Model Management: Powerless California?

It seems hardly credible that lack of electricity may be pushing California into bankruptcy and deep recession. But it's true.

'Rolling blackouts' - electricity cuts - are pushing local companies into lay-offs and shut-downs, discouraging further investment, and making likely incomers to the state think again. According to one report, the power crisis has already cost $1.7bn in lost wages, sales, and productivity.

Local businesses such as mining group Phelps Dodge, brewer Miller, and California Steel have already cut workforces and are in varying stages of moving production out of the state - or at least threatening to do so. Intel, that bellwether of Silicon Valley, has said it won't be building any more plants in California, at least for the time being. Officials charged with attracting new business to the sunshine state - once one of the easiest jobs in the world - are now tearing their hair out.

The reasons for the crisis are well known. Botched deregulation of the energy market made power utilities beholden to buy wholesale on the energy market at prevailing rates but strictly limited the prices they could charge consumers. On top, there has been little investment in new power plants in the state for years. None are expected to come on stream for at least two years. The two biggest utilities in the state, Pacific Gas & Electric Company and Southern California Edison, are almost bankrupt. Even California itself, with a projected budget surplus of $5bn (though 20 per cent of that may have to go on clearing up the mess) is being eyed by the credit rating agencies.

You can't really blame business or management for any of this - it's the fault of politicians, specifically Californian politicians. Energy deregulation has gone smoothly and effectively in other states. Nor can you really expect business to pull the state out of the trouble it got itself into. Business has already been kind enough to California.

But the situation is serious. The California crisis is already starting to affect neighbouring states and could spread further. The US economy as a whole may already be experiencing zero growth. Recession looms.

The April 2000 stock market meltdown has already illustrated how fanciful the California-inspired notions were that new economy firms could somehow escape from the gravitational pull of economic orthodoxy. Now one of the oldest of old economy industries - power supply - is demonstrating that politicians can't change economic rules, either. In the old days economics used to be known as 'the dismal science' - California has taught us why, twice over.