Give Power Buyers a Club in Cartel Wars

Last week, Gov. Gray Davis proclaimed that conservation and new energy supplies will allow California to make it through this summer without additional rate increases. On Monday, he announced a “sweetheart deal” to save one of the state’s largest utilities even as the other slunk behind the protection of a bankruptcy court.

In fact, none of these actions will change this basic reality: An unscrupulous “seller’s cartel” now manipulating California’s electricity market is likely to make this summer unbearable. This cartel consists of the major companies controlling most of the uncommitted electric generation and natural gas transmission contracts in the Western United States.

To fight this cartel, we propose a plan with a stiffer backbone--a hard-nosed “buyers’ cartel” and, if necessary, the forced purchase of in-state generating plants. Failing such actions, Californians face a blackout-riddled summer with a potential electricity bill of nearly $50 billion.

The governor’s plan to beat the sellers’ cartel is built on too many “ifs”: If the West escapes a hot summer, if the increasingly unreliable power plants suffer no outages, if 20% conservation gains materialize, if there’s enough natural gas to fuel new plants, if the cartel doesn’t withhold supply.

Failing any one of these “ifs,” and with forecasts warning of Stage 3 alerts that could stretch a full six months, the sellers’ cartel would gorge as it never has before. Wholesale prices could double or triple from already exorbitant rates of 25 and 50 cents per kilowatt-hour to a dollar or more. This power costs no more than 15 cents to produce.

Unfortunately, Davis’ strategy to negotiate long-term power contracts does little to reduce California’s short-run vulnerability. Most contracts don’t even begin until 2002. President Bush and federal regulators could end this crisis tomorrow by imposing hard price caps and ordering the cartel to supply power to the market. They have steadfastly refused. The results are staggering.

The sellers’ cartel first took utility shareholders on a $13-billion ride to insolvency. After bleeding them dry, it was the taxpayers’ turn. Indeed, after state government took over purchasing power in January, California’s healthy budget surplus dropped by more than $5 billion. This led the Public Utilities Commission to approve the largest rate hike in California history.

However, if the governor’s “Hail Mary” strategy fails, we project additional rate hikes of 100% or more. To avert this disaster, we propose that California join with the other “victim states” of Oregon and Washington to form a “buyers’ cartel”--in essence, a buyers’-side monopsony to fight the sellers’ price-fixing oligopoly.

In particular, we propose offering a “fair price” to the sellers’ cartel, but not a penny more. This fair price would be cost-based--not market driven--and calculated daily on natural gas prices and other factors. It would include a generous profit margin to ensure sufficient incentives for investment in the Western market and result in an average price of 15 to 20 cents.

As an ancillary weapon, California must force the sale of all in-state plants owned by any member of the sellers’ cartel refusing to provide ample power at the fair price. Under a declared state of emergency, the state has the authority to purchase the plants at reasonable prices, and they can be run by qualified utility operators.

Forming a buyers’ cartel will almost certainly spark retaliatory blackouts as the sellers test the political will of our legislators and governor. To prepare, we must end highly disruptive random rolling blackouts. Instead, divide the states into identifiable blackout zones and, with sufficient notice, flip switches off as need be. The benefits to businesses and residents of knowing when the power will be turned off are considerable. Increased crime risks can be offset by targeted police deployment.

The state should also buy literally truckloads of new, efficient air conditioners. Utility employees, youth groups and other volunteers must move systematically through the hot valley spots throughout the California offering to replace old air conditioners--our Achilles’ heel during the summer time peak.

On the energy supply front, the state should continue its effort to build emergency power plant capacity far from population centers but near the transmission grid--no-frill plants built quickly. There will be no better weapon against the cartel than standing reserves.

We do not understate the challenge of staring down a group of well-financed energy companies. There are no other reasonable options, and the stakes are too important to succumb to the generators’ “rolling blackmail.”