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Perspective

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

free lunches. (I thought I had one the other day, but I had to sit and listen to some boring speaker.) If you and your neighbors don't like the physical appearance of power plants and transmission lines, you should not be surprised to pay higher electricity price or face shortages. Californians also appear more inclined than the rest of the country to endorse social programs—programs funded by surcharges imposed by utilities. All of this adds up, in ways both direct and indirect, to higher electric bills.

Now if Californians are willing to pay higher electricity bills in return for a more benign environment and clearer conscience, so be it. I have no problem with that. But they must be willing to pay the price-not to expect others, such as U.S. taxpayers, to bail them out when things get tough.

Another lesson learned, which can be construed as a recommendation, is that In California, during the debate over industry restructuring, policymakers sought to "divide the pie" in a way reflective of "pork barrel" politics. That has happened in other states, of course. After all, industry restructuring requires a political act, so what does one expect? Yet one must give credit to California for making the other states seem like amateurs when it comes to interest-group politics.

What I Believe

I am serious about the gravity of rules that constrain markets. Rules that adversely affect one part of the market can easily cascade to problems elsewhere. Things get worse before they get better. For example, price controls could easily lead to a dynamic "death spiral" effect where simultaneously supply declines and demands rises, with shortages and catastrophe the inevitable outcome. Other examples abound in different markets around the globe where a seemingly innocuous rule leads to a problem that, in turn, provokes new problems potentially more serious. This phenomenon is especially true when government imposes price controls not to control market power, but to relieve scarcity.

Often, these rules that bind markets flow from political compromise. One producer may seek greater wealth and well-being, at the expense of others. This rent-seeker may receive a political favor in return for going along with what others want. And such favors may reveal how governments distrust markets. Policymakers hold a natural aversion (obsessive, but arguably rational) toward any outcome that may threaten their job security. I view politicians and other government officials as overly risk averse. Yet they minimize the political risks of their actions.

In the case of electricity deregulation, in California and elsewhere, there was much concern (some of it certainly legitimate) about utilities exercising market power, especially in a less regulated environment. California's restructuring rules reflected that—for example, the mandatory divestiture of power plants, the requirement to buy and sell at spot prices through the power exchange (PX), and the separation of the PX from the independent system operator (ISO).

All of these actions may reflect good intentions, but the results have been anything but good. In fact, one could now say that some of these policies backfired by creating more market power than