Editorial: Energy's squeaky wheel

July 16, 2001
As the saying goes, the squeaky wheel gets the grease.

As the saying goes, the squeaky wheel gets the grease. In US energy politics, the squeaky wheel is California. The grease? Nine billion dollars.

The state's political leaders say electricity generators overcharged consumers by that much when California's hobbled energy market crashed against shortage. They want the Federal Energy Regulatory Commission to mandate a refund. Their claim is preposterous. But the politicians, led by Gov. Gray Davis, might as well make it. They have little to lose. By contrast, US energy consumers, including those in California, have much to lose if FERC gives the whiners their way.

The commission absorbed responsibility for this decision when 15 days of negotiations mediated by an administrative law judge ended last week without yielding a voluntary settlement. The mediator, Curtis L. Wagner Jr., said he'd recommend a refund of as much as $1 billion. State officials called it a victory. They were right.

Dangerous ground

A refund of any size can be seen as support for the notion that frenzied politicians can validly divine what prices of electricity-or any commodity-should be. This is dangerous ground. Markets are far superior.

Yet California's market was malfunctioning when the alleged overcharges occurred. The state's restructuring program had made it unable to accommodate shortage. During the desperate grope for electric power that began in the middle of last year, distortion and manipulation were inevitable. So now is intervention by the federal government. Out-of-state generators themselves, by offering refunds totaling $500 million, acknowledge that prices spiked excessively during the crisis.

For the California authorities, that's not enough. Michael Kahn, a negotiator for the state, vowed to secure the full $9 billion-if not through FERC proceedings then through litigation. Davis declared, "We are in a war with generators, mostly out of state, that are trying to bleed us dry."

The truculence, of course, is a shield. Davis and his cronies are dodging blame for not correcting their state's mistakes as soon as a market turn made them obvious. Clinging ridiculously to retail price caps, they prolonged a consumption zoom, beggared their state's largest utilities, and loaded the sale of power in California with risk. Reluctant even now to liberate prices at the retail level, they have forced government into the middle of the market, where it buys and sells electricity and owns transmission lines.

Somebody has to pay for the state's foray into the electricity market. Davis gains politically to whatever extent he can divert the cost away from, first, California energy consumers and, second, California taxpayers. Hence the little he has to lose from grubbing for dollars before FERC and in the courts.

The rest of the country has little trouble recognizing the politics at work here. But important economic questions tend to get lost in the drama: Do Davis and the other California blame-throwers have some special insight into what the price of electricity should be? Is this an appropriate way to determine prices everywhere for electricity? For other forms of energy?

The Californians have no special pricing insight, of course. Their motivation is wholly political. Their $9 billion "overcharge" estimate is a capricious political target, not an economic value. Most of whatever they ultimately receive back from generators will result from noise, not commerce.

FERC, therefore, must muffle Davis as much as possible. Given California's political importance, it won't be easy. The commission's aim must be to restore market functions in California so that buyers and sellers, not speech writers and lawyers, determine electricity prices.

Fair pricing

The energy industry, regulators, and consumers should regret but not oppose federal intervention in California's electricity mess. They should hope it ends as quickly as possible. And they should abhor official California's temper tantrums and litigation threats, which have nothing to do with fair pricing of energy.

California showed the US how not to restructure the electricity business. Its leaders have demonstrated how not to deal with mistakes. Now they're providing a sour reminder about the perils of mixing politics and prices.

FERC should not reward the misbehavior. If this wheel gets any grease, others will develop squeaks. Energy pricing by politics helps no one but politicians-and consumers least of all.