Californicated Power
In the 6th largest economy in the world, they don't understand economics
by Scooper
April 2001
Some of you may be wondering what is happening to the Electric Power infrastructure in California, and whether the 6th largest economy in the world is about to become a banana republic in more ways than the clothes we buy. The explanation is as simple as it is outrageous. Here it is.
The California State Legislature and the previous governor, Pete Wilson (a Republican) decided to de-regulate the Electric Power industry in order to open the market to smaller players — especially the "green power" generators, who make electricity from renewable resources. In order to open this market, they forced the electric power companies to sell their generating capacity, which would then force them to buy power from the open market. This might still not have been enough to let the green power generators into the market, because the electric power companies might have negotiated long-term contracts with larger, conventional generating companies at prices below that which the green power generators could match. So, the legislature and governor made it illegal for the electric power companies to negotiate such long-term contracts, which forced the electric power companies to buy power on the "spot" market.
Now forcing the electric power companies to sell off their generating capacity (and who could afford to buy it but large power companies from other states?) made California's electric power companies defenseless against rate hikes by the out-of-state electric power generating companies (the wholesale suppliers). Still, thinking that the fluctuations of the spot market would be short term, the legislature and governor decided that the California electric power companies could just absorb the shocks. They capped the retail electric power price to consumers at about 7 cents per kilowatt-hour.
Californians are economically naive, but environmentally conscious. Since they are phobic regarding nuclear power (too dangerous), coal fired plants (too polluting), hydroelectric plants (destroys too much habitat and scenic wonder), about half the power plants in California use natural gas (releases carbon dioxide, a greenhouse gas, but at least its more natural). So, when the gas infrastructure proved inadequate to keep the electric power plants burning, the wholesale price of electricity went up.
This forced California's electric power companies to buy electricity at 50 cents per kilowatt hour and sell it a 7 cents. You can't do that very long and stay in business. The new governor, Gray Davis (a Democrat), did nothing to avert the gathering crisis, which began in the early summer of 2000. By early spring of 2001, Davis was negotiating secret long-term contracts for the state to buy wholesale electric power (which the electric power companies are forbidden to do) and re-selling it to California's electric power companies. This puts the State of California firmly in the electric power brokerage business, bankrolled by California's taxpayers. So much for de-regulation.
Next, Davis offered to "bail out" the bankrupt electric power companies by buying up their transmission facilities — the electric wires that distribute the power to consumers. Now this is like Stalin stealing the crops from the Ukrainian peasants who were resisting collectivization (state takeover) of their farms, and then, after they were starving, offering to buy up their land. No wonder the ultraconservative radio commentator Michael Savage calls the governor "Red" Davis. This is not de-regulation — it is forcible state takeover of an entire industry.
If this is unclear, just imagine that I force you at gunpoint to buy stocks at $50 per share and to sell them to me for $7. I do this until you are forced to take out a second mortgage. Then I offer to relieve you of your debt by taking your house. When an individual does this to another it is called robbery. When a state does this to a company, it is called a taking, a first step to socialism.
It is not that Red Davis lusts to take over the electric power business per se. It's just that he and the legislature don't want to admit that they and their predecessors screwed up, and that the only way to fix it is for the ratepayers to shell out. Under the banner of "protecting the consumer" they simply can't let the rates float. Instead of gouging the ratepayers and taking the heat, they are gouging the taxpayers instead. They prefer this option because California still has a tax surplus — the money has already been taken, it is there to be spent, and besides, it was taken from the ones who can most afford to pay, because California has a progressive income tax. Floating the rates would not be progressive, it would affect everyone according to how much electricity they use, rather than according to their ability to pay. Apparently, they really do lean toward socialism. Besides, the taxpayers would still have to bail out the poorer ratepayers who can afford neither higher rates nor energy efficient appliances.
And what's the focus of the incompetent California government, the idiotic California press who can't put all the facts together in a single story, and the disingenuous leftie protest groups now? California has approved a rate hike from 7 cents to 10 cents per kilowatt-hour. That's the giant 40% rate hike. If you live outside of California you probably pay more than that. It's not a big enough increase to make the California electric power companies whole after their forced slide into bankruptcy, but it is enough for the State of California to do a little cost recovery after sending so much treasure down the power lines. The real price is more like 25 to 50 cents per kilowatt hour.
The State should adopt an energy policy that incentivizes the electric power companies for building nuclear power plants (the least polluting kind of power there is), and for reaquiring other generation capacity. Then it should either really de-regulate, or return to the days of regulated monopoly (my favorite choice). And the State should get itself out of the electric power business. And yes, there is a good site for the nuclear waste disposal — the underground facility at Yucca Mountain, NM. Everything checks out but the politics.
So there you have it. Politicians who neither understand nor like free market economics made a disingenuous attempt to manipulate the market and called it deregulation. Rather than own up to the fruits of their incompetence, they engage in further manipulations that are irresponsible at best and Stalinist at worst. They are leading California into the third world. It's a shame, an outrage, and a crime.
