Study: Politicians Wrong About Calif. Energy Crisis

By Christine Hall | July 7, 2008 | 8:19 PM EDT

( - Contrary to heated, political accusations, California's on-going energy crisis was caused mostly by bad luck weather and high natural gas prices, say two energy policy analysts in a just-released study.

Republicans blame environmentalists for blocking construction of new electric generators; Democrats blame Republicans for not supporting price controls; the governor blames utility price gouging and a 1996 law restructuring the electricity marketplace. But neither side is giving people the real deal, according to the analysts.

"Our friends on the right are very annoyed with us because we're not playing the party line, which says that California went to hell in a hand basket because 'enviros' held everything up," said Peter VanDoren, editor of Cato's Regulation magazine and co-author of a new study on the California situation.

"Politicians are all about avoiding blame for stuff," added co-author Jerry Taylor, director of natural resource studies for the Cato Institute.

The complex 1996 restructuring law, which gave consumers the freedom to choose a power supplier, is responsible not for the increases in energy prices but for the blackouts, according to the study. That's because the law prohibited utilities from raising electricity rates in response to increases in wholesale fuel costs.

When an unseasonably cold winter drove up demand last year, the price of wholesale gas, which powers nearly half of California's energy needs, increased almost ten-fold.

According to the study, California was hit hardest because of various technical and weather-related problems with its energy supply and because consumers had no incentive to cut back on peak hour energy use. Thus, utilities could not cover their costs.

Taylor and co-author Peter VanDoren, warn that California's energy problem, which includes a spate of rolling black outs and soaring electricity prices, threatens the nation's economy.

"If through bad luck ... hydro [-electric power] runs out in the east ... or the coal plants all go off line because ... of a strike, the same kind of imbalance between wholesale prices and the inability to pass it on would occur" in other states that restrict retail gas prices, he said, "and we would be saying, 'what did Maryland do wrong.'"

That's why it's important-but unlikely-that politicians will be able to fix the problems, according to Taylor and VanDoren.

Instead of building massive power plants, imposing new price caps or negotiating long-term energy contracts, both believe the solution is to kill the existing retail price caps, eliminate the middle-man in charge of running the electricity grid, and allow energy prices to fluctuate hourly, a system called "real-time" pricing.

"If the wholesale prices had been passed on [in] the retail [price charged to consumers], yes, there would have been a political storm," VanDoren said. "However, [if] people ... had been aware of how much it cost to use that unit of power, we would have seen a fairly dramatic demand reduction."

"Long-term contracts [for energy supply] don't solve anything," he added, criticizing a proposal by Gov. Gray Davis.

"If there's a real shortage, all a long-term contract does is change who goes bankrupt," VanDoren said. "If your cost of natural gas rises tremendously but you've made a long-term contract to supply electricity at what appears to be well below the cost of your inputs, you'll go bankrupt. Long-term contracts cannot solve the underlying shortage."

Neither author foresees California lawmakers choosing economics over politics, however.

"H.L. Mencken once said that 'democracy is the system that lets the people say what they want and then gives it to them, good and hard,'" they wrote. "That appears to be the case in California today," where a recent poll revealed citizens' preference for price caps with occasional blackouts over higher prices.See Related Stories:

Gephardt Slams GOP on Energy Price Controls (June 28, 2001)
Deregulation Didn't Cause California's Energy Crisis, Analyst Says (May 15, 2001)