California Governor's Energy Irresponsibility Threatens the Nation
The disturbing actions of California Governor Gray Davis are worsening California's energy crisis in ways that bring to mind how the Smoot-Hawley Act of 1930 deepened the Great Depression.
by Jerome F. Winzig
Rumor has it that California Governor Gray Davis wants to run for president on the Democratic ticket in 2004. Apparently he wants it in the worst possible way. He lacks the moral courage to tell Californians the truth: their electricity rates are fixed too low. So he continues to abdicate his responsibility as governor to provide leadership in California's energy crisis. While it is a crisis his predecessor, Republican Governor Pete Wilson, helped to concoct with a scheme that allegedly deregulated the electricity industry, Gov. Davis has only made it worse since taking office in 1999.
Most disturbing is his refusal to unfreeze the low rates consumers pay for electricity in California. Incredibly, these retail rates are far less than what California's utilities are paying to purchase electricity on the wholesale market. The governor admits, "If I wanted to raise rates, I could solve this problem in 20 minutes." But he refuses to consider raising rates, choosing instead to continue selling electricity at a huge loss.
His decision, which goes far beyond ignorance, may have something to do with recent polls in California. Encouraged by misinformation from their political leaders, 57 percent of Californians do not believe there is an actual power shortage in their state, in spite of rolling blackouts. The governor's decision also seems to be related to threats by some consumer groups. If rates are raised, they have promised to seek a referendum on a state takeover of the electricity industry in 2002, the same year Gov. Davis is expected to run for a second term as governor.
The governor's actions to date are quite dangerous. There is a very real possibility they can push the California economy into a catastrophic collapse, and the effects of such a collapse would ripple across the United States.
As warmer months approach and air conditioners are turned on, California's demand for electricity is expected to exceed supply by 10 percent. Summer demand is expected to top 45,000 megawatts. That's far greater than the 8,900 megawatts the state has purchased -- at exorbitant rates -- over the next 20 years, and only a small fraction of that will be available this summer.
The result is likely to be a summer shortage of several thousand megawatts. That means more rolling blackouts and rising wholesale electricity prices as the market tries to cope with the shortage.
Under the terms of the emergency legislation Gov. Davis signed Feb. 1, the state's Department of Water Resources (DWR) will continue to purchase power for the state, using funds from a planned bond sale later this year. The DWR will need $2.5 billion a year in revenues from retail electricity rates in order to sell the $10 billion in bonds sought by Gov. Davis. But with retail rates still frozen, the DWR can only expect to receive $241 million a year, a revenue shortfall of 90 percent!
Keeping energy rates for California consumers frozen below wholesale price levels while the rest of the nation is paying more for energy is a recipe for disaster. The major credit-rating agencies are nervous about California. Standard & Poor's Corp. has put the state on a credit watch for a possible downgrade that could affect all of California's outstanding public debt. Moody's Investor Service Inc. says the power crisis could soon "seriously threaten the health" of California's economy.
Gov. Davis' response has been disturbing. He is going ahead with plans to spend as much as $6 billion purchasing electrical power in the next few months. He is looking at spending several billion more to purchase transmission assets. According to a news article in the Wall Street Journal, "the governor and his aides have, in some cases, ignored state law" in handling the power crisis. At the governor's request, the state's Public Utility Commission is considering ways to avoid paying utility companies for some of their expenses, as mandated under the emergency legislation. When the state legislature approved another of the governor's requests -- to abolish the California Independent System Operator's 26-member board and replace it with a new five-member board -- the governor threatened the old board members with fines of as much as $5,000 if they didn't resign immediately.
The state's DWR is so new at purchasing power that it has at times offered to pay $50 to $100 more per megawatt hour than the going market price. Quoted in the Wall Street Journal, David Mills, trading-floor manager for the federal Bonneville Power Administration, says, "They agree to prices that make you wonder. You'd at least think they'd check to see what the prevailing price is before throwing out their offer." Yet the DWR says it isn't aware of any cases in which it has overpaid for electricity.
Watching this slow-moving train-wreck-in-action brings to mind the Smoot-Hawley Act that President Herbert Hoover signed in 1930. It raised average U.S. tariff rates by 53%, and other nations retaliated. Within two years, U.S. exports dropped by two-thirds, total world trade was cut in half, and the Great Depression was in full swing. We can only hope that the same kind of intentional stupidity doesn't prevail in California, with the same disastrous consequences for the country -- and for Gov. Davis.