California's Manmade Energy Crisis Is Stupid
California's manmade electrical energy crisis was avoidable and can be corrected before it wrecks California's economy, but only if the state's politicians are humble enough to change their ways.
by Jerome F. Winzig
California's electrical energy crisis is a manmade crisis of monumental stupidity. California Governor Gray Davis blames the crisis on deregulation, but California has not really deregulated the California electricity industry. Instead, the legislature tried to manage competition and impose its confused vision of the electricity market. The legislature's program actually increased -- rather than decreased -- the political control of an entire industry.
Under this program, the state of California:
- Forced electric utilities to sell their power plants to independent investors, limiting the utilities to power distribution only.
- Assumed total day-to-day control of the electricity power grid in California, supposedly to keep utilities from abusing their market power.
- Required the new owners of electric power plants to sell their electricity to a state "power pool" with the price set by a daily spot market run by the state.
- Prohibited power distributors from signing long-term contracts that might protect them -- and ultimately, their customers -- from short-term price fluctuations.
- Compelled all power distributors to buy their electricity at the highest (yes, highest!) price received by any electricity generator in the daily state-managed spot market.
- Limited power distributors from charging any residential consumer more that 6.5 cents per kilowatt hour, regardless of the price paid for power in the state-managed spot market.
- Allowed power distributors to charge much higher rates for commercial and industrial customers.
This insane set of regulations was imposed on a state that has not built a major electric plant in ten years even though the consumption of electricity has risen by 25 percent. It was done in spite of California's heavy reliance on natural gas during periods of peak demand. It was implemented at the same time as the demands on the electricity distribution grid in northern California were reaching full capacity.
With this year's cold winter and an increase in natural gas prices, the result was predictable and avoidable. While Minnesota consumers lowered their thermostats as their natural gas bills doubled, tripled, and quadrupled, Californians continued to pay the same rates for electricity generated by natural gas. They kept their Christmas lights burning brightly and called the power company "grinches" when they pleaded for voluntary cutbacks.
Caught between rising wholesale prices and fixed retail prices that encouraged consumption, the states two biggest utilities, Southern California Edison and Pacific Gas & Electric, found themselves $11 billion in debt and teetering precariously on the brink of bankruptcy. Fearful of not being paid after releasing water over its dams, BC Hydro, the huge Canadian producer, withheld 1,000 megawatts of power from the state, as did other suppliers. And the state found itself subject to rolling blackouts.
What did California's politicians do? They asked the U.S. Energy Secretary to order electricity producers to sell electricity to California even though they might not get paid. They passed a stop-gap measure to take $400 million from the state treasury to buy power for two weeks. They threatened to use eminent domain to seize control of generation plants.
Significantly, the state has refused to undo its politicization of the California electricity industry. It could take three short-term steps that could have an immediate impact: removing the 6.5 cent per kilowatt limitation on electricity prices, abolishing the requirement to purchase electricity on the state spot market, and allowing utilities to sign long-term contracts.
California's leaders could also talk to other states that have had real success with deregulation. Pennsylvania has already saved consumers $3 billion while adding capacity. Texas has kept rates steady while increasing capacity by 10 percent. And Wisconsin has focused first on beefing up its transmission grid, doubling its transmission capacity.
If California's leaders instead persist in their idiocy, they will do great harm to California's economy and to the nation's economy. Let's pray they have the humility to admit they made a mistake.