Deeper and Deeper We Get in Risky World of Power

California’s politicians have embarked on a course unparalleled in the history of any state government. In a few short months, with a minimum of reflection, the state’s leaders have propelled California from electric utility regulator to lender to short-term electricity purchaser (almost $2 billion and rising) and then long-term electricity purchaser ($10 billion in bonds). They are negotiating to move the state into electricity transmission (up to $6 billion) and outright power generation (unknown billions). It reminds me of the song about the lady who accidentally swallowed a fly and, in search of relief, proceeded up the food chain until she swallowed a horse (“She died, of course.”).

To these almost unbelievable costs add the tens of billions of dollars of lost private business investment because of the fear of increased energy costs. Trying to assess the cumulative impact of this, I can think only of the words of the late Illinois Sen. Everett Dirksen: “A billion here, a billion there, and pretty soon you’re talking about real money.”

Costs for all forms of energy (coal, natural gas, oil and electricity) have risen dramatically across the country. Forty-nine states plus the District of Columbia have reluctantly but wisely passed these costs on to consumers, who have in turn partially mitigated demand through self-imposed conservation. This can be a hardship for some people, so most states have targeted financial assistance for those citizens unduly burdened by the price increases.

These are the ways well-managed states handle a problem like this. So far, only California has managed to produce a crisis.

A reality check is past due:

* No scheme (regulatory, deregulatory or other) could have insulated Californians from the natural market forces that cause commodity prices to rise and fall. Under the best of circumstances, deregulated markets produce the lowest price available at the moment, not a single arbitrarily low price over time.

* The energy purchase decisions taken by California’s politicians have and will increase the costs of the state’s electrical power. Having refused to allow utilities to enter long-term purchase contracts at the bottom of the market, the state is now entering into long-term purchase contracts of its own at a time of historically high prices. Given the recent experience of Southern California Edison and Pacific Gas & Electric with fixed-price commitments, the risk premiums built into those new contracts promise to be astronomical.

* California politicians and bureaucrats cannot reasonably expect to purchase, finance, transmit or generate electricity more efficiently than their private-sector counterparts.

The recent spectacle of our politicians playing investment bankers and attempting to negotiate with seasoned power company executives and Wall Street financial institutions illustrates this. Imagine the interest group pressures, pork-barrel budgeting and log-rolling when they try to build and operate power plants.

We seem to be involved in an elaborate shell game conjured up by our elected officials but designed to conceal one fact: Irrespective of the bluster or the protestations to the contrary, we Californians, like all the rest of our countrymen, will end up paying for every penny of the cost of every kilowatt of electricity that we consume. We will pay now, or we will pay later, either as consumers or taxpayers, but we will pay.

In other words, we will pay for the spider, the bird, the cat, the dog, the goat and the horse that our politicians will have consumed in trying to catch a fly. And that, as Dirksen said, adds up to real money.