Volume 1, Number 7
23 April 2001

The California Energy Crisis

Dear Friends,

The people of California want more electricity than they are willing to pay for.

First, a bit of homespun philosophy. I believe that we in the United States want more than we are willing to pay for. This explains the explosion in consumer debt. But it also applies to how we use government. We put our money into a big pot (taxes) and want to take out more, collectively, than we put in collectively. This is so whether we want to take out for national defense, for health, for public parks, or for help for the poor. We run a surplus only because we can't decide how to spend it.

Don't tear down the fence until you know why it was put up

Regulation of public-utility rates was initiated in the nineteenth century. At that time, electricity utilities could best function as monopolies in their areas. The investment, including transmission wires and plant, was great, and one utility could usually handle the needs of its home area. Two or more would be wasteful. If one grocery was charging too much, you could go to another. Not so with electricity. But guess what? Once the investors had built expensive plants, some communities tried to force the utilities to charge rates too low to give them a fair return. (They tried to get more than they were willing to pay for.) In a famous case that all of us pre-war economics students had to learn (Smyth vs. Ames, 1898), the Supreme Court required regulators to set rates that would provide "fair return on fair value." So regulation was established both to control monopoly and to be fair to investors. (Smyth vs. Ames was later overturned as the definition of value was debated, but the principle remains).

Conditions are different now. Smaller plants have become more economical, and distribution costs have dropped, so they can cover wider areas. Two or more utilities can compete in a given area. One company may provide the lines and charge another company to use them. Because of advances in long-distance transmission, local utilities need not produce all their own power. They may buy from wholesalers thousands of miles away. Thus competition has been introduced. It is no longer necessary to regulate electricity rates any more than it is to regulate the price of bananas.

Now we can tear down the fence

I believe the California problem could be easily solved by complete deregulation. Let the wholesale and retail producers charge what they will — just the way grocery stores do. If they charge too much, customers will buy from competitors. With deregulation, competitors will build new plants if rates are high enough. On April 5, Governor Davis proposed a 46% increase in rates, "bowing to the inevitable," as The New York Times put it.

In 1996, the legislature deregulated wholesale rates but not retail rates. Why not retail? Ironically, because everyone then thought the rates would go down with competition, and the retailers (mainly Pacific Gas and Electric and Southern California Edison) wanted their rates for consumers to be frozen, so they would profit by purchasing electricity at lower wholesale rates while charging the same (high) retail to their customers. They also wanted them frozen high enough to compensate themselves for the "stranded costs" of expensive nuclear plants and other capacity. What a whopping error! With Silicon Valley and other industries, California's economy was growing prodigiously, demanding ever-more electric power. Instead of going down with deregulation, wholesale rates shot up. The retailers (mainly PGE and SCE) were required to provide for their customers but because retail rates were capped they could not charge more to compensate for the higher wholesale rates. At this point it was the customers/voters who refused to let the regulatory commission lift the caps. PGE and SCE had to borrow prodigiously to meet their costs. PGE declared Chapter 11 bankruptcy on April 6, while SCE was forced to give up much of its assets to the California government in exchange for financial help. It is a classic case of people wanting more than they are willing to pay for, contrary to the Smyth vs. Ames principle.

Even though small, local generators are now feasible (to compete with the large wholesalers), Californians have not built any for fifteen years. Actually, California environmental laws are loose - applying only to coal-burning facilities. However, the general atmosphere of more restrictive environmentalism (than is necessary for clean air), plus NIMBY, has frightened the regulators away from awarding permits or the utilities from building. Californians now want more electricity but have been unwilling to pay its cost (in terms of NIMBY, etc.).

What about the wholesalers? Are they gouging the public, making prodigious profits? Wholesalers are organized into pools throughout the United States, which swap electricity with each other. If, for example, the Northeastern States have too much electricity but the Southwest has too little, Northeast can sell the surplus from its western edge to Central, which in turn will sell some of the surplus from its western edge to the Southwest, and so on. Although electricity cannot be transmitted economically for 3,000 miles (perhaps 1,000 is the limit), the use of these pools creates the equivalent of Californians being able to buy electricity wholesale from any part of the country. If California wholesale prices are re-capped, the utilities will buy at the (capped) California price until all California electricity is used up, then buy the excess in other states. To combat this, many Californians are urging the Federal Energy Regulatory Commission to cap all wholesale prices in the United States. So far, President Bush has resisted.

