TCS Daily


California Passes the Buck on Electricity

By Duane D. Freese - January 1, 2001 12:00 AM

George W. Bush isn't even president yet and already key California Democrats are trying to pin their energy crisis on him. "Bush cannot allow his friends in the energy business to gouge California," Garry South, political strategist for Democratic Gov. Gray Davis told the Los Angeles Times last week.

Such buck passing explains why California is suffering one of the biggest energy fiascos since the oil embargoes in the 1970s. Soaring energy prices, utilities near bankruptcy and potentially severe energy shortages threaten to dim the Golden State's high-tech economy, not only this winter but for years to come. And its leaders are looking for cover rather than finding meaningful solutions.

South's boss a week earlier lambasted the Federal Energy Regulatory Commission (FERC) when it refused to rollback the state's partial deregulation of its electricity market. By not imposing hard price caps, he said, FERC was acting "to ensure unconscionable profits for the pirate generators and power brokers who are gouging California consumers and businesses." U.S. Sen. Barbara Boxer, at the same time, called upon Attorney General Janet Reno to investigate "potential collusion and any other unlawful acts by generators in the electricity market."

Such finger pointing won't produce a single joule of electricity this yuletide. And neither will steps to re-regulate California's wholesale electricity prices. Price controls only guarantee one thing - lower output and economic distortion. Just ask economists from the Nixon administration. They imposed controls to bring oil-price induced inflation under control and threw the economy into a tailspin. Ultimately when the controls were lifted, inflation raced back with a vengeance.

One of California's problems is that its deregulation of electricity put hard caps on the price end users - businesses and homeowners - could be charged for electricity. The arrangement encouraged excessive use of air conditioners last summer even as wholesale producers faced skyrocketing prices for fuel, particularly natural gas that fires 31 percent of the state's electricity production facilities. The middlemen between the two, the state's two big-investor owned utilities, whose power lines reach businesses and homes, ended up borrowing $8 billion to purchase electricity supplies from the deregulated producers they could not pass along, thus making every watt they supply another step toward insolvency.

Those caps were finally loosened some last week. But other problems still cloud the state's energy future.

For a decade, no new power plants have come online, And the six now under construction fall short of the states energy needs. A not-in-my-backyard, something-for-nothing attitude has placed a lock on more electricity generation. And among the most backward thinking are some of the state's leading New Economy lights.

A Sacramento Bee editorial last week noted that Cisco Systems, which provides the routers that help run the energy-dependent Internet, won approval from the San Jose City Council to build a 20,000 employee business complex, but then turned around and joined a successful effort opposing construction of a natural-gas powered electricity plant by Calpine Corp. The reason Cisco gave for its opposition was that the plant was incompatible to the area. But as The Bee editorial pointedly noted: "The (proposed) power plant location is about as compatible as any can get. It is near an existing natural gas pipeline. And it is near the main transmission lines that feed the valley."

So, who is colluding with whom to reduce supplies and raise costs? Californians have cut their own throats yet are asking the Feds to find Jack the Ripper.

The rest of the country, though, may find its soon looking for fictitious villains as well.

Low natural gas prices over the last decade, coupled with the federal government putting large tracts of land out of reach, have discouraged exploration in the continental United States, even as those low prices have fired up demand. Over the same period, clean air laws and community opposition have curtailed use of coal for new electricity generating facilities, despite a $50 billion investment over the last 30 years in clean coal technology. Gas, as the "clean" alternative, thus is heating 70 percent of new homes now and will fuel nearly all the electricity plants now under construction.

That means the whole nation, which on average relies on natural gas plants for only 15 percent of its electricity needs, may soon match California's reliance. Without abundant new supplies, the likelihood is that natural gas prices that have more than tripled in the last year will likely triple yet again in the next decade. And that could spark a further slowdown in the electron-dependent New Economy.

While Bush could honestly echo California's Davis, who deflected blame from himself by telling reporters, "I inherited this problem," it`s obvious from the remarks by Davis' aide that Democrats will still pass the buck to him. They will push him to set price caps, and re-regulate the electricity industry, not only in California but in the 25 other states where steps to deregulate have been taken.

But if Bush doesn't want to suffer the last president hoisted on an energy petard, Jimmy Carter, he'll push to get the federal government out of the way and encourage more rapid state deregulation as well. It is the only way to really get supply and demand to match. Price caps will merely lead to further energy shortages, rationing and blackouts. And the worst thing for a New Economy isn't high priced electricity, it's no electricity at all.
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