What California Must Do

Monday, July 30, 2001

California’s energy crisis may be news, but for students of recent California history it’s "déjà vu all over again," as Yogi Berra would say. Other states, which had closed the offices they had set up here to raid California jobs during the severe recession of the early 1990s, are here again to lure California employers to their states. California jobs are again in jeopardy, this time because of the cost and unreliability of electrical power.

What has been the state’s response and what should it be? Simply, the focus should be on correcting the imbalance between the supply of power and the explosive growth in demand, which has caused both rolling blackouts and soaring electricity costs.

What Has Been Governor Davis’s Response? The Blame Game

California governor Gray Davis has, instead of focusing on the real problem—lack of supply—engaged in an all-out public relations campaign to shift blame to federal regulators, to the new administration in Washington, to prior administrations in Sacramento, to providers in Texas, and especially to deregulation of California’s electricity market.

Time and again the governor and his spokespersons have complained that they inherited the problem. To the contrary, the prolonged inaction of the Davis administration has allowed a problem that surfaced on its watch to become not only a power crisis but now a fiscal crisis for state government. And, ironically, deregulation—which Davis now blames for his woes (though as lieutenant governor he murmured not a word of dissent when it was enacted by the unanimous vote of both houses of the state legislature)—has, whatever its imperfections, stimulated applications to add some 10,000 new megawatts to California’s power supply.

Persistent Misrepresentation

But Davis and his surrogates persist in falsely charging prior administrations for not increasing supply—while misrepresenting his administration as having greatly increased the number and capacity of power plants. The truth, according to the California Energy Commission, is that 23 plants were certified and 18 were built in California from 1985 to 1998. In fact, the truth has taken as bad a beating as California’s economy.

State government does not and should not build power plants. But it does have a responsibility to create a regulatory environment that encourages the private sector to build needed new generating capacity. California’s experiment in deregulation has succeeded in attracting investment in new generating capacity. The plants for which applications have been filed after and because of the enactment of deregulation have been of notably greater capacity than those built before. When deregulation was enacted in 1996, California enjoyed a surplus of supply over demand of 30 percent but at the same time suffered from the anomaly of outrageously high rates. That’s the first reason deregulation was enacted: to replace a regulated monopoly and bring about free market competition to drive down what were among the highest rates in the nation—rates that threatened California’s ability to compete for employers and job-creating investment.

The second reason was to attract private providers to invest in the creation of new generating capacity to meet the exploding power needs of the New Economy—to keep in California all the jobs that it promised to produce.

And deregulation did succeed in stimulating a significant increase in the amount of power that power providers applied to build after deregulation was enacted, especially after the effective date of the legislation and the defeat by California voters of Proposition 9 (which unwisely sought to repeal deregulation) in 1998. Just look at the filings for 1997, 1998, 1999, and 2000 as reported by the California Energy Commission (see graph on page 69). After enactment in August 1996, there was a significant increase in filings in 1997. The total megawattage of the filings for 1998 doubled that for 1997. After the effective date of AB 1890, the legislation that set up the current system (March 1998), and the defeat of Proposition 9 (November 1998), removing the threat of repeal, the total for 1999 was double that of 1998—exceeding the 5,000-megawatt mark in 1999 alone.

As a result of deregulation, California will have 10,000 megawatts more power by 2002–03 than would otherwise be available to keep our businesses operating and our homes functioning.

From Power Crisis to State Fiscal Crisis

California has purchased power for Southern California Edison and Pacific Gas & Electric to the tune of at least $50 million a day, or $1 billion every 20 days. Davis aides have revealed to Democratic legislators that the actual cost of continuing to do so through 2003 will be not $10 billion, as they had originally envisioned, but upward of $23 billion. This is a cost that, if not borne by ratepayers, will certainly be borne by taxpayers. Already, the Davis administration has burned through its fat surplus and is being warned to cut its budget by the state legislative analyst. The Wall Street credit rating agencies have twice downgraded California’s bond rating. The power crisis has become a fiscal crisis for state government.

Public Power?

California has also sought to purchase those portions of the decaying grid (i.e., the power transmission system) owned by the private utilities so that, in effect, taxpayers "get something in return for their bailout of the Investor Owned Utilities" (to quote a legislator supporting such action). This is a move that would take California back—way past reregulation—to public power along the lines of the Tennessee Valley Authority. It’s an idea that is as new and exciting as socialism. And it won’t solve anything. Changing to public ownership of the grid will not add a single watt of power. But it will take what is now investor-owned property off local tax rolls, adding to the tax burden of local property taxpayers.

