TCS Daily

Power Shortage In California Is No Laughing Matter

By James K. Glassman - July 23, 2001 12:00 AM

It was a pretty funny idea for the start of the summer season - an electricity-free Tonight Show. Audience members wore miners' caps for the June 20 show. The orchestra played by candlelight. An impersonator of Vice President Dick Cheney, abetted by waving flashlights, pretended to drill for oil. The dénouement came when the real Gray Davis, governor of California, stepped into the spotlight to the applause of the audience.

The message couldn't be clearer. Efforts by the Bush Administration and private energy companies to bring new energy supplies on line were mocked, while Davis' handling of the crisis - a policy of bashing energy producers for alleged price gouging and seeking lawsuits against them urging private conservation - was cheered.

Californians at the time could afford to laugh, a little. Electricity consumption was down by 11 percent from a year earlier, and wholesale electricity prices that had reached an average of nearly $300 a megawatt a few months ago were down around the $60 to $80 level. The state was suing producers to get back $9 billion they allegedly had overcharged, and the Federal Energy Regulatory Commission was weighing in with a variable price cap for the entire 11-state Western grid as well as doing some investigating of its own.

To the vast majority of Californians, the crisis, a Los Angeles Times poll indicated, was mostly the result of manipulation of supplies by power producers. As economist and New York Times columnist Paul Krugman summed up the popular attitude in late June: "It turns out ... that Mr. Cheney - who prides himself on his tough-mindedness - was naively out of touch with reality. And the real realists were those silly people who thought that California could solve its crisis by saving energy and suing energy producers."

Well, the real reality is far different. As a FERC mediator found on July 9 after two weeks of hearings between the state and energy producers, the overcharges, if any, likely amounted to no more than $1 billion - about the amount the energy producers were still owed. Indeed, as far as price manipulation is concerned, it is governments' intervention that is getting in the way of greater and more reliable energy supplies, both in California and elsewhere.

A demonstration of that came just before the Fourth of July. With temperatures topping 100 degrees, the much-vaunted conservation allowed by mild temperatures earlier came to an abrupt end. As southern Californians began turning on their air conditioning en masse, an alert was triggered. The alert itself then triggered FERC's variable price controls. But when state utility operatives couldn't tell energy suppliers what they would be paid, out-of-state producers, who have no obligation to provide power to California, stopped doing so.

Coupled with the shutdown of an in-state plant for repairs, that nearly triggered rolling blackouts -- until the federal Bonneville station provided extra juice to the system.

Las Vegans weren't so lucky. There, a lack of adequate supplies led to hour-long rolling blackouts for 75,000 homes.

All the lawsuits in the world and all the investigations by state or federal agencies of producer prices aren't producing a watt's worth of energy. They are for the most part just expending a lot of hot air.

A dozen investigations, both federal and state-run, of energy pricing have yet to turn up the mechanism by which power producers are controlling prices. What studies have shown is that government meddling in price controls discourages investment, and that the key to lower prices lies in ample production throughout the entire energy supply train.

California's big problems began because the state imposed a cap on retail prices charged by its investor-owned utilities to consumers even as those utilities had to pay market rates for electricity. Imagine if grocery stores could charge consumers no more than $1 for a dozen oranges while a freeze in Florida pushed the prices of oranges up to $2 a dozen. There would surely be an orange shortage at the retail level. The utilities weren't even allowed to hedge their bets through long-term contracts, instead having to buy all their power on the spot market. Until very recently, the state hadn't added a new utility plant in a dozen years, making it increasingly reliant on outside sources, including hydropower from the Northwest. Emission rules in state and nationally, meanwhile, made electricity pricing sensitive to prices for clean-burning natural gas.

So when a drought dried up hydropower and the increase in demand for natural gas tripled from historic levels, the stage was set for disaster. When state officials haggled and refused to let prices rise, conservation was deterred, and the investor-owned utilities went into bankruptcy. The state's Independent Service Operator, which controls the state's electricity grid, told some suppliers they would get only 1.8 cents back on the dollar. So, while state officials complain about price gouging, producers have a more legitimate beef that it's the state that's sticking it to them.

What California and other states need are reliable supplies of electricity. Even Davis recognizes that. In true political form, even as he bashes producers, he basks in the glow created from the opening of new power plants. In late June and early July, he cut the ribbon for the state's first two new plants since 1988. He hopes to herald in another couple dozen more.

But the job of bringing those plants into being isn't helped by Davis's threats to seize power plants, impose windfall profits taxes and sue producers, or by federal or state price controls. What investor would put money in a business the state might take away, or keep them from making money from?

Not many, as became apparent when stock prices fell 30% in the aftermath of the state's saying it would seek $15 billion in rebates and FERC put its cap on prices. And less investment means fewer new plants or improvements in old ones.

At the same time, the federal government will need to remove impediments to the production of energy supplies to fuel new plants. Higher prices for natural gas have already led to a 700 billion cubic foot a year boost to its production. But the Energy Information Administration still says even larger increases of supply will be needed. It forecasts that the nation will need an additional 9 trillion cubic feet of natural gas a year - a 45 percent increase - by 2020 to accommodate economic growth and clean air rules.

Conservation won't make up for that need. Only production will. And trillions of cubic feet of natural gas lie locked up in federal lands and by bans on offshore drilling.

Realism suggests that opening those sites to environmentally sound extraction over time is better than waiting until a bigger crisis pushes rash action. It suggests that higher prices and profits are needed to attract investment to the whole energy sector. And any Californians or others who believe that lawsuits and conservation will produce energy Nirvana instead are truly living in la-la-land. We may laugh at Leno, but we can't afford to take his skit to heart - unless, of course, we really want to turn the lights out on his show and the nation.

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