Soaring Electric Rates in Southern
Electricity rates in San Diego County and in adjacent south Orange
County—the first area in California to be freed from state rate
regulation—have sharply increased in the last month or two, immediately
following the end of state rate regulation. The result has generally been
interpreted as a failure of the
free market and is being cited in efforts to halt the extension of rate
decontrol to other areas in the state.
I cannot claim to be familiar with all of the important details of
the situation. My only source of information (apart my own sharply higher
electric bills) is news reports by people who appear to have no
understanding of any kind of the principles governing a free market.
On the basis of my knowledge of those principles, in conjunction
with knowledge of the fact that rate decontrol has thus far come to just
this one area, I am prepared to advance the following explanation.
The freeing of one part of a market, while the rest remains
controlled, subjects that one part to the full pressure of a competition
among buyers that properly should extend over the entire market. The
situation is analogous to water in a garden hose the nozzle of which has
been tightly blocked and then is opened just slightly. Naturally, water
escaping from just one small part of the nozzle will escape with great
force. But as soon as the entire nozzle is unblocked, the water pressure
will be greatly reduced.
The freeing of the very limited market of San Diego and south
Orange Counties means that the power supplies of that relatively small
area are subjected to the competition of buyers of electric power
throughout the state and in surrounding states. The solution is the
freeing of the power supplies of the whole state and of surrounding states
to meet that competition. Then the price pressure will be greatly reduced.
The further solution is the removal of obstacles to the
construction of new and additional power plants, so that the overall
supply of electric power can be increased. This would serve to bring about
a progressive reduction in the real cost and price of electric power. It
would enable businessmen in the industry to be free to earn high profits
on the foundation of lower costs. Free competition would then serve to
eliminate such premium profits by driving prices down toward the lower
level of costs (just as happens in the computer industry). Further high
profits would have to be earned by further reductions in cost, and so on
and on, with an ever falling real price of electric power. (Of course, to
make this possible, the environmentalists would have to get out of the
This is the overwhelming thrust of the free market: ever lower, not
higher prices. To be sure, this result is not very obvious when prices are
expressed in terms of fiat paper money, which is comparable in its cost of
production to paper clips or pins, and which gets cheaper faster than
businessmen can make most goods and services cheaper, with the result that
prices expressed in paper money almost always rise.
But it is very obvious when prices are expressed in terms of how
many hours or minutes of labor the average worker must put in at a job in
order to earn the price of something. Once prices are thought of in these
terms, it is clear that the real price of almost everything has been
falling for generations—precisely because of the free market and its
profit motive and freedom of competition. That’s the real meaning of a
free market in electric power as well.
we do not yet have such a market. We have merely taken a modest step
towards it, in the aftermath of numerous other, more powerful steps in the
opposite direction, such as the moratorium on the construction of new
atomic power plants and the moratorium on the development of new domestic
sources of oil and coal that would serve as fuel for conventional power
plants (and also serve to prevent the OPEC cartel from raising the price
of oil and thus the cost of producing electric power).
moratoria, coupled with rate controls, have served to create shortages of
electric power in various places, and efforts to cope with these shortages
have intensified the competition for whatever electric power is available.
To the extent that such power is now available by competing for it with
the residents of San Diego and south Orange Counties, the residents of
those counties are temporarily bearing the brunt of the consequences of
environmentalism and other anti-free-market forces. That is the real
meaning of the surge in electricity rates. The enemies of the free market
should not be allowed to get away with blaming the free market for the
consequences of their anti-free-market policies.