California Gov. Gray Davis and the state's Democratic legislature are starting to seize control of the energy industry in order to "manage" the state's power crisis, but Democratic Sen. Diane Feinstein has a better idea. According to Investors Business Daily, she wants expedited permitting for new power plants and true market pricing. As the senator points out, "Absent that, there is no incentive to conserve." To which I would add, there's no incentive to increase supply, either.
California is buying up contracts for supplying power and essentially indemnifying utilities for losses caused by a combination of price controls, surging energy demand and supply disruptions caused by government (regulatory barriers) and divine providence (dry weather that has reduced the hydroelectric power that would otherwise be available). Davis is belatedly asking Washington to relax some environmental curbs on power generation, but most of the state's ecological restraints are entirely self-imposed.
President George W. Bush and Energy Secretary Spencer Abraham have wisely ruled out energy price controls in the California market. Richard Nixon tried price controls on beef and on oil, producing less of both for American consumers. Power suppliers can't sell at a loss, and they need to protect the interests of their shareholders in the Golden State.
Faced with an unbridgeable chasm between California and other Western states that don't want to be forced to sell power they need for their own energy users, the Bush administration decided the states would have to sort out their own disputes, reserving federal authority to help open up new energy supplies and provide regulatory relief where appropriate.
Those of us who love California and free markets alike have to be very distressed about what's happening on the West Coast. Calling the California crisis a consequence of "deregulation" is like calling World War II a consequence of America's defense buildup. As we know, America and many of its allies neglected national security concerns in the lead-up to that tragic war; and California never deregulated energy, it just shifted the prime regulatory focus from supply to distribution.
Indeed, ignoring the energy supply side was California's huge mistake. As my colleague Fred Smith at the Competitive Enterprise Institute puts it, "The California problem is the result of a long tradition of political control of electricity. Politics allowed the utilities to misinvest in capacity - first too much and then too little - and made it possible for environmental activists in the state to mandate a series of anti-energy-use policies. The costs of the latter were paid for with cross-subsidies from other ratepayers."
The California mantra has been to force, nudge and browbeat people into using less energy, not finding ways to produce more. State officials took it as a given that energy demand would remain flat, but as Steve Forbes reminds us in his Feb. 19 Forbes magazine column, green pressure to use only "cleaner-burning" fuels "pushed the use of natural gas, ignoring the fact that, because everyone had assumed natural gas would remain in a glut, the state and other political entities had been doing everything possible to block drilling, exploration and transportation for new supplies."
The bureaucrats and politicians didn't plan on the surging growth of the Internet economy, which put new and unanticipated demands on the power grid. With fast-growing energy demand the state's "managed competition" approach to energy supply proved to be exactly the wrong answer.
In tax policy, Bush clearly understands the primacy of the supply side and giving people incentives to work, save and produce more. The forthcoming Bush-Abraham energy plan will, I am confident, show the same wisdom in energy policy: Let the market provide incentives to produce more, transmit power more efficiently and keep costs reasonable while protecting the environment.
Prudent regulation can protect the environment without damaging the free economy. True renewables like nuclear power produce energy more safely and efficiently than ever. California's "boutique environmentalism" brings brownouts and destroys jobs without doing a thing to make the world cleaner and greener.
That leads, as California is learning to its regret, to rolling blackouts as a way of life. Along with the resurgence of OPEC and the growing strain on natural gas supplies, the coast's power crunch shows how far energy policy has gotten off track. If we really want Kyoto-style energy restrictions in the United States, California is a perfect example of what we are in for. But if this is the eco-left's vision of "sustainable development," they will have a lot to answer for.
Fortunately, it's increasingly clear that reliable, cost-effective energy supplies are the lifeblood of the 21st century high-tech economy. That should trump any propaganda that tries to use California to stop true deregulation, which will be an essential element of modern energy policy.