Let Consumers Shop for Cheaper Energy

The wholesale price of electricity has plunged 95% from its highs earlier this year while most electricity rates have simultaneously shot up 40%. What’s wrong with this picture? Government tried to help.

When electricity prices surged last year, Gov. Gray Davis decided to shield consumers from the temporary price spike by subsidizing their rates, first with utility company capital, and when that ran out, with tax money. This wiped out the funds of the state’s major utilities and then ate a gigantic hole in the state treasury.

Fortunately, the governor didn’t lift a finger to help us with natural gas prices, which spiked at the same time. As a result, heating bills went through the roof, consumers turned down their thermostats, the higher prices uncorked transmission bottlenecks and attracted additional supplies, and gas rates quickly settled back down. Not so with electricity.

By subsidizing electricity prices at their peak, the governor prolonged the price spike by directly underwriting it. This put the state’s finances into a fiscal death spiral that Davis could only exit by signing long-term contracts at prices well above what they would otherwise have settled down to if simply left alone. As a result, the state now owns $43 billion of electricity contracts costing roughly $70 per megawatt-hour in a $30 market.

Let’s add up the cost of all this “help.” To recover utility losses, the administration has bailed out Southern California Edison with $3 billion of ratepayer money, adding $750 to an average customer’s future bills, according to the Foundation for Taxpayer and Consumer Rights. To replenish state coffers, Davis is attempting to borrow up to $13.4 billion, which with interest will tack an additional $2,000 to an average customer’s payments over the life of the bond. In addition, the long-term contracts more than double the price that consumers should be paying, and will for years to come.

What can be done?

First, the contracts should be challenged. A court has already ruled that the Davis administration illegally negotiated them in secrecy, in direct violation of state law. And it turns out that while the governor was locking consumers into ridiculously high prices, key administration officials advising him were also on utility payrolls or holding stocks in the companies they were negotiating with.

The state attorney general is paid to act as a consumer watchdog but has instead become an administration lap dog. Private organizations have stepped into the breach to challenge the contracts, but they are no match for the legal resources of the companies they must battle. The attorney general should do his job.

Failing this, the Legislature should restore the consumers’ freedom to decline these obscene prices by allowing them to shop around for the lowest-priced electricity.

Recently in Texas, for example, NewPower Holdings offered consumers $672 in savings if they simply picked up the phone and shifted their electricity business away from a competitor. Eighty thousand Texans did. Californians had the same freedom when this governor took office. But this right was rescinded to hold consumers in a captive market until the high costs of the state’s subsidies and contracts are recouped. Freedom of choice would allow consumers to escape these above-market prices.

So while competing power companies woo Texans with bargain-basement offers, Californians are held hostage to crushing rates created by their own government. True, if consumers escaped this Soviet-style power gulag for the freedom of the open market, the state treasury would lose the difference, but that money already has been lost. The only question is whether it is recouped by sky-high electricity bills for decades to come or by governmental belt-tightening now.

Restoring the consumers’ freedom to choose would arm them with the most powerful consumer weapon of all: the ability to take their business elsewhere. If government really wants to help, it can start by getting out of the way.