Who's Minding the Store?

State Regulators are Asleep at the Switch

By Tyler P. Berding, Esq.

As I read about the newest energy "crisis," I can't help but think about California's historical problems with other energy-related products. In the early seventies, we were beset with a "shortage" of gasoline. I'm sure that most people can remember the lines of cars at the pumps. Of course, coincident with the "shortage" were higher gasoline prices. Gasoline producers feigned innocence and claimed that the problem was due to what was then known as the Arab Oil Boycott. The prices never came down, even though supplies apparently improved. For the past year we have gone through another round of "shortage" and price increases for gasoline, again amid steadfast oil industry denials that they were in any way responsible, and that such increases were merely the result of supply and demand.

Real supply and demand is one thing. Artificially creating a shortage is quite another. A recent Chronicle Business section article stated:

“BP Amoco systematically jacked up West Coast oil prices by exporting Alaskan crude to Asia for less than it could have sold it to U.S. refiners... (Documents obtained through a suit by a Portland newspaper included 1995 email exchanges) in which BP trading managers discuss the benefits of `shorting the West Coast market' to `leverage up' prices there.”¹

Five years ago, the California Air Resources Board mandated that the chemical MTBE be added to all gasoline sold in California. It was touted as necessary to reduce air emissions. The cost to produce gasoline with MTBE was cited by petroleum companies as yet another reason to raise gasoline prices. About three years after MTBE was added to gasoline, we discovered that it was seeping out of tanks and polluting groundwater. Now MTBE is being removed from gasoline. This will not, of course, do anything to lower gasoline prices, and now there is the added cost to clean up the MTBE, which someone will undoubtedly pass on to consumers.

In 1996, deregulation of California's electric utilities was supposed to deliver lower utility bills to consumers. If it ever was, deregulation is no longer the consumer darling it was supposed to be. Instead, we face blackouts and huge increases in gas and electric prices instead of the reductions we were promised. It is now understood that the producers of energy are seizing upon a "shortage" to raise prices astronomically.

Hey, deja vu all over again? How could something that was supposed to be such a godsend turn into a major disaster-again?! Why are our policy makers so naive about the forces of our market economy? How could we forget why we needed the Public Utilities Commission in the first place? All utilities, including gasoline, are natural monopolies, regardless of how many separate "producers" there are. The reason is that with such commodities as gasoline, natural gas, and electricity, we seem to consume all that is produced. Demand always exceeds supply. With gasoline, blame it on our lack of public transportation and our over reliance on the automobile, but regardless of the reason, I have never read anywhere that there is a 90-day supply of gasoline piling up in tanks around the country. With electricity, there is no means of storing it, so whatever is produced, is used. The fact that prices for these commodities do not benefit from "competition" should be of no surprise to anyone; yet somehow our policymakers were caught with their pants down, again. The Sunday Times reports:

“Lawmakers didn't understand how electricity is fundamentally different from other markets. Many assumed the electricity market would follow the lines of a textbook marketplace, with competition spurring lower prices and demand prompting greater supply. For many reasons, experts say, the electricity market is different in ways that change the normal dynamics of supply and demand. Electricity can't be stored and saved, new power plants to increase supply take years to build, and most importantly, there is no way for people to know the price of electricity when they are using it, meaning they are not responsive to demand.”²

Maybe we need to extend the reach of the PUC, or have the state own the sources of utility production. Who knows? But if there is one lesson we can learn from each of these examples, it is that government must assert some system of checks and balances on private enterprise, and to do that effectively, government must first run a few checks on itself. Business will try to maximize profit and avoid regulation which reduces profits. That fact shouldn't surprise anyone. Government exists, in part, to regulate enterprise, but it cannot do an effective job of that unless government itself does its homework.

Perhaps it is the effect of term limits, or that too many lawyers and not enough economists are elected to public office. Nevertheless the evidence is mounting that one reason we have had such a series of economic debacles is simply that too few in government are really prepared. Is there anyone in Sacramento who actually researched the potential effects of deregulation before we did it? Did anyone experiment with MTBE before we ordered it dumped it into billions of gallons of gasoline? Is anybody investigating the effects of oil producers' price fixing tactics? Apparently not. Capitalism is wonderful, if government supplies oversight. When government abandons its regulatory role, things can get ugly in a hurry. All of this gives me the sinking feeling that no one is minding the store.

SF Chronicle, January 7, 2001.
LaMar, State of Shock, The Sunday Times, January 7, 2001.

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