Gas Prices

The Senate was able to grab the headlines recently when they drilled oil company executives about the high price of gasoline, but they did little to find out why we pay so much at the pump. If they would have brought in economists from think tanks like Cato or Reason who understand how markets work, they would have found out that prices are dictated by the laws of supply and demand.

The senators may have also learned that government plays a major role in limiting supplies and raising demand. The increase in price of a barrel of oil was triggered by unrest in the Middle East and has been kept high in part by the inability to export oil out of Iraq.

 The politicians have also stopped new oil production in this country. The federal government bought out oil leases to stop offshore drilling and has still not authorized drilling in northern Alaska.

A major cost component of gasoline is refining. The government has stopped any new oil refinery to be built in the United States since 1976 while we use 25 percent more gas now than we did then. Any refinery shutdown will raise the price of gas, especially here in California where we are required to use a special formula, limiting the ability to bring in gas from out-of-state.

Putting ethanol in gasoline directly raises the price. It also reduces our gas mileage and it takes more energy to make ethanol from grain than the combustion of ethanol produces. The only reason it is in our gas is because congress mandates it as a subsidy to Big Ag.

Taxes at the pump cost us over 55 cents a gallon and most of that money is wasted. The federal tax is squandered in administration costs and boondoggles like the Big Dig in Boston and bridges to nowhere in Alaska.  Proposition 42  requires that the sales tax on gas be spent on transportation. In defiance of the voters, Governors Davis and Schwarzenegger have suspended Prop 42 every year, until this year, since we passed it in 2002. The squandering of gas taxes has led to overcrowded freeways that create traffic jams which require more fuel to be burned.

The oil company executives are doing their job when they maximize profits for their companies. The politicians should do their jobs by first understanding the forces that led to high gas prices and then reversing their part in restricting supply and increasing demand.
 

Electricity

What the media refers to as deregulation came about as a result of Californians paying 50% more per kilowatt of electricity than the rest of the country. Knowing that businesses in the state were hurting, then Republican Governor Pete Wilson and our Democrats and Republicans in the state legislature unanimously passed what they have the audacity to call "deregulation". Doubling the pages of regulations as they did in Assembly Bill 1890 is not deregulation, it is what I call the Sovietization of California's electricity. Their "deregulation" created an Electricity Oversight Board to continuously monitor the market, provide regulatory oversight to the electricity industry and select the board of directors for the newly created Independent System Operator (Cal-ISO) and the Power Exchange Corporation (PX). Lenin would have been proud.

Energy service providers either contract directly with the Cal-ISO, which is regulated by the Federal Energy Regulation Commission (FERC), or through a scheduling coordinator to gain access to the power grid now operated by Cal-ISO. Investor-Owned Utilities (IOUs) are mandated by AB 1890 to sell all of their generated power into, and purchase all their generation needs from, the Power Exchange. This is by no means a laissez-faire energy policy.

Since the passage of AB 1890, our state government has been very aggressive in limiting the supply of energy at the same they artificially raise demand.

Our state has spent billions of dollars subsidizing our electricity bills to insulate us from the true cost of government managed electricity. For most people, there has been no reason to conserve. The result is higher prices on the spot market because of increased demand. Because they can't raise rates without permission from the Public Utilities Commission, power companies are going bankrupt and power generators have held back on power since they were not getting paid. One of the consequences of all this government action is rolling blackouts throughout our state.

Governor Gray Davis called power generators "robber barons" and an Attorney General Lockyer said that he was looking forward to escorting Enron Corp. Chairman Kenneth Lay to a jail cell occupied by a "tattooed dude who says, 'Hi, my name is Spike, honey'." These disturbing statements by our highest public officials along with their threats of eminent domain must surely give power company executives second thoughts about doing business in the Golden State. On the other hand, they have to love their secret negotiations with Governor Davis. The resulting $43 billion in overpriced energy contracts will ensure that we will pay too much for electricity for the rest of the decade.

Californian politicians are now demanding strict federal price controls to temporary mask their past mistakes. The Bush administration initially resisted. Vice President Cheney recalled that the Nixon price controls led to a series of "unintended consequences" (such as the gasoline shortages of the 1970's).

Now instead of calling the government control of prices, price controls, the Bush administration came up with a new name, "price mitigation". Price mitigation artificially holds down the price of electricity when reserves fall below 7%, triggering a Stage 1 supply emergency. This is the worst time to limit the price of electricity. When we are nearing blackouts, instead of bringing online an inefficient power plant that the owner may also have to pay penalties to the government to operate because of excess pollution, the plant will remain inactive and California will have more blackouts than if we did not have the price cap.

It is unfortunate that the media blames the free market for the blackouts that are really caused by government regulation. The true power crisis we are having is that the government is micro-managing the energy markets. Only when we get the government out of the energy business will we have abundant and affordable power.

The state can help solve the government created energy crisis by taking the following measures:

1) Have energy suppliers deal with at the most only one state agency when they are building a new facility. Said agency should help companies comply with federal and local red tape and never be allowed to slow down construction.

2) Allow electricity suppliers to charge less at night.

3) Eliminate the Electricity Oversight Board, Independent System Operator and Power Exchange Corporation.

4) Instead of bailing out the investor owned utilities with the taxpayer's money, the state should allow them to go bankrupt and buy the land and easements they use for power distribution. The state then could sell the easements back to the utilities and anyone else that would want to put up competing power lines.