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> From: “Mises Daily Article”

> To:

> Subject: The Great Power-Shortage Myth
> Date: Tue, 24 Sep 2002 08:41:51 -0500
> <ruled”>>ruled in
> favor of
> this position.
> 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 Universityâs
> 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
> <
> >
> His web site is <Daily”>>Daily
> Articles Archive, and read his interview in the
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