High prices of any commodity are essential in times of scarcity, to encourage both conservation and increased production or innovation. Historically, when any product is scarce or new, some people make a lot of money. Then, as competition develops and substitutes appear, their profits decline. That's what happened to hoola-hoops. So let's be patient.

New technology is on the horizon, but only if prices rise high enough. Fuel cells, which make electricity out of hydrogen (but cannot do it in infinite amounts) offer a cleaner source. Photo-voltaic cells, which make it out of the sun's rays, are also within existing technology. Right now the cost of each is too high. If wholesale rates are capped, there will be little or no incentive to develop these cleaner types and bring down costs. Ironically, the way to prevent clean electricity from being developed is to keep the price low.

If the price is increased, we might find ourselves spending more on electricity and less on movies, vacations, or whatever. The total amount of goods and services produced in the United States has more than doubled (inflation-adjusted) since 1950. Could we not take a small amount from that increment and devote it to electricity instead, to encourage the production of new, cleaner types?

Electricity production, distribution, and consumption is extraordinarily complex. Consider the following:

  1. Maybe it's all right for the rich to spend less on cruises and yachts, but what about the poor? I have spent many hours (days, even) wandering through the slums in every Latin American capital except Havana and in about ten cities in Africa. Most of the poverty-stricken people I talked to wanted jobs and electricity. So, why do I propose higher rates? Because I want us to create the incentive to produce more and cleaner electricity. The poor will benefit, but not right away. There are other ways to help them immediately. One is through a negative income tax (rich people pay, poor people receive). Another would be to cap retail rates but only on the first so-many kilowatt hours, and then let them rise.
  2. Capping prices causes tensions. It makes for demand greater than supply. Because the price is low, consumers waste the product - turning on air conditioners that they could get along without. (Air conditioners didn't exist when I was a child).
  3. Capping prices means that someone must do the capping. That person (Governor of California? Regulatory commission?) is subject to political pressure from those who want more because they have the electoral power to demand it. That is what is happening in California right now.
  4. I have heard rumors that wholesale producers are holding back to increase prices. Until I see real evidence, I will believe it is only rumor, because (a) power plants require heavy capital equipment, and they suffer losses if that equipment is not used, and (b) it is expensive to store electricity (as in batteries). Thus power plants lose much if they do not sell right away.
  5. The competition resulting from total deregulation would encourage the use of windmills, which are usually cheaper than all the other sources, but not enough to supply the whole country. Higher prices might also make solar energy feasible.
  6. The parent of PGE recouped much of its stranded costs. It is now rich while PGE, the utility, is going bankrupt. Had rates been deregulated, the whole PGE complex would have had to stand the losses on stranded costs, just the way any industry takes losses when it builds plants that become outmoded.
  7. At present in California there is enough electricity in the South but not enough transmission lines to carry it to the North. More lines need to be built, but Californians do not want them in their back yards.
  8. The utilities face the problem of peak loads. They do not want to have more productive capacity than they need, yet if they have enough for peak loads, they may have idle capacity at other times. To face this problem, they make "interruptible contracts," especially for off-peak-load users. Under these contracts the customer will receive cheap electricity but knows that, in exchange, it may undergo interruptions (such as turning off air conditioners) when necessary.
  9. Despite the pooling of electricity, and the interruptible contracts for off-peak hours, it just might be that the capacity of the total United States will not meet future demand. (I believe capacity is great enough for present demand, and the main problem is delivering it to the right places at the right prices). But if the future is one of greater demand than capacity, either new ways to produce it must be found, or demand must be dampened by higher prices.
  10. Businesses are leaving California for states where electricity is more secure, usually letting their workers go. What once was the dynamic state of the future is threatened with becoming a backwater.

I submit that no regulatory authority has either the brains or the political freedom to put together an enormous jigsaw puzzle to accommodate all these forces. Only competition, with decisions made at the margin (producers and consumers negotiating with each other) will cause the right amount of electricity to be produced at the right time and delivered to the right places. Remember, this is only my outlook. I'm not trying to persuade you, but I would like to hear from you.

Let Friends seek an adequate supply of electricity at prices that approximate the cost to produce it. Let us live simply, giving up some luxuries to boost incentives for new, cleaner modes of producing electricity. Let us be generous to the poor by paying part or all of their costs. Let us not be vindictive — let us worry more about the poor getting enough than the rich temporarily getting too much.

Well, how do you feel about it? Please send comments.

Love and Peace, Jack Powelson

PS: I am indebted to Karen Street, F/friend from California, who knows more about this subject than I do, and who corrected a number of errors. But Karen disagrees with me on policy. Her long comment is in an addendum, together with a comment by Dick Bellin.

