Mimsy Were the Borogoves

Editorials: Where I rant to the wall about politics. And sometimes the wall rants back.

California never had a free market power failure

Jerry Stratton, March 4, 2020

San Onofre Nuclear Nipples: The San Onofre nuclear plant from I-5, March 5, 2012.; California; nuclear power

A monument to regulatory sclerosis.

Now that California’s state-managed power grid is yet again failing, I hear again how deregulation failed back in 2000. But I was in San Diego, at the brunt of the damage. There was never any deregulation. There was never any attempt to bring a market economy to electricity in California. We never had a choice of power generator, nor did the people we bought power from. I remember looking at the various options we had, and looking at the mix between green and non-green power generation, compared to the average; every option, even options supposedly focused on green power generation, had exactly the same mix percentage-wise.

According to Green Mountain’s three-fold flier, what they did that made them green was donate to clean energy solutions. At the time I thought that was silly, but it didn’t occur to me it was indicative of a larger problem with the system. It was only afterward, when I learned how the system worked, how micromanaged it was by California, that I realized why power companies did it that way.

They had to. There was no market where Green Mountain could go buy green energy and sell it to me. Instead, we had an exchange run by California bureaucrats that funneled all the same power from one side, the electricity producers, to the other side, the electricity sellers. The politicians claimed it was a means of simulating a market economy, but if you looked at it, it was clearly designed to deny a market economy. Long-term contracts were forbidden. Negotiating prices was forbidden; well, technically not forbidden, but the power sellers didn’t get to pay the price they negotiated. The formula decided the price they were going to pay, and it was designed to run high. Everybody paid the same price, what the bureaucrats, not the end customers, decided was the market price. They used a formula that heavily weighted the highest bids, making it an easy system to manipulate.

This was what Enron did. They looked at the formula and manipulated the inputs to the formula, forcing all consumer-side sellers to pay high prices for power. They, of course, passed the formula’s costs on to us. That wouldn’t have worked in a market economy, because we could have chosen to switch to different power generators, and we’d have negotiated prices with them already anyway so that faking high prices wouldn’t have altered our contracts.

We couldn’t do that under California’s highly regulated exchange. It was an exchange-based system that forced everyone to pay high prices. The same natural forces that caused health care prices to skyrocket under the federal ACA exchange caused electricity prices to skyrocket under California’s exchange. It wasn’t a deregulation of electrical power market any more than the ACA was a deregulation of the health care market. It was a massive government takeover of an already highly micromanaged system. It took everything that was wrong and doubled down on it.

Like the dwindling number of “insurance” companies under our current health care exchanges, the California exchanges meant a dwindling number of places to buy electricity. The “green” seller I had looked at that didn’t sell green energy left the system. They were on the losing side of the exchange. They had to buy power from the exchange at whatever price the formula said they had to pay, which changed daily. They weren’t allowed to go outside the exchange to find less expensive sources or negotiate long-term contracts. They couldn’t go to a power generator and say, I have x customers who need y electricity every day, can you give me a deal on 365 days worth.

Power-hungry politicians and bureaucrats don’t like it when people go around power-hungry politicians and bureaucrats. They prefer bottleneck exchanges and their inevitable shortages and high prices. They prefer micromanagement and its inevitable corruption. It means more power and more milker money for them.

Texas appears to be doing a much better job of it. I can choose from a variety of options that actually provide different mixes of power, and I can choose different prices and choose different contract lengths.

Not only did I end up paying only slightly more for electricity for a three-bedroom house in Texas with air conditioning compared to a one-bedroom apartment in San Diego without air conditioning1, but the companies themselves were very responsive when I had to contact them—which was only once, because I couldn’t believe it was that easy to set up power for my house over the Internet. I assumed I had done something wrong. I hadn’t: the power was turned on automatically the day I drove up to the house.

Gas prices May 3 2012: Gas prices from $4.50 to $4.70 on May 3, 2012, in San Diego, California.; San Diego; gas; 2012

The rest of the country has left 2012’s gas prices behind. Not California.

So many government programs that claim to do better than letting people buy what they want and not buy what they don’t want, at the prices they are willing to pay, are like this. Politicians incentivize screwing people over, and then act surprised when people get screwed over. The unaffordable care act does this. You want to provide such crappy service that nobody wants to buy insurance from you? No problem. We’ll make up the lost profit by taking it from these guys over here who were doing a good job and so have more customers. The ACA called these risk corridors payments.

Of course, when the system incentivizes doing a crappy job by punishing those who do a good job, everyone does a crappy job. That means there isn’t enough money to transfer, and the bailing out of insurance companies has to come from the taxpayers instead of from the risk corridor program.

A friend of mine from the San Diego days, in complaining about California’s current2 electricity monopoly, suggested encouraging mom and pop power generation. It’s a great idea. The technology exists, or is close enough that a free market would make the necessary improvements. But the only way we could get small business power generation would be by drastically reducing regulations on the power industry. A heavy regulatory burden gets rid of competition for large businesses. Meeting the regulatory burden requires hiring extra bureaucrats to manage dealing with state and federal bureaucrats. Burdensome regulations reward having more bureaucrats than employees dedicated to the core of the business. Bureaucracy is the one advantage that big businesses have over startups and mom and pops. If we want small businesses, we have to get rid of regulations. We have to get the state out of the way.

Economies of scale as a small-business killer is a myth of the administrative state. In almost all circumstances, small, nimble businesses unencumbered by bureaucracy will outperform large businesses filled with administrators. The main circumstance where they don’t is when their industry is heavily regulated by the friendly hand of government thinking it knows better how to run a business than do the business owners and customers. I happen to be reading, as I write this, about the shale oil revolution. Because shale oil was thought to be impossible, it was less regulated. It was an individual entrepreneur-driven revolution coming from outside the bounds of what the government thought possible. The same kind of revolution could happen for power generation if we get the government out of the way.

So much of the swamp’s “reform” is taking government-managed systems that don’t work, and adding more government-managed systems. Let people buy what they want and not buy what they don’t want, and mom-and-pop companies will sprout up to cater to everyone’s unique needs. The more bureaucracy—the more we add regulations on top of exchanges on top of regulations on top of taxes—the harder it is for startups to start, the harder it is for smaller companies to cater to their customers instead of to the bureaucracy, and the harder it is for smaller businesses to remain in business with the added regulatory costs.

If it requires twenty administrators to manage your interactions with the government, it’s going to be easier for PG&E to meet that than it is for a two-person community operation. The two-person organization will eventually have to either go out of business because you can’t have a company where 90% of the company doesn’t contribute to the bottom line; or they’ll give up and sell out to the monoliths.

This is, in fact, a clue: if your “deregulation” results in bigger businesses and fewer startups, it isn’t deregulation.

If you want more mom-and-pops, you need to stop regulating them out of business.

In fact, if you want to remove our dependence on fossil fuels for power generation, you will need to end the subsidies, stop trying to choose which technology will win, and just get out of the way of the individually-owned small businesses that are the engine of progress. That’s where we’ll get the breakthroughs that make a difference.

In response to Exchanging the market for high prices and corruption: The Democratic health insurance exchange looks like it’s going to make many of the same mistakes politicians made in California when they tried to choke electrical power through a power exchange.

  1. And this was after California’s exchanges were repealed and prices went back down to normal. Normal for California is still expensive.

  2. Pun not intended but accepted.