POWER HUNGRY IN CALIFORNIA
By Imad-ad-Dean Ahmad, Ph.D.
Minaret of Freedom Institute
Not since the "oil shortage" of the 1970's
has so dramatic a
demonstration of the wisdom the Prophet's warning against price
controls as in
the recent debacle in California.
As
other localities around the country contemplate how they will
"restructure" their "deregulation" (an oxymoronic
expression to say the least), this is an opportunity for Muslims
to reflect on the
wisdom contained in the sunnah of rasûl-Allah (saws)
on
these matters. Unlike
the California
legislators who allowed the retail price of energy to remain
regulated when the
wholesale prices went up, Muhammad (as) declined to fix prices
when the people
asked him to do so. His
response to
popular pressure was: "Allah grants plenty or shortage; He is
the
sustainer and real price-maker.
I wish
to go to Him having done no injustice to anyone in blood or
property"
(Islahi 1988).
The Prophet's statement was not only
eloquent and courageous, it was
economically sound. The
commentators on
the California disaster lack not only the Prophet's moral
compass, but his
economic insight. They
perceive the
California disaster as a consequence of deregulation rather than
as one of
regulation. California
demonstrates not
the problems of deregulation per se, but of deregulating in the
wrong way, that
is, by refusing to deregulate sufficiently.
The proximate cause of California's
problems is a failure to expand
capacity to meet needs. Of
this there is
no doubt. Deregulation
provided greater
flexibility to the system in California to draw on power from a
multiplicity of
sources. This did
not cause the power
outages. The
problem is that the power
generation is insufficient for a state with such an enormous
appetite for
electrical power.
The deeper question is why has
California's power industry
failed to anticipate this need and provide for it? The answer to that
question should be sought
in the divergence of the regulatory structure in California as
it addresses
wholesale and retail power distribution.
Deregulation was more aggressively pursued at the
wholesale level. To
understand this dichotomy, one must
remember some basic economics.
There are
two ways to set the prices that one must pay for any commodity
(electricity
included): (1) a competitive marketplace in Allah (swt) sets the
prices; (2) a
regulated market in which hunman beings fix prices. In the first case
Allah adjusts the price to
balance supply against demand and distribute the commodity among
all bidders
based on the relative value of their proposed uses to the
economy as a
whole. In the
second case economic
efficiency is sacrificed to the particular needs of those who
are most
politically powerful and able to influence the system to set
prices either
artificially high or artificially low as may serve their
particular
interests. This is
the reason that the
Prophet (as) referred to such mechanisms as unjust.
Attempting to avoid the mistakes made by
California regulators, the
Public
Utilities Commission of Ohio (PUCO) developed a list of
the contributing
factors to California's problems.
A
review of that list suggests how the regulatory structure in
California impedes
the natural tendency of free markets to meet demand in an
efficient manner.
Complex institutional requirements in
California make it difficult for
buyers and sellers to negotiate direct contracts that would
facilitate
determination of longer-term requirements. While investor owned
utilities buy
power on a spot market, the prices paid them by their retail
customers are
still regulated. The
utilities have a
disincentive against meeting demand when demand is high because
they are
guaranteed a loss. They must pay high costs for electricity that
they must
resell at a low price. Further, there were regulatory obstacles
to the
implementation of price risk management tools that might have
allowed them to
avoid unexpected changes in the spot market.
As the Qur'an says, Allah (subhana wa
ta`âla) has provided us
with abundance. Shortages
are thus the
work of human attempts to circumvent the Divine Law. The regulation of
retail prices in California
seems to have aggravated the unexpected burst in demand for
power there. Economic
actors use prices as a tool for
rational calculation of their plans for the future. Relying on regulated
prices is a dangerous
game. If one is
told that the regulatory
agency assures such-and-such a price, one may increase the
planned exploitation
of the regulated commodity.
But such a
in increase in usage, which would drive the price upward in a
free market,
encouraging an increased expansion of supply, in a regulated
market only leads
to shortages. The PUCO
report unambiguously concludes that "price caps in
California markets
limited the incentive for generators to locate new plants." Further the "The
permitting process for
new generation is long and costly and has caused delays in
siting new
generation facilities. Almost
17,000
Megawatts of new supply is planned but has not been built."
It is urgent for Muslims to understand the
details of what I happening
in California for a number of reasons.
An obvious one is that, as in the case of the oil crisis
of the 1970's,
one can expect to hear–indeed we have already heard–accusations
that it is
"greedy Muslim oil producers" who are responsible for
California's problems. A
more subtle element is that we Muslims who
live in America are part of the communities that are wrestling
with the issue
of utility deregulation. It
is in our
interests as consumers to understand the issue and to educate
our neighbors
that deregulation can help us to get reliable electricity at
moderate costs
provided that we do not allow the residual regulatory
infrastructure to impair
the market mechanisms that insure efficient production and
rational
distribution to be sacrificed to the greed of politically
powerful interests or
to the mythology that that regulators are better at determining
prices that he
market forces created by Allah (swt).
It is the duty of Muslims to explain to non-Muslims why
just laws lead
to prosperity and unjust laws to shortages.
Let human legislators pursue the prevention and
punishment of injustice
and leave the price-fixing to Allah (swt).
References
Abdul Azim Islahi 1988. Economic
Concepts of Ibn Taymîyah. (Bradfrd-on-Aon: Islamic Foundation),
p. 94, translating
Ibn Taymiyyah's quote with reference to Abu Dawud and Tirmidhi.