From Rockefeller to Gates, the 20th century instilled American consumers with a deadly fear of the corporate monopoly. Those lessons were well learned, and trust busting has protected the economy from the deleterious consequences of cartels. However, privatization of government-controlled industries during the 1990s proved that some advantageous natural monopolies do exist. In Monday night’s “State of State” speech, Gov. Gray Davis finally acknowledged this fact by sounding the call to take California’s crippled electrical industry back into public hands.
In shortly under a decade, California has dug itself into one big, electrical hole and now lacks the juice to crawl out. Shortly after the power industry was privatized in 1996, the state forced Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric to sell portions of their generator holdings. Now, residents are facing the threat of large-scale brownouts and the even more ominous reality of electric rates going through the roof. How did this happen? California’s electrical industry was simply not prepared for deregulation.
The state has not constructed a significant power plant in 10 years. Private generators such as PG&E are forced to buy energy wholesale from out-of-state power grids, which are charging exorbitant prices. The state allows these purchases to be made piecemeal, instead of on the basis of long-term contracts. This renders operators susceptible to violent price fluctuations and, recently, the courts upheld the industry’s right to pass these costs on to consumers so long as purchases are made responsibly. But purchases are not being made responsibly and attempts to install rate caps have not yet worked.
Most consumers believe that PG&E, Edison and SDG&E have intentionally withheld energy in order to artificially inflate prices, but as yet, there is very little evidence that this is true. Proponents of privatization have pointed out states such as Ohio and Texas, which have successfully deregulated their respective industries. These states, however, contained a sufficient supply of power generators when the transition was made, and have since taken steps to oversee the power trade. Yes, California could pull this off as well, but there is really no need.
Certain industries, such as telephone and general utilities are best left in state hands because they require large amounts of infrastructure and oversight. These services are simply not meant for the competitive market; they require a higher level of stability. It takes a lot of hardware to keep California wired properly, and service disintegrates when there are too many cooks in the kitchen. People must not be forced to gamble with light and heat; the government has a duty to ensure that these things turn on when the switch is thrown.
Davis’ plan to regain control of electrical generators in California is characteristically political and lacks details, but he has the right idea. Of immediate importance, Davis made the crucial decision that the government will not allow PG&E, Edison and SDG&E to go bankrupt. Such an occurrence would deal a serious blow to the state economy. The governor also called for more state authority to purchase and construct power plants, earmarking $250 million for conservation efforts, cutting government electricity consumption and overhauling the board that oversees the power grid.
It remains to be seen, of course, how the government will achieve these ends. But the most important aspect for the time being is that the objective of moving back toward public control be firmly established.