July 31, 2001
COMMENTARY
The
State Will Pay for Davis' Panic
The five-to-20-year power contracts signed in a panic by the Davis
administration have saddled California with billions of dollars of
"stranded costs" that will burden our economy and state budget for
years to come.
Now, Gov. Gray Davis' spin doctors want us to believe that these $43-billion
long-term contracts were both necessary and the impetus for a moderating energy
market. Here's the real story:
Last summer, under a flawed deregulation, a handful of large out-of-state
generators effectively cornered California's wholesale electricity market. This
"sellers cartel" first drained our electric utilities dry. In
November, it became the taxpayers' turn to be victimized, when the Davis
administration gave carte blanche authority to the Department of Water Resources
for energy purchases. Between November and July, the department burned through
$8 billion in short-term energy purchases, devouring almost the entire state
budget surplus. This required the state Public Utilities Commission to pass the
largest rate hike in California history and will require the state to issue
$12.4 billion in bonds this fall to service this debt. In February, with spot
market prices at all-time highs and rolling blackouts rippling through the
state, the governor's representatives began to negotiate long-term contracts
with the sellers cartel. This was an ill-advised long-term strategy to fight a
short-run crisis. To understand why, look at the negotiating chessboard from the
electricity cartel's perspective. The cartel's negotiators knew that within 18
to 24 months, there would be a huge glut of power on the market as many power
plants were already under construction in California and throughout the West.
Once the new energy resources were available, the cartel would no longer be able
to manipulate the market. This supply glut would drive prices back to the 1999
range of three to five cents per kilowatt-hour, far lower than the prices now
set in the long-term energy contracts.
To the cartel members, this looming power glut was a recipe for heavy losses.
Locking the state into long-term contracts at lucrative rates was their
redemption. The Davis administration walked into this market inferno, bargaining
from extreme weakness at the top of the market, signing contracts that were too
expensive. The administration also capitulated on two highly objectionable
clauses. The first requires the state to absorb all costs of environmental
protection for many of the generators. The second holds the generators
"harmless" for any increase in taxes imposed on the generators by the
state. This provision essentially freezes taxes on the generators over the next
several years, requiring taxpayers to pick up the tab.
Notwithstanding the administration's spin, the current improvement in our energy
situation may be traced to at least four other factors: This summer has been
unusually cool, Californians have increased their conservation, recessionary
forces have reduced demand and, most important, the Federal Energy Regulatory
Commission finally imposed price caps on the sellers cartel, dampening market
manipulation.
The bottom line is this: Long after the rolling blackouts stop, California still
will be saddled with billions of dollars of unnecessary electricity costs and
high bond debt. These higher costs will hurt consumers and businesses, put heavy
pressure on the state budget for years and inhibit the state's economic growth.
There are two lessons from this multibillion-dollar mistake. The first is to
have full public review of major energy decisions. Equally important, the Public
Utilities Commission must be allowed to retain its rate-making authority so that
problems are not hidden in a state bureaucracy.
For
information about reprinting this article, go to http://www.lats.com/rights/register.htm