The Night the Lights Went Out in California

The crisis should severe as a warning about flawed deregulation efforts in Ontario and Alberta but must come as welcome succor to the management of the remaining public utilities like New Brunswick Power, a crown corporation which has frequently been criticized for management and safety practices, including by the Atomic Energy Control Board, now the Canadian Nuclear Safety Commission.

NB Power is an interesting example of a utility trying to protect its status. Instead of rationally responding to criticism, management has rushed to the courts to suppress it. This reached spectacular absurdity when the crown corporation, supposedly acting in the best interests of its owners, the people of New Brunswick, funded a lawsuit by CEO James Hankinson against an editorial cartoon in the Fredericton Gleaner, which poked fun at Hankinson’’’’s responses, or non-responses, to a legislative committee.

Premier Bernard Lord had enough. He told NB Power’’’’s board that funding Hankinson’’’’s lawsuit was an inappropriate use of corporate money. The board dropped the lawsuit, not because it was a frivolous waste of money, but because the lawsuit could become a distraction to the Board and management, something that apparently hadn’’’’t occurred to anyone before the premier’’’’s letter.

Now New Brunswick Power, and other public utilities, can simply point to the mess in California whenever the issue of deregulation or privatization comes around. Problems have also developed in Alberta and Ontario, but let’’’’s focus on California where the greatest chaos has arisen.

It’’’’s important to understand that what happened in California was neither deregulation nor privatization, but rather a bizarre halfway house that left California’’’’s electric infrastructure trapped by a weird web of regulation. It would be like a prison tethering a former inmate to the front gate and then wondering why he didn’’’’t do better when freed.

The market works through price signals. When something gets more costly, you use less and shift your purchases to other areas. California deregulated wholesales prices but left most retail prices regulated. When wholesale prices rose power companies could not pass on the increases to consumers.

That’’’’s the primary cause of the California crisis. Power companies are going bankrupt because they must buy energy at market prices, which have risen dramatically, and sell it at artificially-low regulated prices.

Environmentalists should turn purple at such an arrangement. Nothing would do more to help conservation along than high energy prices. Left-wingers should also turn purple when governments keep power prices below costs. Ultimately, the bill will be footed by all taxpayers, but affluent people use more electricity than poorer people, so they get the biggest public subsidy.

Another California flaw has been forcing the utilities to buy on the spot market. Energy prices fluctuate a lot. Dependence on the spot market is a recipe for price shocks.

Other markets feature a variety of contracts that enable buyers to lock in prices. Such contracts ease day-to-day price fluctuations by ensuring a long-term supply at predictable prices. The risks are transferred from the consumers of electricity to private suppliers, investors and risk-takers. If they lose a bundle by guessing wrong, so be it.

Deregulation and privatization suffers from past errors of government planning. Many public utilities overbuilt in the 1960s and 1970s, leaving the consumer with the bill for unnecessary capacity.

More recently, many public utilities, thinking they learned the lessons of the past, have under-invested, leaving consumers vulnerable to power shortages and the resulting escalation in prices.

Deregulation and privatization offer a balm to such problems. New technologies and micro-power plants offer cheaper, often more environmentally friendly, power generation. Innovative projects from private sector investors – willing to take personal risks rather than shove them onto the taxpayer – hold the promise of re-building generation capacity.

But such investments take time to come on stream. They won’’’’t be started until investors feel secure that deregulation is here to stay. Deregulation and privatization don’’’’t have to be bungled. In Britain and Australia, they brought large benefits for consumers and industry.

Fifty years ago some of the most prominent economists in the western world predicted that the planned economies of Eastern Europe would soon overtake the messy market economies of the west.

Instead, in market economies standards of living grew spectacularly, while government planned economies produced human, economic and environmental disaster. Yet, some people still think that government planning is the cat’’’’s meow for electrical utilities.