After a series on monumental errors, our legislators are debating Montana's energy future. They want to avoid a crisis of California proportions. They're wrestling with forces and prices distorted by decades of regulation and flawed deregulation.

California adopted policies that worsened problems. Basic economics can help us avoid mistakes by predicting likely consequences of alternative actions.

To placate constituents, legislators are launching trial balloons. One proposal is for the state to condemn hydro-generating plants sold to Pennsylvania Power and Light (PP) in 1999. Such acts are normally associated with Third World dictators and Russian kleptocrats. It's sure to frighten away potential power suppliers.

Price caps and windfall profits taxes are other risky proposals. Rep. Doug Mood, R-Seeley Lake, advocated both when he told electric generators, "… you can't make a billion dollars, you can make a profit that is just and reasonable ..." The words "just" and "reasonable" profits should alert us to politicians' efforts to redistribute wealth. It's tempting to impose price caps and windfall profits taxes. However, these politically expedient solutions only delay responsible actions. Here's why:

Windfall originally referred to fruit that was blown from a tree. Thus the fruit was a gift from the wind, and was not "earned." Windfall profit implies ill-deserved luck, not merit or foresight.

America has bad experiences with policies to capture windfall profits. Domestic oil producers and refiners maintain sizable inventories to assure smooth and uninterrupted supplies. In the 1970s OPEC's supply constraints caused the value of oil inventories to dramatically increase. Forces beyond the refiners control caused this "unearned" increase, a windfall profit. Political opportunists argued this excess profit should be taxed away, since refiners had no "right" to the windfall profit.

The term windfall profits is dangerous, for it gives license to politicians to confiscate and redistribute to those more deserving. But who decides who is more deserving and by how much? And outside forces can be negative as well as positive. Should we be willing to protect business from "unjust" and "unreasonable" windfall losses? Should we have

reimbursed Weyerhaeuser for losses suffered when Mount St. Helens wiped out their timber?

The potential for profit induces individuals to take business risks. They gain when others find benefit in their work. Entrepreneurs may be motivated by self-interest, love of family or ego. It's the value of their products, not underlying motivations, that effects social well-being.

Investment decisions are based on incentives and information. If businesses expect to have their profits confiscated because they are "undeserved," they will avoid risk. Only short-term projects will be favored. Investments in research and capital improvement will shrink.

Innovations are discouraged by the fear of confiscation.

Prices provide information. Prices guide production and consumption decisions, coordinating the actions of millions of individuals. But price controls censor information. They discourage conservation, innovation, and efforts to meet increased demand in socially responsible ways. Here are two examples.

In the Northwest, federally subsidized electricity from Columbia River dams keeps power rates at half the national average. These artificially low prices encourage excessive consumption. Without the signals carried by higher prices, Northwesterners don't confront the full costs of their behavior. Hence, they have little incentive to act in a more

environmentally responsible manner. Among the casualties are the region's salmon.

There is always huge demand for plywood after a natural disaster. We can all understand the desire to cap the price of plywood after a Florida hurricane. On the surface, bruised and battered consumers are being "protected" from opportunistic price gougers. But then what? If price caps are imposed, lumber yards and mills don't redirect plywood shipments towards devastated places. Thus, loads of plywood end up in Memphis for a new bowling alley rather than Miami for boarding up broken windows and replacing missing roofs. Artificially restricting prices in Florida, where the product is suddenly in high demand, creates painful shortages. Hurricane survivors are harmed by well intended efforts to help them. This model applies both to gasoline and electricity.

Constructive responses to Montana's energy problems surely include assistance to low-income residents, especially during winter. Windfall profits and price caps are attractive to politicians looking for easy outs. But they'll do little to resolve fundamental problems and will only delay the search for responsible solutions.