Power Tripped

Faulty re-regulation turns out the lights in the Golden State.

Adrian Moore & Michael W. Lynch from the June 2001 issue

(Page 4 of 4)

"I don’t know what market power means in this context," says Michaels. He insists that the relevant benchmark for price isn’t the cost of generating power, but the price at which it can be sold in other markets. "There’s not much evidence of anyone withholding power. Sure, the power is over cost, because demand is highly inelastic. But I don’t call that market power. I call that equilibrium." Adds the Mercantile Exchange’s Levin, "They invented a doomsday machine, and they want to blame the people who used it."

California’s policy response has been even worse than Davis’ jawboning. The first response came in July 2000, when the state reimposed price caps on SDG&E. "People conserved when the prices went up," says the Cal-ISO’s Emery. "Then they capped prices and usage went back up. So this summer there’s no incentive for people to conserve."

A January Public Utilities Commission order "temporarily" raised rates about 9 percent, but left the utilities still selling most of their power at a loss. By then, the utilities owed roughly $12 billion to suppliers and were unable to finance the purchase of any more power. In response to the situation, Davis called a special session of the legislature, which authorized the state to purchase electricity for delivery to customers. By mid-February, California was spending $45 million a day on power, and by early March the state’s expenditures had already reached $3 billion.

In February, the legislature passed a $250 million conservation bill designed to cajole consumers into switching to energy-efficient appliances and battery-powered MP3 players. It authorized the creation of a state power authority: the California Consumer Power and Conservation Financing Authority, which can issue bonds to build power plants. (The bonds will be paid off with revenue from selling the power.) The legislature is working on bills to authorize the state to buy the transmission lines from the utilities, the tab for which is expected to be between $7 billion and $9 billion. If they don’t want to sell, Davis has threatened to use the power of eminent domain. In late March, the PUC defied the express wishes of Davis and voted to raise electricity rates by nearly 30 percent. It also authorized the state to sell up to $12 billion in revenue- backed bonds to pay for power it has already purchased and to keep the lights on through the summer. In April the legislature passed a $1.1 billion energy conservation package to do such good works as teach children about the importance of turning off lights.

"None of the proposals on the table solves the problem, which is structural," says Levin. "The state is really taking over the electricity industry. It’s a march to Marxism and a march to bankruptcy, we just don’t know which march ends first."

More to Come

Davis was unwilling to allow the retail price of electricity to increase, to let the utilities go bankrupt, or to permit private buyers to purchase utility assets. (He hastily rejected an offer by the D.C.-based Trans-Elect to purchase the utilities’ grid for $5.25 billion.) "Believe me, if I wanted to raise rates," the governor proclaimed on February 16, "I could have solved this problem in twenty minutes." His answer is a state bailout of the utilities. The only question on the table, it seems, is what form the bailout will take.

Davis first wanted the utilities’ hydropower dams in return for the bailout, a plan he abandoned when an idea he liked better came along: options on the utilities’ stock. But the California constitution doesn’t allow the state to hold stock options, so Davis now proposes to buy the utilities’ transmission lines. The common themes here are the state getting a piece of the action in exchange for billions of taxpayer dollars. "I give you a dollar; you give me a hot dog," is how state Sen. John Burton (D-San Francisco) describes the transaction.

Yet at least one of his colleagues, Tom McClintock (R-Thousand Oaks), isn’t buying it. He estimates such a plan will stick each ratepayer with a $1,300 bill but do nothing to increase the state’s power supply. "The ratepayers end up with the tab while the state ends up with the power lines," he explains, taking issue with Burton’s frankfurter metaphor. "A more accurate description of the deal would be, ‘You give me $1,300, and I’ll give my friend a hot dog.’ This kind of transaction usually requires a gun."

Yet Davis is getting considerable support for the takeover. Michael Shames, executive director of the Utility Consumer Action Network, points to four advantages of the state owning the grid. The first is financial, since the state would be able to issue bonds based on its full faith and credit. Savings will also accumulate, at least theoretically, since a state power authority will pay neither taxes nor dividends to investors. As a political entity, the state will be freed from much federal oversight. It will also be much more willing to cooperate with the state’s municipal-owned utilities on grid maintenance and allocation. "Having the state purchase the transmission grid differs very little from the current status quo," says Shames, who maintains that the provision of electricity is inherently political. "The ISO will continue to run the grid; the utilities will continue to maintain the grid. The only change is literally on paper."

Others disagree, arguing that inefficiencies of political control will quickly overwhelm any possible financial advantage. They predict disaster. "They are on a full-bore Cuban-style recovery plan," says the Cato Institute’s Jerry Taylor. "The state hasn’t shown itself to be a particularly adroit player in electricity markets so far, and I doubt turning over the entire industry to these guys is going to make things better."

On April 5, Davis finally admitted the state faces a crisis and announced a plan to increase rates on less than half the utilities’ ratepayers. His plan, which hinged on the utilities agreeing to sell their power grid, would provide the utilities with less money than the existing PUC plan. Unimpressed, PG&E filed for bankruptcy protection the next morning. Meanwhile, the state has locked in contracts for less than half the summer’s expected load and experts are predicting blackouts.

"Armageddon is on the way," prophesies Levin of the New York Mercantile Exchange. He fully expects the lights to go out in California many times this summer unless its government wises up and forces businesses to contract directly with power companies for electricity. "The state is not an able-bodied commercial agent," he says. "It’s a patsy, and everybody knows it. They are not buying that much power, and they are having trouble keeping the lights on now. And that’s at 60 percent of load."

Such dire pronouncements are echoed by the Cal-ISO’s Emery. "The summer is going to be worse than anything we’ve seen so far," she offers. "There’s no easy way out now."

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