February 24th 2001

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Articles from this issue:

THE ECONOMY: Manufacturing key to economic health

EDITORIAL: A time bomb under the Howard Government

CANBERRA OBSERVED: WA result shows Coalition's dilemma

WESTERN AUSTRALIA: ALP rides One Nation to victory

NATIONAL AFFAIRS: Behind the push to become part of Asia

AGRICULTURE: ABARE report underestimates dairy backlash

Straws in the Wind



Indonesian wrath causes exodus of Papuans

CORPORATIONS: Does shareholder value makes everything acceptable?

COMMENT: Media's North Korea blindspot

FAMILY: Marriage is good for you


FILM: "Hannibal" raises issue of film violence

Books promotion page


by Jocelyn Maxwell, Peter Westmore, John Rogers

News Weekly, February 24, 2001
California power


It is incredible that the power fiasco in California is being blamed on deregulation and the establishment of a free market in electric power when the facts are quite otherwise. An economically illiterate media persists in doing this, but it is disappointing to see News Weekly following suit (February 10, 2001).

The only part of the Californian power industry which was deregulated was the wholesale price of electricity, and this was done not for the whole state but just for San Diego County and the southern portion of adjacent Orange County.

Even in this region the wholesale price was not completely deregulated as utilities were forbidden to enter into long-term contracts with out-of-state suppliers, thus forcing them to buy on the spot market.

With price restrictions on power imposed everywhere else in California, the spot market became a pressure cooker with spot prices briefly as high as US$5,000 per megawatt hour and, according to one report, as high as US$11,500 per megawatt hour.

When utilities attempted to pass on their higher buying costs to customers they were quickly ordered by the state government to roll back the increases and now, nor surprisingly, are facing bankruptcy.

The power industry in California - and, in fact, the whole of the western US region - is so heavily regulated, utilities there are constantly running plants at close to the limit of existing generating capacity, and are thus always on the brink of crashing their systems and causing widespread blackouts.

Power companies further afield have been reluctant to supply them with more power for fear of not being paid.

The whole sorry tale is described by George Reisman, professor of Economic at Pepperdine University in Los Angeles ("California Screaming under Government Blows" at

It is a saga of politically correct power plants (in the last 10 years only power plants using natural gas as fuel have been allowed to be constructed in California), consequent enormous demand and high prices for natural gas in the area made worse by inadequate pipeline capacity (new gas pipelines being an environmental no-no) and the net result being that it does not pay to build new power plants in California.

Human experience with price controls dates back 40 centuries, and the result is always the same: shortages, market distortions, corruption and black markets. Even publicly staged executions of "profiteers" by the Roman emperor Diocletian could not cause goods to materialise without, at some point, paying a market price.

All competent economists oppose price controls. Yet politicians - and their constituents - continue to be seduced by them century after century.

Incidentally, the rolling blackouts in California have caused a reduction in electricity of less than 10 per cent of the cutbacks required in just the first phase of the proposed carbon restrictions under the Kyoto Protocol.

Jocelyn Maxwell,
Wollstonecraft, NSW

Editorial note

News Weekly's comment on California's electricity crisis was based on numerous sources, including the following:

1. Report of California's Public Utilities Commission into California's Power Crisis, August 2, 2000. Its Executive Summary stated:

"California embarked on an experiment to redesign the electric industry during the 1990s ... The theory behind this policy shift was that competition would lower consumer prices and encourage cleaner, non-nuclear power sources. As the Los Angeles Times succinctly stated, 'Cheap, reliable power was the aim in the dismantling of a decades-old system of utility monopolies that generated and delivered power and regulators that decided what customers would pay.'

"That system caused business and consumer outcry that Californians were paying on average 50% more for electricity than other states and concerns that state policy favored nuclear and heavily polluting power plants, stifling cleaner, more efficient options.

"Although laudable, the promises of that restructuring experiment have not materialised. Californians still pay substantially more on average than counterparts in other states who have not shifted to competitive market structures."

2. Report by John Howard of Associated Press, March 8, 2000: "With California's power grid straining to meet demand, both state and federal officials are looking into the turmoil surrounding the state's deregulated electric industry ...

"In California, a 1996 law ordered restructuring of the electric services market to break utilities' monopoly power and introduce competition. Power generators are supposed to compete to offer energy to distributors, who then compete to deliver the energy to consumers."

3. Another AP correspondent, Charles Feldman, wrote, "California was the first state to deregulate its electricity market in 1996. The move was supposed to lower the bills of consumers by preventing most utilities from passing rising costs on to their customers until at least March 2002.

"Under deregulation, the state's investor-owned utilities sold most of their power generating plants. Now they must buy back that power at market prices."

The News Weekly article was incorrect in referring to the privatisation of the Californian power industry, when it should have referred to the deregulation of the industry which was previously dominated by private power monopolies.

This does not alter the fact that the problems facing now privately-run, deregulated Victorian power industry are similar to those experienced in California.

While many of the writer's comments about environmental restrictions on new power plants, including rejection of the nuclear energy option, blind support for "alternative energy sources", etc. are correct, it is more prudent to rely on a variety of sources such as the above than a single free market web site run by the Ludwig von Mises Institute (www.mises.org).

- Peter Westmore

Values gulf


The article by Max Teichmann (NW, February 10) detailing the results of a survey conducted by the Melbourne Herald Sun is very revealing.

A recent article in the American journal The New Criterion (December, 2000) entitled "The Cultural Revolution comes to the Ballot Box" noted:

"The almost even division of the electorate reveals a deep and troubling fissure in our society - the difference is not class ... It's values."

One quarter of American voters said that the most important thing to consider when voting for a candidate was whether he/she was honest. They voted 80 per cent for George W. Bush.

One-eighth of the electorate said the most important thing was whether the candidate "cares". They voted 83 per cent for Al Gore.

The Herald Sun survey reveals the fundamental nature of the values gulf.

The coming federal election, I suggest, will in a large part be about values and not class.

People are little interested in a 1.7 cent increase in petrol prices, the GST, etc. that fill the pages of the Fairfax and Murdoch press penned by left-wing rationalists - called journalists.

John Rogers,
Denistone, NSW

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