The bankruptcy of PG&E and the governor’s inability to find a Democratic legislator willing to carry his proposal to prevent Southern California Edison from filing may allow the public to avoid this ill-conceived scheme.

Surprisingly and depressingly, there is a great rush to embrace public power, not only by consumer advocates but by the Democrat-controlled legislature and the governor. It is imperative that common sense win out. A decision for public power not only threatens to fatally chill investment in needed new generating capacity but would return us to a system that lacks competition and runs the high risk of taxpayer subsidy. Likewise, the state is insisting that federal regulators impose caps on fees that private power providers can charge in the wholesale market. Not even the Clinton appointees to the Federal Energy Regulatory Commission were willing to do that. And while the Bush-appointed FERC in mid-June adopted a plan to help curb wholesale price spikes while preserving free market principles, Davis only grudgingly conceded that this was a "step in the right direction."

Finally, much too belatedly to avoid insolvency for the state’s major investor owned utilities, the California Public Utilities Commission has moved to raise rates—while the governor protests that he did not know or approve of their action.

Limits to Conservation . . . and to Political Courage

What Davis is doing is promoting conservation. Fine. But businesses don’t need to be persuaded. They already know they save money by doing so, which is why most already are conserving. But there are limits to what businesses can do without artificially constraining production. Again, the out-of-state job raiders will promise California manufacturers and employers that they will be free of such constraints if they leave California and relocate their businesses to their states. As for residential ratepayers, they have little incentive to conserve as long as they are insulated from rising wholesale costs—as Governor Davis has continually insisted—by artificially low capped rates.

A far more sensible response, which California has made, is to accelerate the approval of siting and construction of new generating capacity. Last fall the state legislature passed and Davis signed a bill to streamline the approval process to provide for certification within six months of the generator’s application. But that applies only to smaller "peaker plants." And a six-month certification is still 50 percent longer than the four-month average in the rest of the country.

What is needed of course is the same fundamental reform to be applied not just to peaker plants but to plants of greater capacities. It is longoverdue. An onerous, protracted process of approval, requiring numerous public hearings fraught with uncertainty and delays, has discouraged the siting and construction of power plants of greater than 50 megawatts capacity ever since the 1970s. But nothing short of the present crisis could have prompted the legislature to reform and truncate that nightmarish process. Environmental—or more accurately, "no growth"—lobbies would have killed any effort at reform in its shell. Even now, "not-in-my-backyard" grandstanding can stop the building of a new plant. Consider the city of San Jose, in the very heart of the New Economy, which very nearly killed plans to construct a new generating plant. It reversed its initial objection only when political pressure and the energy crisis had reached a peak.

Deregulation has, whatever its imperfections, stimulated applications to add some 10,000 new megawatts to California’s power supply.

Will California Be Able to Hold onto the New Economy?

Whether we do in fact suffer the flight of California jobs to competitor states depends on their ability to provide affordable, reliable supplies of power, as well as on our own. California is not alone in the uncertainty of the answer to that critical question. Indeed, regions of the United States that have not experienced deregulation are thought by energy experts to be in great peril of the same rolling blackouts that threaten California. The answer—for California and our competitors—is, just as soon as possible, to give energy generators incentives to build sufficient new generating capacity to keep pace with or exceed the rising demand for power. If we fail to do so, we will simply watch as the New Economy heads offshore.

A Needlessly Long, Hot—and Dark—Summer

The net result is that Governor Davis has been late—very late—to act. Instead of having the political courage to empower the investor-owned utilities by giving them needed rate increases when they were needed, he dithered and delayed and then stumbled into purchasing power for the IOUs at costs that have imperiled the state’s credit on Wall Street. To have achieved the needed capacity in time to avoid the certainty of blackouts this summer and probably next, he could have exercised the extraordinary emergency powers to suspend the operation of statute and regulation that the state government code confers on the governor of California in times of emergency—including explicitly the sudden and severe shortage of electrical energy.

What, exactly, could Davis have done? A year ago, he could have

• Decreed that investor-owned utilities are free to engage in long-term contracts to buy power from wholesale providers

• Decreed that the investor-owned utilities be permitted to charge realistic rates for power that would have avoided the shockingly high taxpayer subsidies we now see instead

• Suspended requirements for protracted hearings (as he must now) to further truncate and accelerate the approval process for siting and construction of new generating capacity

Edmund Burke once said: "The public interest requires doing today those things that men of intelligence and goodwill would wish, five or ten years hence, had been done." Would that the ghost of Edmund Burke had whispered—or shouted—in the ears of the governor and the legislature when they had the chance to spare California from a long, hot—and dark—summer.