A Company and a State Held Hostage

To understand why the current electricity crisis is going to cripple the California economy, consider this story about a very real California company. To protect the company from any competitors seeking to exploit its current problems, we will call it Hobson’s Choice.

Hobson’s Choice is one of thousands of medium-sized companies that form the economic backbone of the state. It generates millions of dollars in tax revenue each year and employs more than 200 people. It does so by making a very simple but electricity-intensive product that we all use almost daily. Unfortunately, over the last six months, the company has had its electricity repeatedly cut off. Every time this happens, it costs the company almost $50,000 to get its production line going again. Even worse, the company has had trouble meeting its orders and is now in grave danger of losing key customers.

The company is in this mess because it signed a contract with Southern California Edison to become an “interruptible customer.” In exchange for its interruptible status and the lower rates it brought, the company agreed to allow Edison to shut off its power during emergencies.

Note, however, that before the company’s top executive signed the deal, he had wanted to build his own on-site cogeneration power plant so he wouldn’t have to rely on Edison. That’s when Edison stepped in with its devil’s bargain. It was an offer the company couldn’t refuse, but it wasn’t the only offer by Edison that has backed the company into a corner.

Some years ago, the company had made plans to expand out of state. Again, Edison intervened. It offered a special per-unit electricity rate that would fall if the company increased its usage by adding more machines and equipment. Besides being a travesty for energy conservation, such a generous rate structure set the final hook so deeply into the company’s belly that it is now flopping around on the deck gasping for air.

Of course at this point in the story, you might say that the company is getting exactly what it bargained for. After all, it agreed to be cut off from power during emergencies, and now the emergency is really here. But to jump to this conclusion would be to miss one key point and one crucial fact: Edison officials led the company to believe that interruptions would occur rarely and only as a result of equipment failure.

What the company never dreamed of was having its power shut off because of the withholding of power into the grid by unscrupulous generators operating in a corrupt deregulation scheme. Now here’s the crucial fact: The company is supposed to have the right to revert from interruptible to regular customer status if it chooses. But the state Public Utilities Commission in response to the current crisis has decreed that all interruptible customers in the state must maintain that status until further notice--effectively holding them hostage to the crisis.

The PUC has done this to avert blackouts. But in doing so, it has chosen to target a particular class of customers that are crucial to the economic health of the state. Moreover, with its “hostage policy,” the PUC has all but signed the death warrant for Hobson’s Choice and thousands of other companies in similar straits.

Indeed, Hobson’s Choice must quickly decide whether it will simply pull up stakes and leave California or run the very real risk of bankruptcy. It is a decision that literally thousands of other small, medium and large companies are grappling with now as they ponder short-run electricity cutoffs and, in the longer run, as they confront a potential explosion of electricity rates.

How the governor and the Public Utilities Commission respond to the plight of these companies will determine the health of the California economy for years to come.