of deregulation in the state-controlled electricity wholesale market California implemented in 1998. But 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 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. This refusal to diversify helped make natural gas prices soar. The growth in population and economic development in California contributed to a dramatic increase in demand for power. Retail prices, however, were regulated. Strategically, voters-cum-ratepayers were shielded from the "real scarcity that prices reflect". The shortages were inevitable.

All the indications are that Ontario and Alberta are following the same path of managed, fictive 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 glut. And the Independent Electricity Market Operator, an arm of the government, will be in the wings to run the wholesale market. Where have we heard this be before? Rent seeking from industry has already commenced, as business seeks-and is rewarded with-subsidies at the expense of the taxpayer. As I said, it's business as usual. Ontario may not have the same supply problems that beset California, but like California, it 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 floating 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, not least price control, is blamed on markets that were never allowed to work.

To further obfuscate the issue, out of the woodwork has emerged a new kind- and more sinister-breed of regulator. The various Canadian utilities point-persons 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.

Their model suits what they refer to as the consumer's special relationship with electricity, a non sequitur if ever there was one. Why non sequitur? Because the claim supports just as well the exact opposite argument. So crucial is our need for it, how possibly can electricity be 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; whose salaries are inflated, 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? It's infinitely preferable that electricity be entrusted to private enterprise. Only it raises initial capital voluntarily. And if private enterprise is to survive, it must not only apply careful entrepreneurial forethought to all endeavors, but, above all, it must satisfy the customer.

On the cards for some Canadian jurisdictions is a Third Wayism, an interventionism, but not a free market in power. It is precisely this hydra-headed monster that has caused the California market to implode.

In 1940, the prescient economist Ludwig von Mises warned that middle of the road interventionism 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. Any price fixing below true market level invariably results in increased demand and scarcity. Hence when politicians make a commodity cheaper so as to procure votes, the good becomes scarce. With rising demand and unchanged supply, chronic shortages ensue. Once scarcity develops, the regulator must step in, and begin fixing prices of labor and materials at every stage of production.

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 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 satisfy consumer demands to the same extent that the free market does.

Gray Davis, California's Governor, now wants to fully nationalize the grid. He is also promising to sue-even jail managers of-power companies for not selling their juice below market value. He wants to ban power producers from exporting electricity to other states. Theft of private property is also on his agenda, as he threatens to use "eminent domain" to seize power plants. Ludwig von Mises was right to be emphatic about interventionism leading to socialism and its attendant tyranny.

© 2001 By Ilana Mercer
Previously published in The Ottawa Citizen; February 2

Join the Debate!
Click here to enter the discussion!