Electrical Newspeak in California
In George Orwell's novel 1984, state propaganda perverted the language, turning some words into their opposites, to prevent people from questioning authority and thinking for themselves. The government of California has applied this technique by calling the restructuring of the State control of electricity industry "deregulation." The mass media, along with opponents of private enterprise, have spread this perversion of language and economics.
by Fred E. Foldvary, Senior Editor
Until 1996, California's electricity industry consisted of local monopolies with government restrictions on production and prices. The companies were guaranteed a return on investment, which left them with little incentive to control costs. That led to costly and wasteful electrical plants which the customers had to pay for.
True deregulation would have eliminated governmental restrictions on peaceful and honest enterprise, and left electricity production and consumption to the supply and demand of the market. But that is not what happened. The government kept price controls on the consumption of electricity. Not only that, the utilities had to impose a "transition charge" that offset the rate cut that was mandated. They were allowed to charge their customers for their "stranded costs" of past bad investments instead of having the investors bear these costs.
The consumption of electricity has times of peak demand, and the rational way to price electricity is to charge more during the peak times and less when demand is lower. That makes the peak demanders pay for the extra capacity needed for peak times. But instead, the State-controlled prices ignore fluctuations in demand, eliminating the incentive to conserve during the high-demand times.
In a truly free market, if firms make high profits, this provides an incentive to increase production, and the greater supply then leads to lower prices. But instead, this phony "deregulation" made the private utilities sell their power plants, the State officials having regarded vertical integration as anti-competitive.
Effective deregulation frees up production before it eliminates price controls on consumption, to give production some time to adjust to the potential demand. But production in California has been frozen for many years due to environmental concerns along with "not in my backyard" politics. With a fixed supply and soaring demand, the price has nowhere to go but up.
Still, new firms could have increased production if they were freed of price controls. Instead, new competitors were forced to charge customers the same "transition fee" as the older firms, and then turn the money over to the State. To be competitive after the surcharges, their electricity would have had to be priced very cheaply, which is not realistic in today's market.
In a truly free market, buyers and sellers are free to make whatever contracts they wish among one another. They can hedge against price increases with futures contracts. But the California restructuring instead created a centrally controlled forum for buying and selling electricity, the Power Exchange in Pasadena. The State mandated that all firms pay the highest price offered during a day. Moreover, the companies were prevented from entering into long-term contracts when prices were lower.
So this "deregulation" forces the utilities to pay high prices and charge customers low prices. Production is restricted, companies are not free to contract, and prices are controlled. This is the "free market"? It is rather a dream come true for opponents of economic freedom: put in ridiculous rules which are bound to fail, call it "deregulation," and then use that as an excuse for government to take over the whole industry.
For decades, economists have theorized that central planning and control of industry is grossly inefficient, and the collapse of the Soviet Union provides a fine example. But historians have noted that we do not learn from history, so Californians will have imposed on them a State-run electricity monopoly subject to political favoritism along with bureaucratic inefficiency.
Some States, such as Pennsylvania, have done true deregulation. Pennsylvanians get relatively inexpensive power. As California electricity stays expensive, people may start to wonder why prices are lower in other States. Unfortunately, history also shows that theory and logic have little impact; the system must first fail before it gets reformed. So Californians will have to suffer high prices and shortages until the State-run system bogs down in corruption, scandal, and waste. Maybe, just maybe, we will then turn to real deregulation and let markets work to provide abundant and inexpensive energy to long-suffering consumers and producers.
For more information, see Reason article.
-- Fred Foldvary
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Copyright 2001 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.