How Not To 'Privatize' the Power Grid

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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". 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 glee.
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. Ontario, like California, 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 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.

Their
model suits what they refer to as the consumer's special relationship
with electricity, a non sequitur if ever there was one; The claim
supports just as well the exact opposite argument.

So
crucial is our need for it, how 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 endeavours, 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, 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.
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 labour 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.

California's
Governor, Gray Davis wants to fully nationalize the grid. He is
also promising to sue power companies – or even jail their managers
– 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. Interventionism leads to socialism and its
attendant tyranny.

February
16, 2001

Ilana
Mercer is a freelance writer based in Vancouver, Canada.

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