The Cause of the California Electricity Shortages: “Price Controls”

As an economist, whenever I hear the word “shortage” I wait for the other shoe to drop. That other shoe is usually “price control.” So it was no great surprise to discover, after the electric power shortage in California made headlines, that there were price controls holding down the price of electricity to the consumers.

In the absence of price control, a shortage is usually a passing thing. When prices are free to rise, that causes consumers to buy less and producers to produce more, eliminating the shortage. But when the price is artificially prevented from rising, the shortage is prevented from ending.

The electric power shortage in California is not unique. What is a new twist, however, is that there are no limits on how much the wholesale electric power suppliers can charge the utility companies that directly supply the consumer. Since the utility companies have been paying more for electricity than they were allowed to charge their customers, they were operating in the red and the financial markets are downgrading their bonds. Buying high and selling low is the royal road to bankruptcy, and bonds in a bankrupt company are not usually worth much.

Nor is it any great surprise that “consumer advocates” are denouncing the utilities for seeking a rate increase — or that politicians are proposing a small increase, completely inadequate to cover the cost of the electricity bought by the utilities. In the never-never land of California ideology, it is considered terrible if the public should have to pay the full cost of what it wants.

In California, prices higher than you like are attributed to “greed” or “gouging” and the answer is either more government regulation or having the government take over the utility company completely and run it. There are people who are old enough to know better who get their 15 minutes of fame by going on television and repeating the sophomoric slogans of their youth, back in the days of Berkeley in the 1960s. And there are media people who take them seriously — or at least pretend to.

But just as there is no free lunch, there is no free electricity. And the idea that the government can run businesses at lower costs flies in the face of worldwide evidence that whatever enterprise politicians and bureaucrats run has higher costs. That is why even left-wing governments have been privatizing in recent years, even if this fact has not yet gotten through to those Californians who are still living with the ideological visions of their Berkeley youth.

Far from lowering the cost of producing electricity, government at all levels has for many years and in many ways been needlessly increasing that cost.

Nothing forces prices up like restricting the supply. It has been years since anyone has built more electricity-generating facilities in California because the environmentalists, the courts, the state and local governments, and assorted wackos have made it virtually impossible to build a hydroelectric dam, a nuclear power plant, or a facility that uses coal or oil to generate electricity.

There are all sorts of bright ideas for generating electricity by using sunlight or windmills. It never seems to occur to those who espouse these ideas to ask why people who have spent a lifetime working in the electricity industry do not share their enthusiasm for these schemes. Could it possibly be that the costs of generating electricity this way are higher?

There are already vast arrays of aging windmills in the hills leading out to California’s central valley as monuments to the utopianism that seems to flourish in the golden state. All that is needed is Don Quixote.

Politics is supposed to be the art of the possible but, in California especially, it is often the art of the impossible. Somehow politicians must make it seem possible to get benefits without paying costs. But if we are too squeamish to build a dam and inconvenience some fish or reptiles, too aesthetically delicate to permit drilling for oil out in the boondocks and too paranoid to allow nuclear power plants to be built, then we should not be surprised if there is not enough electricity to supply our homes and support a growing economy.

The easy answer that is preferred is to use electricity generated outside of California — somewhere out in the real world beyond our borders.