Although I have been following and writing about the twists and turns in
California’s latest electricity crisis for the Orange County Register, I haven’t touched
on the subject for WorldNetDaily readers. As a summer approaches in which
the Independent System Operator, the government agency that runs
California’s power grid and numerous other authorities fear rolling
blackouts or worse, however, it might be helpful to offer a Californian’s
perspective.
The larger picture might be that California is getting ready to go through
one of its periodic fits of government muscle-flexing of a sort that
drives businesses and residents out of the state. It is hardly surprising
that the state government would be in a particularly hubristic mood about
now. The Democrats have the governorship for the first time since the
early 1980s and control both houses of the legislature by hefty margins.
In Sacramento the pent-up demand for activist government programs is
palpable, although legislative Democrats have expressed impatience
bordering on disdain for the closed-off micromanagerial style of
Democratic Gov. Gray Davis. Even without any sense of solidarity or
fellow-feeling among Democrats, however, the state budget is expanding
rapidly. Last year it jumped from about $80 billion to about $100 billion
— in one year — and there was still a surplus. The surplus is now being
eaten by electricity buying, which may be a blessing. The Democrats still
hope to float a bond to get the power-buying money back into the general
fund, but it’s not certain they’ll be able to do it.
The Republicans not only failed to get a respectable showing for George W.
Bush last November, they lost seats at almost every level and look fairly
moribund. They could be a factor in votes to float bonds that require a
two-thirds margin, but otherwise they are strictly a sideshow in Sacramento.
Legislators like Tom McClintock and Ray Haynes have a fairly cohesive,
essentially free-market understanding of the electricity situation, but
while they have plausible proposals they have virtually no political
traction.
No significant new sources of power have come online in California since
the rolling blackouts this winter, a season when electricity demand is
usually relatively low. A couple of new plants or upgrades are scheduled
to be ready by June, though the crisis has yet to impact on the customary
molasses-like regulatory pace and the NIMBYism of local activists; so even
those additions might not be in place before summer. Everyone acknowledges
that peak demand will exceed supplies (especially since low snowfall in
the Pacific Northwest means that area is likely to have less surplus to
sell to California than usual) sometime this summer — maybe several
sometimes. State officials are praying that pleas to consumers to conserve
will be effective, but up to a couple of weeks ago they refused to let
consumer prices — the most effective method of inducing conservation —
rise to reflect wholesale prices, which became artificially high due to
government intervention.
The most important thing to understand about the background to the crisis
is that what happened in 1996 was not “deregulation” as the measure is
customarily called, but a restructuring accompanied by reregulation. Far
from creating a freewheeling and open marketplace, it defined utilities
only as consumer transmission companies and contained strong incentives
for existing utilities to sell their power generation facilities. It
forced electricity suppliers to use the state-run Independent System
Operator and the Power Exchange as their sole source of electricity, and
set up an artificial “spot price” system that made the highest price bid
in a given time period the prevailing price. It left wholesale prices
uncontrolled (they were subject to federal regulation anyway and until
Wednesday the Federal Energy Regulatory Commission had declined to
control or “cap” them), but froze consumer prices. So when wholesale
prices spiked — as was bound to happen under the government PX and ISO
distribution system — the utilities couldn’t pass along the increases to
consumers and lost, literally, billions.
So how to get out of the mess? It won’t be easy for this set of officials,
most of whom believe the remedy for failed or dysfunctional government
regulation is more government regulation, but just for the record here are
some suggestions for the longer haul, assuming we get through the summer
with only moderate disruptions.
Gov. Davis at least says he understands the main problem — that
California hasn’t built any power plants in the last dozen years, although
demand for electricity has risen, especially with Silicon Valley’s central
role in the development of the Internet. He says his office is working
night and day to expedite the building of new plants and a dozen have
already received preliminary approval. But California’s regulatory process
is labyrinthine, and it is unclear yet whether the governor’s minions are
really cutting red tape effectively enough to expedite actual building.
Beyond that, the most important thing California policy-makers can do to
increase the likelihood of ample electricity over the long run is, as
Adrian Moore of the Los Angeles-based Reason Foundation put it in a
January study, to “articulate a vision of moving toward competition that
will alleviate concern over regulatory intervention.” The message power
producers get from the state’s leaders today is that officialdom regards
them as either an enemy or a target.
Gov. Davis has demagogued at the expense of those he has chosen to
characterize as sinister out-of-state producers who have gouged or
exploited poor beleaguered California, and state legislators have spoken
darkly of criminal penalties for high prices, of putting power industry
executives in jail, of seizing power plants by eminent domain, of sending
tanks to Houston. The political instinct — to find an “other” on whom to
blame problems, to sound more tough and determined the less cohesive your
own proposals are — has held sway. Gov. Davis, whose instinct is to be
low-key, postpone big decisions and keep all the reins of power in his own
hands, has not seemed especially convincing as he demonized, but he has
tried it anyway, although this week he at least spoke of life beyond the
crisis this summer could turn out to be.
