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The Great Power-Shortage Myth

Mises Daily: Monday, September 23, 2002 by

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The California Public Utilities Commission, with the enthusiastic agreement of  leading politicians in the state and the uncritical acceptance of the press and the other media, has announced that the cause of California's numerous electric-power blackouts of recent years was the deliberate, malicious withholding of the use of available power-generation capacity by the major power-producing companies—which companies, if the account were true, must necessarily be thought of as modern-day demons.

These companies, we are told, had sufficient unused generating capacity available to more than meet the excess of quantity of power demanded over the amount actually generated, but they deliberately chose not to use it because of their greed for profits. The conclusion drawn is that they and their greed for profit were responsible for the power blackouts and all of the consequences resulting from them, including such things as people dying from the inability to operate vital medical equipment on which their lives depended.

In the words of a leading California newspaper,

"The Public Utilities Commission said Tuesday [September 17, 2002] that those companies deliberately produced an average of 40 percent less energy than they could have. Without those cuts, the PUC said, most of the almost three dozen blackouts and brownouts of 2000-2001--including the black traffic signals, the stopped air conditioning, the dim classrooms--could have been avoided." (The Orange County Register, September 18, 2002, p. 3)

Elsewhere on the same page, in a related story, the newspaper reported:

" 'And news Tuesday that maybe it [the blackouts] didn't have to happen angered many of those affected. '. . . His father was dying of cancer in March 2001 when his dialysis treatment suddenly stopped. 'He had to have his dialysis every other day, and when (he) couldn't get it, he couldn't breath,' Marquez said. `It didn't have to happen. . . . It was all bogus.' "

Scoring par for the Republicans, State Senator Bill Morrow of Oceanside was reported as saying: "'My gut tells me we're still going to see that there was some available power that could have and should have been used during the emergencies.' . . . Sen. Joe Dunn, D-Santa Ana, the chairman of the investigative committee agreed."

Now let us consider what light can be shed by economic science on the phenomenon of electric-power blackouts.

An electric-power blackout is a special case of the wider economic phenomenon of a shortage, that is, of a situation in which the quantity of a good that buyers are seeking to buy at the prevailing price exceeds the quantity of the good that the sellers possess and are willing to sell. The gasoline shortages of the 1970s are an excellent illustration: drivers of vehicles were seeking to buy more gasoline than the service stations possessed and were willing to sell, with the result that many drivers had to go away without being able to buy the gasoline they wanted.

The only significant relevant difference between a shortage of electric power and other shortages is that when the quantity of electricity demanded approaches the quantity that the producers are able and willing to generate, the whole system of power generation and transmission threatens to overload and create, in effect, a huge short circuit, possibly resulting in great damage to the system. Should such a thing occur, it would itself constitute a giant blackout. In order to avoid such results, sections of the system, or grid, as it is called, are disconnected, resulting in local blackouts. (In many cases, various users of power—usually large ones—may be made, instead, merely to reduce their power consumption, in which case the situation is called a "brownout." Localized blackouts are put into effect after such measures prove insufficient.) In effect, the power users who are disconnected are in the position of the motorists who must go away empty handed.

Now there is something of major significance about the very nature of shortages that has a vital bearing on the question of whether or not the power companies would deliberately withhold generating capacity that would have alleviated or prevented the power shortages. This is the fact that, in the conditions of a shortage, increases in the amount of the supply offered for sale do not reduce the price of the good. On the contrary, they serve merely to reduce the severity of the shortage. Not until the shortage is entirely eliminated does it become necessary to reduce the selling price of a good in order to increase the quantity of it that is demanded.

