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Perspective

I wanted deregulation. But not if we can't do it right.
Fortnightly Magazine - April 15 2001

a Milton Friedman or Friedrich Hayek, as I do, should be disheartened by the events in California. Deregulation now could be put off indefinitely, not only in the electricity industry, but in other industries as well. Advocates for deregulation should be really angry—California has no right to give deregulation such a bad name. California was supposed to be the trendsetter—suburbs, freeways, surfing, sushi, and so on—but this latest "first" has broken the spell. What were they trying to prove? Of course, by taking the lead in electricity deregulation or whatever they did in California, they have become the sacrificial lamb for the rest of the country. For that, I guess we should be truly grateful: Thank you, California!

But hey, I can't get too enthusiastic about this. Not yet, anyway.

What We Learned

Moving beyond the muddle, what have we learned from the California experience? I decline to offer explicit advice on what should be done because I really can't say anything that hasn't been said so far. Other analysts, through various media, have articulated some reasonable proposals that should be seriously considered. I realize that humility may get you to heaven, but it won't win consulting contracts.

The first lesson, what the policymakers must never forget, is that . If the government or anyone else tries to interfere with this natural course of events, bad things will surely happen. Price ceilings and controls eventually make consumers worse off. We knew that already from experience in the natural gas industry. Policymakers intend that price ceilings will help consumers, and they may for a short period. But after a while come the market distortions that inflict harm.

Having said this, however, I concede I am a bit ambivalent about lifting price controls in a market where competitive constraints on prices don't seem to exist. Here I am talking about the California wholesale power market, where perhaps an argument can be made for the Federal Energy Regulatory Commission (FERC) to impose a price ceiling on wholesale power until it is determined that competitive forces can be relied on to control prices. In the case of California's dysfunctional wholesale power sector, price ceilings may be a necessary evil—at least until new market rules are put into place to eliminate abnormalities. Notwithstanding the persuasive economic arguments against price ceilings, the political solution may require them, at least as an immediate response to California's worsening state of affairs.

In fact, some evidence exists (though inconclusive) that generators and marketers might have withheld electricity from the market during peak periods. Of course, the danger here is that various interest groups may pressure the FERC to continue with price ceilings when they are no longer justified, leading to a more distorted market than if they were never imposed. They will view price ceilings like putting out a fire with kerosene, or the Federal Reserve System reducing the money supply during the onset of the Great Depression.

The second lesson is that . Californians are more environmentally conscious than most of us. It is their right, but life has few