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).
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.