Click here for independent and knowledgeable commentary by Karen Street and Dick Bellin.

Readers' Comments

Please send comments on this or any TQE, at any time. Selected comments will be appended to the appropriate letter as they are received. Please indicate in the subject line the number of the Letter to which you refer! The email address is tqe-comment followed by @quaker.org. All published letters will be edited for spelling, grammar, clarity, and brevity. Please mention your home meeting, church, synagogue (or ...), and where you live.

Yes, I need to learn to live more deliberately, and make choices fitting my values! When I opened my PG&E bill for 3 weeks, and it was over $500, my first thought was for those with the same bill who would choose: food or medicine — or heat! We've read about those who choose food over their necessary medicine, but having to make a third choice?

Tom and I bought PG&E stock over 20 years ago at $13/share. It's now $9+/-. Many small folks own PG&E for the dividend and count on it for their retirement income, just as many bought the "widows and orphans" AT&T stock years ago, and held on in good faith. I guess that tells us where we should put our "faith"! :-)

So, I'm reminded again: live my life to fit my Quaker values.

— Amy Cooper, Lafayette California (but a member of Cambridge MA Friends Meeting).

Amy is the daughter of Wini Barrett, who directed the AFSC Institute mentioned in the first paragraph of the present Letter. — Jack

An article in the February 12 New Yorker reported that Pennsylvania did the exact same thing as California (deregulate the wholesale market, but cap the rates of the consumer market), only with different numbers, and it worked. Among the differences they cited were: more advertising to consumers about how to switch providers, and higher caps that allowed providers more wiggle room in which to compete. Definitely worth a read.

Larry Powelson, Seattle (WA).

My son Larry is correct. Pennsylvania capped the retail price well above the competitive level. Below it, firms compete just as I suggested they should in TQE #7. — Jack

I concur that we should not have special pricing policies for the poor, but rather work to see that welfare payments and social security are adjusted to give them adequate purchasing power to choose between spending more or less on electricity and more or less on the other items in their consumer basket. It is amazing how people sit around in tee shirts while the electric heat is set at 82 degrees F. Try sweaters in winter and fans in summer!

— Jim Booth, Red Cedar Friends Meeting, East Lansing (MI).

I do not dismiss the importance of environmental concerns; but environmentalists who oppose new power plants on principle will soon render themselves impotent, since the American people will have the electricity they demand, one way or the other. Not a wise strategy if a cleaner environment is truly the goal.

— Ken Allison, Episcopal Church, Scottsdale (AZ).

Jack Powelson's essay on the electrical crisis in California shows more kindness towards producers than other economist, for example Krugman (New York Times, April 15, 2001). Krugman advocates (temporary) price caps, mainly justified on the assumption that such would limit a huge transfer of wealth (windfall profits) out of California to a handful of out of state companies.

Publicly owned utilities such as in Los Angeles and Sacramento seem to be doing well, and have already invested in renewables and fuel cells. If I were in California, I would want to have a hard look to see if such companies could furnish electricity with greater stability, and at reasonable costs.

— Jack Herring, Boulder (CO) Meeting of Friends.

Two articles from the recent Atlantic Monthly (May 2001) will be of interest to your readers.

  • "Russia Is Finished: The unstoppable descent into social catastrophe and strategic irrelevance," by Jeffrey Tayler, and
  • "Ayn Rand Comes to Somalia: In the absence of government bureaucracy and foreign aid, business is starting to boom," by Peter Maass.

— Carl Wallen, Tempe (AZ) Friends Meeting


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Publisher: Russ Nelson, St. Lawrence Valley (NY) Friends Meeting

Editorial Board

  • Virginia Flagg, San Diego (CA) Friends Meeting.
  • Herbert Fraser, Richmond (IN) Friends Meeting.
  • Asa Janney, Herndon (VA) Friends Meeting.
  • Gusten Lutter, Mountain View Friends Meeting, Denver (CO).
  • Jack Powelson, Boulder (CO) Meeting of Friends, Principal Editor.
  • J.D. von Pischke, a Friend from Reston, VA.
  • Wilmer Tjossem, Des Moines Valley (IA) Friends Meeting.
  • Faith Williams, Bethesda (MD) Friends Meeting.

Members of the Editorial Board receive Letters several days in advance for their criticisms, but they do not necessarily endorse the contents of any of them.

This newsletter was formerly known as The Classic Liberal Quaker.

Copyright © 2001 by Jack Powelson. All rights reserved. Permission is hereby granted for non-commercial reproduction.

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