Soaring heat indexes and scorching drought conditions are inducing panic throughout the nation. Public officials plead with consumers to cut back on water use, while utility executives frantically scramble to manage increasingly frequent brownouts and power disruptions. States of emergency have been declared, and water rationing is being seriously considered in Maryland and elsewhere. Yet authorities shrug their shoulders and blame the heavens, saying, "We can't do anything about the weather." Perhaps not, but water and power shortages are the product of government mismanagement, not the weather gods. It's time public officials take responsibility for their mess.
Consider water. How much to deliver to consumers and at what price to sellit are decisions made by regulators, not businessmen. Water prices havebeen kept artificially low -- about half the price of delivery on anational basis -- with over-consumption the inevitable result. Moreover,water prices do not rise in times of drought or plummet in times of plenty. Consumers are insulated from price signals regarding scarcity and thusmust be begged to consume rationally.
Worse, truly phenomenal volumes of water are being wasted as a consequenceof insane agricultural policies. In parts of the West, for example, highlysubsidized water, sold to farmers at around 10 cents per 1,000 gallons, isdevoted to irrigating price-supported surplus crops in the desert,irrigation that is so excessive that federally funded cleanup measures arefrequently required. Pools, dishwashers, toilets, showers -- all pale incomparison with the waterlogging of suboptimal cropland in 19 westernstates, a task for which 80 to 90 percent of America's total water use isdedicated.
And drought or no drought, the law prohibits city dwellers from purchasingsurplus water from farmers. Mutually beneficial transactions are verboten. It's no wonder that when a dry spell occurs the entire system collapses.
The story's the same for electricity. Tightly regulated for years, powercompanies have been prohibited from charging peak prices during periods ofheavy demand. But peak pricing is even more important in the electricityarena than in the water business. Because many of the facilities thatgenerate energy during periods of peak demand are used only 10 to 14 days ayear, owners need to recover a year's worth of depreciation and capitalcosts in one fell swoop. Hence, extra power during peak demand isincredibly expensive. Last summer, for example, power production costsreached $7.50 per kilowatt-hour in some parts of the Midwest. Likewise,the heat wave just last month drove the marginal cost of power in thePennsylvania-New Jersey-Maryland interconnection to 94 cents perkilowatt-hour. Yet consumers were shielded from the market and continuedto pay 5 to 7 cents per kilowatt-hour.
The price of such regulatory "kindness"? Brownouts and power disruption.Whenever governments attempt to insulate consumers from market prices,resources are used inefficiently and waste runs amok. Industry economistsestimate that around $250 billion annually is lost to the economy becauseof the disconnect between electricity demand and prices. Remember thatpower lines must maintain a certain amount of voltage no matter what thedemand, and presently, the voltage on the lines at night goes virtuallyunused. Manufacturers have little economic incentive to concentrate theiroperations in the evening, even though the economic savings would betremendous. Residential consumers could likewise switch to running thedishwasher at bedtime or, with the increasing computerization of homeappliances, purchase devices that run the water heater at night so that thefollowing day's power use could be kept to a minimum. In fact, the bulk ofthe economics gains that supposedly will accrue from the much-ballyhooedrestructuring of the electricity industry stem not from the benefits of"competition" but from the theory that a restructured industry willeventually price electricity accurately at the margin.
Consumers have had no trouble adapting to marginal pricing of long-distancetelephone service. Few of us find it odd that long-distance calls arecheaper after 9:00 p.m. Why should electricity or water be any different?Some people might argue that the poor need to be protected from real-timepricing, but even if so, the present regulatory structure makes littlesense. After all, we help the poor pay for foodstuffs not by imposingprice controls but by handing out food stamps. If intervention must occur,why not institute inframarginal pricing -- control the price of power orwater for a set amount of consumption but decontrolling prices beyond that?
It would be difficult to design a more absurd set of water or electricitypolicies, and it's doubtful one could do so even if one tried. But this iswhat happens when politicians -- not businessmen -- run an industry.Although we can't do anything about the weather, we can do something aboutwater and power scarcity: Deregulation. Now.