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| Davis Sees the Light
by John M. Curtis Copyright August 1, 2001
Nailing down long-term contracts, the state tried to provide its own insurance against runaway electricity prices—attempting, in effect, to break the volatile spot market. “Insurance is insurance, and it costs a little bit, but it’s a damned good thing to have,” said S. David Freeman, the former head of the Los Angeles Department of Water and Power and now chief energy advisor to Gov. Davis, touting the benefits of long-term contracts. But with the state signing $43-billion in long-term contracts—accounting for 40% of all electricity purchases—rate payers are now getting the raw end of the deal, enduring a bloated 40% rate increase to pay the state’s power debts. Back in spring, setting up a power authority and cementing long-term contracts looked attractive when spot prices were going through the roof, despite the fact that economists warned about the bottom falling out. With spot market prices now under $80, the state’s upside down, once again paying more in long-term contracts than the current spot market. Davis and Freeman may be right when they attribute the spot market collapse to long-term contracts, though ratepayers must now pay the freight for inflated rates out into the distant future. Sure, it’s beneficial to have price stability, but that doesn’t explain why the state didn’t build triggers into their contracts, automatically adjusting the price per megawatt hour to match changes in the spot market. Sharing risk is essential with power generators, not simply playing cat-and-mouse to see who’s getting the best deal. Gov. Davis and the legislature had more options than simply signing long-term contracts. Like the insurance industry, the legislature could have set the maximum profit margins for energy suppliers whose delivered cost—even during the spike in natural gas prices—was about $50 per megawatt hour. With the state accruing massive debt, signing long-term contracts and approving $11.4 billion in bonds sales, there’s no relief in sight. Under the state’s flawed deregulation scheme, ratepayers have no protection against the free market. Acting irresponsibly, the Public Utility Commission turned their backs on the state’s major utilities, hemorrhaging into red ink once spot price spiraled out of control. Without timely price increases, the PUC pushed utilities to the brink, forcing them to buy energy at inflated prices and cumulating massive debt. Raising prices a whopping 40%, the PUC passed the buck to cash-strapped ratepayers, already reeling from current economic woes. Now shifting the burden to state Department of Water Resources, the PUC claims that its current rate hikes should cover the state’s obligations for the foreseeable future. How cynical. While somebody’s got to pay, it’s not fair to finance the entire debt on the backs of California ratepayers. They weren’t responsible for passing defective deregulation in 1996, leading to chaos and runaway power prices. Davis can’t only blame marketers for operating within the law to maximize profits at ratepayers’ expense. California must also take the heat for shafting ratepayers and pony up to help foot the bill. Gov. Davis deserves credit for restoring stability to California’s runaway energy market. Gaining control of the markets is “clearly explained by the fundamentals of supply, which has increased, and demand, which has decreased because people are conserving,” said Gary Ackerman, executive director of the Western Power Trading Forum, a trade group representing power suppliers, discounting Davis’ claim that long-term contracts dropped power prices. But Ackerman, like others in his industry, refuses to admit that the state is less dependent on the volatile spot market. Bad economic times and fear of rolling blackouts also helped dramatically reduce demand. Add to that federal price caps, fewer power plants off-line, and new plants adding an additional 1,415 megawatts, and suddenly the state’s replete with power—dropping spot prices. But perhaps the most blatant factor involves the media who shined a bright light on the power industry’s questionable business practices. Now content to avoid rebates and stay in business, energy suppliers no longer have California over the barrel. Winning the propaganda battle, Gov. Davis navigated California into calmer waters. Limited price caps haven’t discouraged more power, they’ve set appropriate parameters by which energy suppliers must fairly play by the rules. The Federal Energy Regulatory Commission [FERC] changed its tune when the White House finally took enough heat for supporting an industry known for market manipulation and price gouging. With only the amount at stake, Davis proved that California was indeed the victim of unacceptable business practices—though the current law invited the shenanigans. It’s now up to the governor and legislature to set appropriate conditions—including profit margins—under which the power industry can do business in the state. Long-term contracts must include triggers that protect the state against paying through the nose. Passing defective deregulation, the state can’t expect ratepayers to foot the entire bill. As long as the state boasts a surplus, it’s high time for Gov. Davis to put it to good use. About the Author John M. Curtis is editor of OnlineColumnist.com and columnist for the Los Angeles Daily Journal. He’s director of a Los Angeles think tank specializing in political consulting and strategic public relations. He’s the author of Dodging The Bullet and Operation Charisma. |
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addled with massive debt for exorbitant energy purchases, the state must share the bill with weary ratepayers. Skating on thin ice, Calif. Gov. Gray Davis’ prayers were answered, calling in unseasonably cool weather and unprecedented conservation— reducing the state’s energy demand by 12%. “It’s our obligation to provide power to the homes and businesses that drive California,” said Davis, justifying the state’s whopping $8-billion debt buying power to keep the lights on. Avoiding rolling blackouts so far, Davis stemmed the avalanche of bad publicity threatening to upend his office, leaving the door open to GOP hopefuls. Easing the bleak picture, abundant supplies have drastically reduced prices once soaring to a whopping $2,900 per megawatt hour and now down to a measly $80—the wholesale price needed to light about 750 homes. All the doom and gloom about power outages faded like an ominous mirage, with abundant supplies and reduced demand. While ratepayers have a short memory, the state’s astronomical debt for inflated power purchases looms, as the state finds its way out of the red ink.|
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