But if producing the electricity the state needs to sustain its high-tech
lifestyle gets you excoriated and threatened, how eager would you be to do
it? If you had choices — and big national and multinational generators
always have some choices — would you concentrate on jurisdictions that
welcomed you and worked with you?
The emphasis on sticks rather than carrots for power producers, if
continued, will have ripple effects throughout the economy. We might not
see the kind of exodus of businesses and corporate headquarters we saw
during the recessionary early 1990s (under Republican Gov. Pete Wilson,
another high-taxing big-government type in office). But companies thinking
of locating new branches or operations in California will surely think
twice before committing to a state when electricity supplies are
unreliable and the government views business as a handy whipping-boy.
The best way to head off serious economic consequences (beyond the
slowdown that seems to be starting) before they develop would be for Gov.
Davis or one of his electricity appointees to say something like this:
We’ve had serious supply, distribution and marketing problems, and the
state has had to take a larger role than we might have liked. But we view
it as a temporary role. Our goal is an electricity industry that is open,
competitive and market-oriented.
We want suppliers to know that while we will enforce health, safety and
environmental standards we have streamlined the permitting process and
won’t engage in or allow petty harassment. With the proper safeguards
we’re open to nuclear. We want consumers to have choices so they can shop
around for electricity supplies that meet their needs and nourish their
values — which is the best way to bring prices down. We have learned that
an open marketplace can coordinate supply and demand better than a board
of government supervisors. We are studying reasonably successful models
like Pennsylvania and adapting them to California. Over time we want an
open, competitive, free, private and healthy electricity industry.
Whether Gov. Davis, whose every move to date betrays a preference for
heavy government involvement (if not outright ownership) in every aspect
of electricity, could make such a statement credibly is another matter.
Perhaps his top energy adviser or a task force reporting after the summer
crisis could do so and be believed. But without such a statement to
reassure the public and the business community and to provide a cohesive
outline in which to fit other steps, it will be difficult to avoid dire
long-term consequences.
Within that framework, here are a few long-term goals:
Balance supply and demand through a flexible pricing system. The social
and economic value of real prices is that they send signals about what
consumers really want. Eventually, as a recent Cambridge Energy Research
Associates special report put it, “California consumers must
pay the true costs of wholesale power. When consumers pay the real cost
of power, both supply-side and demand-side signals result.” It may be
painful for a while but ending the consumer rate freeze will encourage
conservation and hasten the development of new supplies.
As Dr. Robert Hirsch, senior energy analyst at the RAND Corporation put it
at a recent congressional hearing, “If you want more electric power you
must build more power plants.” Despite recent price spikes, he thinks
natural gas will be the most stable fuel for most plants, but emphasizes
using a variety of sources. Gov. Davis and other officials say they’re
working to get new plants already approved online, but permanent
streamlining of the approval process is vital. According to CERA it takes
4.5 years to complete a power plant in California compared to 2.5 years in
Texas and 3.9 years in New York. It might take short-term relaxation of
some environmental regulations to speed up the process, but simply setting
deadlines for bureaucrats might do it.
Privatize the grid. The state might well buy Southern California Edison’s
transmission lines and maybe some more to get the company past the current
financial crisis. As soon as possible, however, it should either sell the
system back to Edison or put it up for auction. Governments tend to
postpone infrastructure maintenance and upgrades and manage systems
poorly.
Allow more diversified buying. Utilities should be allowed to enter
medium-term, long-term and short-term contracts as well as using the Power
Exchange (preferably privatized) on a voluntary rather than a
mandatory basis. If the Independent System Operator (preferably
privatized and truly independent) were better integrated into the Western
states’ regional grid, availability and long-distance transmission would
be improved.
As Adrian Moore’s Reason Foundation report urges, stop dictating utility
structure. It was a major mistake to force (or “incentivize”) the
utilities to sell their power plants. Utilities and others involved in
power generation and transmission will need maximum flexibility to meet
the necessarily unknown challenges of the future.
Bust up the municipal monopolies. Municipal utilities now get special
breaks and subsidies from the feds. Sooner or later state officials should
challenge those wealth transfers, but for the medium run allowing
competition in cities with municipal power will spur improvements.
It seems unlikely that California officials will do much or any of this.
What is more likely is that the state will take over more aspects of
electricity generation and distribution and eventually come up with an
enormously expensive system chock-full of open and hidden subsidies paid
by taxpayers that — once the planned new plants come online — will
provide a fairly stable supply of electricity at artificially high prices.
But that will take several years to accomplish.
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