As illustration of this fact, imagine that back in the days of the gasoline shortages, the quantity of gasoline demanded in some city, at the then-prevailing government-controlled price of gasoline, was 1 million gallons per day, while the supply available was 900,000 gallons per day. There would  have been a shortage of 100,000 gallons of gasoline per day. Now imagine that the suppliers somehow managed to find an additional 50,000 gallons of gasoline per day. Would they have had any difficulty in selling those additional gallons? None at all. The shortage of 100,000 gallons means that there are buyers ready, willing, and eager to buy 100,000 additional gallons—at the prevailing, controlled price—that up to now have simply not been available. They will certainly snap up the additional 50,000 gallons at that price. Indeed, they will snap up a full additional 100,000 gallons per day at that same price if they become available.

Only when enough gasoline becomes available to fully meet the quantity demanded at the controlled price, i.e., only when the shortage is totally eliminated, and a still further addition to the supply that sellers are able and willing to sell occurs, does it become necessary for the sellers to reduce their price in order to increase the quantity of the good demanded.

In fact, the question we are dealing with here is the same as asking what would have happened to the price of gasoline at an individual service station, which up to now has had to turn away many drivers, if somehow it was now in a position to sell a larger quantity of gasoline. It would certainly not have to reduce its price in order to induce those whom it has had to turn away to buy its additional gasoline. There is little that those drivers would rather do more than pay that price, if only they can obtain the gasoline. Only when all such drivers had been fully satisfied in obtaining the amount of gasoline they were seeking at the controlled price would any reduction in price become necessary as the means of increasing the quantity of gasoline demanded at that service station. Until that point is reached, absolutely no reduction in selling price is necessary in order to sell a larger supply.

Now then, here are the companies generating electric power. There is a prevailing price of the power they are selling. At the moment, they are operating at some definite percentage of their capacity. As the day wears on, however, the amount of power being drawn from the system, as the result of such things as people turning on air conditioners, electric lights, machinery, whatever, progressively increases. At some point, the amount of power being drawn from the system starts to threaten to surpass the amount of power the companies are able to generate. Once that happens, first brownouts and then blackouts are imposed.

However, what we have just been told by the bureaucrats, the politicians, and the press is that in almost all instances, the power-producing companies possessed additional generating capacity more than sufficient to meet the portion of the demand that they did not meet and which turned out to constitute the excess of demand over supply—i.e., the shortage and its extent. This demand we now know is a demand which they could have met without any reduction whatever in selling price, if, in fact, they had had the ability to meet it.

This raises the question: in what circumstances would a producer choose not to meet an additional demand for his product at his presently existing price? A shortage represents such an additional demand that is not met.

Once we see the question in this light, the claims made in the press about the cause of the California blackouts appear truly astounding. What we are being told is that the power producers were in a position to do extra business--they allegedly had all the necessary generating capacity--but simply refused to do it. We are being told a story which, if applied to restaurants or coffee shops, say, would claim that additional normal-type, well-behaved customers were coming through their doors, ready to order from their menus, and that even though these food-service establishments had the all the necessary means of filling the additional customers' orders, they simply refused to do so--indeed, they refused to do so out of reasons of greed!

It should be obvious to everyone that this is the most utter nonsense. It is never profitable--and, therefore, never reasonable--for a business to refuse to do business that is profitable for it to do. To pretend that businessmen and their greed are nonetheless responsible for people not being supplied, and for people therefore suffering deprivation and even death, is to display an ignorance of elementary economic law surpassing the ignorance of physical law on the part of those who claim that broomsticks are means of flight.

Probably those who are spreading the nonsense about the power companies have in mind the idea that the power companies somehow conspired to reduce the supply of power in order to raise its price. Even if such a conspiracy existed, which has never been proved and was not even alleged in the recent tales appearing in the press, it could not possibly explain a withholding of supply in the face of a shortage. The shortage exists and endures only because the price is not allowed to go high enough to eliminate it by reducing the quantity demanded to the level of the limited supply available. When it becomes clear that the price will not be allowed to rise any further—and there could be no clearer proof of this than the imminence of brownouts, not to mention blackouts—then no reasonable motive exists for a power company not to sell as much as it profitably can at the prevailing price.

