DWP Bears Blame Only for Lack of Clairvoyance

Hindsight is useful indeed, if unavailable when really needed, but it does facilitate the blame game when past planning turns sour. However difficult it is to predict the future, one thing is certain: The unlovely Los Angeles Department of Water and Power debt and fuel/power contracts, described recently in The Times, will provide ample fodder for finger-pointing and posturing over the coming weeks and months. Before we begin lambasting past decision-making by the DWP and its contractual partners, it is useful to review the energy outlook as it appeared in the mid- and late 1970s.

Predictions of oil prices at $65, $85, even $125 per barrel (in 1996 dollars) were common. (The average current price is about $20 per barrel.) Those predictions may not have been reasonable from the viewpoint of economists, but most people who must make actual decisions in the world are not economists. That the energy situation constituted the moral equivalent of war was a truism of presidential proportions. Americans had spent long hours in long lines at gasoline stations, and the increasing federal role in the pricing and allocation of fuels had magnified rigidities, created shortages and politicized the market. Political stability in the Persian Gulf was uncertain at best; the Iranian upheaval had just concluded and the Iran-Iraq War was about to begin, and so the volatility of prices was viewed as having increased dramatically.

The shortages and capriciousness caused by the government regulations meant that the true cost of obtaining fuel supplies was higher than the dollar price and that supplies might become impossible to obtain for some periods of time. And the allocation regulations might change quickly, wiping out the best-laid plans of mice and utility executives. In a little-remembered incident, the Defense Department, then legally entitled to commandeer fuel supplies in order to maintain its operations, took possession of a large shipment of fuel oil destined for Southern California electric utilities.

Those costs, uncertainties and rigidities in the oil and gas markets drove up prices for such substitute fuels as coal, in particular with respect to prices embodied in relatively secure long-term contracts. Accordingly, utility planners and public officials in Southern California, charged with preserving reliable service in a growing economy, opted for coal produced domestically and thus not subject to supply disruption overseas and for the security of long-term contracts. That was hardly irrational under the circumstances, even if one believes that a different set of price assumptions and attendant number-crunching would have yielded a different decision.

Suppliers signed contracts with the DWP under the same conditions and uncertainties. And just as DWP, in exchange for predictability, took the risk that prices might fall sharply, as they did, the suppliers took the risk that they would be left holding the bag if energy prices rose even more than predicted at the time.

Whether the debt for the power plants was carried on the books clearly and appropriately is a separate matter, although it does not seem relevant to the basic issue unless we believe that different investment and contractual decisions would have been made had the approach to accounting been different. That seems unlikely. However unappealing the current situation facing DWP, it is the result not of stupidity or venality, but instead of the human inability to predict the future.