Recent political pandering by Illinois’ top three constitutional officers is appalling. The governor, lieutenant governor, and attorney general’s pronouncements and actions demonstrate they have a poor understanding or simply choose to ignore the realities of our free market economy. By seeking to intrude upon, control, and dictate energy prices, the clear message to the business community is that the top priority of the state’s elected leadership is electoral populism—not the long-term economic standing of our state.
Of course Illinois consumers were troubled by significant jumps in the price of motor fuel after Hurricane Katrina smashed the Gulf Coast, but it wasn’t a problem unique to Illinois citizens. The hurricane shut down oil production platforms, supertanker off-loading docks, refinery production, and transport pipelines.
Likewise, with the arrival of Hurricane Rita, approximately 25 percent of the nation’s oil refinery production has been disrupted, and prices are expected to jump again. What’s not to understand about such basic economics?
Attorney General Madigan
When gas prices rose with the disruption caused by Hurricane Katrina, the Illinois attorney general immediately filed emergency rules to prevent price gouging by petroleum-related businesses. Our attorney general wants to demonstrate her office is protecting the public from an unfair or deceptive act of “offering to sell any petroleum product for an unconscionably high price.”
What constitutes an “unconscionably high price” when a barrel of oil fluctuates from $30 to $70? The irony is that commodity traders have a far greater effect on the price consumers pay at the pump than does the owner of the local gas station that the attorney general wants to intimidate. Today’s retail gas station owners operate on slim per gallon margins in a competitive environment and are far more dependent upon the convenience store receipts to determine profitability than the revenue generated by the gas pump.
Lieutenant Governor Quinn
Lt. Gov. Quinn called a press conference to propose the Citizens Utility Board (CUB) receive statutory authority to oversee the petroleum industry in Illinois. Although created by statute, CUB isn’t a government agency. At a time when world energy demand and geo-politics are severely heightened over oil policies, it’s hard to fathom CUB being anything but an obstructive presence on an already complicated stage.
If elected officials wish to do something constructive about gas prices, they should embrace policies that expand refining capacity, encourage alternative fuels, promote efficiency, reduce barriers to production, and generally try to help rather than restrain market forces.
Gov. Blagojevich’s actions are the most amazing. His blatant instructions via a letter to the five members of the supposedly independent and objective Commerce Commission telling them to adopt his bias toward electric energy pricing was reminiscent of Louisiana’s infamous Gov. Huey Long. The commission’s docket contains rate increase requests from the state’s dominant gas and electricity suppliers. The commission also is being asked to sanction the introduction of market-based pricing for electricity in 2007 after a 10-year rate freeze.
Gov. Blagojevich informed the commissioners he would consider their approval of market pricing plans proposed by the electric industry “a serious neglect of duty or gross incompetence.” He chose to arbitrarily announce his desires without benefit of the findings of a thorough regulatory proceeding that would traditionally conclude sometime next year.
The governor’s letter clearly threatened the sitting commissioners with the loss of their well-paid positions. To accentuate the point, the governor promptly decapitated the chairman and replaced him with another, who presumably will follow the playbook.
Most of us remember California’s rolling blackouts and skyrocketing electricity prices during the summer of 2001. James Sweeney, professor of management science and engineering at Stanford University, attributes that crisis to intense regulation of price controls for residential electricity rates. In his book, The California Electricity Crisis, Sweeney contends the government’s poor plan and poor implementation resulted in the electricity market meltdown. Not taking this lesson in over-regulation to heart could certainly contribute to a similar meltdown in our state.
In an ill-conceived effort to control residential energy prices, California’s politicians sent the utility companies into bankruptcy and ultimately saddled taxpayers and customers with higher costs.
Residential users are more likely to only think about energy when the monthly statement arrives, while businesses are routinely modeling operating costs and preparing multi-year forecasts. The failure to access reliable energy wreaked havoc upon the production and financial results of thousands of employers. The experience caused some to re-think their California investments.
Illinois embarked upon a program of de-regulation that reduced and froze residential rates for 10 years, embraced open market economics for commercial and industrial users, promoted a restructured generation and delivery model for the electric industry, and held forth a promise that Illinois would emerge among the progressive states. As we approach the 10-year anniversary of the visionary law that’s worked as effectively as predicted, some politicians desire to put the genie back into the bottle of control and strict regulation.
There are legitimate roles for government in our economy, but when Alan Greenspan frets over a bubble in the housing market, it doesn’t mean elected officials should automatically presume fraud and unconscionably high prices in the housing market. Likewise, if the price of plywood and wallboard escalates in the coming weeks because of reconstruction demand on the Gulf Coast, the Illinois attorney general shouldn’t impose emergency rules to control the price of construction materials at retail building centers. Yet, that’s the politicians’ knee-jerk approach to energy pricing issues.
Illinois elected officials need to understand a political culture that thrives on regulation, litigation, taxation, and intimidation is counter to an economic culture that rewards creativity, enterprise, and investment and trusts the efficiency and resilience of the marketplace. IBI