If the power companies had had the power available to sell more to customers being asked to reduce their usage of power, if they had had the power available to sell to those about to be disconnected from the system, and if their cost of generating that additional power did not exceed the prevailing price of power, they would have had every reason to generate and sell that additional power, for doing so would have meant added profits in their pockets.

The only circumstances in which a business will not be ready--indeed, eager--to do an additional volume of business is if it is physically unable to do so because it lacks the necessary physical means of doing so, or because the costs it incurs in doing so exceed the additional sales revenue it will receive.

Precisely these are the reasons the power companies did not supply more power than they did on the days that brownouts or blackouts occurred in California. To an important extent, they were physically unable to supply more power. At any given time, a more or less considerable part of the overall generating capacity a power company possesses may be down for necessary maintenance and repairs. Perhaps such equipment could be brought back on line without performing the necessary maintenance or repairs. But doing so would impair power production, and thus the ability to earn revenue and profit in the future. Stepping up power production in this way is therefore extremely costly and therefore usually does not pay. (Consumers of power should be glad that producers behave in this way. For it serves to assure their supply of power in the future.)

In some cases, additional power-generating capacity that was available in one part of the state could not be used to increase the supply of power in a different part of the state, where it was needed. This is because there is a major bottleneck in the power-transmission system between northern California and southern California that sharply limits the amount of power that it is possible to transmit between the two regions at any given time. In other cases, additional power-generating capacity that was available and could have increased the supply of power where it was needed was not brought on line because environmental laws and regulations, and the accompanying severe penalties for violating them, served to make the cost prohibitive.

In no case were the power companies and their profit motive responsible for brownouts or blackouts. The claim that they were responsible is a fairy tale that no intelligent person should take seriously.

This fairy tale, it should be realized, is part of a wider, magical-type mindset, so to speak. A major aspect of this mindset that we have seen is the belief that the power companies were responsible for the supply of power being less than it would otherwise have been. Here the power companies' repeated efforts to build new and additional power plants—which were again and again thwarted by  the environmentalists—not only are entirely ignored as matters of historical fact but also apparently cannot even register as relevant in the brains of many people.

Additional power plants, many of our contemporaries appear to believe, are not necessary for the production of additional electric power. That this is widely believed is clearly implied precisely in the acceptance of the claim that somehow the existing power plants are sufficient by themselves to provide a reliable, trouble-free supply of power--or would be if only the power companies did not maliciously withhold a major portion of their capacity from the market. (Recall that the figure stated by The Orange Country Register for capacity allegedly withheld was 40 percent.)

On this view, the reason the power companies seek to build additional power plants, it would appear, is only to gain the malicious pleasure of polluting the environment. And, of course, in some mysterious way, to earn additional profits from investment in additional capacity that is allegedly not needed and will only be added to the unused capacity that allegedly already exists (something, of course, which also implies a contradiction in the logic concerning the alleged goal of pollution of the environment).

The proper limit to the extent of the analysis of an absurdity is the demonstration of the fact of its absurdity. The claim that power companies are responsible for power shortages, or for the supply of power being less than it would otherwise have been, is clearly absurd.

The making and acceptance of such a claim should be taken as clear evidence of  profound ignorance, irrespective of the public position, social status, or number and level of academic degrees held by those concerned. If a newspaper or television station reports such a claim as fact, one must question its ability to report the news. If a politician or public official reports such a claim as fact, one must question his fitness to hold public office. If a teacher or professor, or even Nobel Prize-winner, reports such a claim as fact, one must question his credentials and the credentials of those who awarded them to him.

Reason and science--in this case, economic science--are potent weapons against irrationality and ignorance. All that they require is to be brought to bear.


George Reisman is professor of economics at Pepperdine University’s Graziadio School of Business & Management in Los Angeles, and is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996). His book is available through Mises.org or Amazon.com. His web site is www.capitalism.net. You may contact Dr. Reisman by MAIL. See his Mises.org Daily Articles Archive, and read his interview in the Austrian Economics Newsletter.