On Energy, the Fix Is Definitely Not In

The infrequence of rolling blackouts and the late-night kilowatts being burned in the state Capitol may lead some people to believe that California’s self-induced electricity crisis is under control. The truth couldn’t be more starkly different, even with Gov. Gray Davis’ latest omnibus proposal.

Despite all the photo-ops, speechmaking and political activity, the situation has gone downhill since a major new law was passed a few weeks ago that makes the state the energy buyer for most Californians. And it will get ever worse.

The escalating number of lawsuits and regulatory cases pending in various state and federal venues complicates the economic and legal situation daily. As with most American crises in recent memory, the only real winners will be lawyers and lenders. Consumers will get far less out this than anyone, save the investor-owned utilities whose roles have been dangerously weakened.

It is painfully clear that the state’s designated electricity focal point--the Department of Water Resources--is drowning. As a result, not only is the future jeopardized but the past mess is far from cleaned up.

Under the emergency law, AB 1X, signed with much fanfare by Davis on Feb. 1, the DWR is supposed to leverage the state’s good credit to carve out long-term power deals, creating space for a settlement with the near-bankrupt private-sector utilities to pay their multibillion-dollar debts and get back on their feet. Instead, as of Feb. 13, the governor was having the DWR play a game of brinkmanship with the same creditors who are owed hundreds of millions of dollars, principally because the state has refused to authorize adequate utility rate increases. Such increases would let consumers experience the real cost of power in today’s supply-short Western power market.

While the state transmission grid operator, the California Independent System Operator (Cal-ISO), continues to operate on the verge of rolling blackouts and scrambles constantly to buy emergency supplies on a moment’s notice--all of which are very expensive in a supply-short market--the DWR is refusing to pay for those emergency supplies unless they are priced at the more reasonable nonemergency “forward” prices.

This act of negotiating bravado by our governor’s electricity buyers might be commendable in a different context. In the current one, it is undermining the entire premise of the new law authorizing the state to be the exclusive power-buyer for consumers. It is causing suppliers to threaten to refuse to sell to the Cal-ISO. It is creating lawsuits and ultimately causing bidders in the state’s recent much-ballyhooed auctions for long-term supplies to delay signing contracts with the DWR.

A Southern California Edison executive told a group of the utility’s bondholders last week that his company, which is responsible for delivering power to more than 4 million homes and businesses, has no idea how much high-priced emergency supplies Cal-ISO has purchased for its customers in recent weeks. Nor does it know how much of the rest of the state’s purchases through the DWR have been bought for them. The utility has yet to see an accounting or a bill.

Even if it had a full accounting, it couldn’t transfer payment to the two state entities. The California Public Utilities Commission has yet to authorize a process by which the state will be reimbursed by the utilities on whose behalf Cal-ISO and the DWR buy the juice.

This is just one area in which it is painfully obvious that the state--admittedly on an emergency basis--was thrust into a commercial role it has no business being involved in. Yet the governor, legislative leaders and their highly regarded volunteer advisors are hell-bent on buying transmission assets, hydroelectric plants and utility stock through state-backed warrants.

Meanwhile, the utilities that were supposed to be saved from bankruptcy may yet be forced into it by some understandably impatient energy suppliers who want to get paid. And the critical supply situation worsens because the state refuses to fully back the Cal-ISO purchases. The state’s spreading credit-worthiness problems mean California is paying premiums for the short-term interim supplies the governor boasts are keeping the lights on.

Sadly, the state is no better off--one could argue it’s worse off--than it was Dec. 1. That was when Davis came out with his initial plan, which was essentially trying to politically force federal regulators to solve a problem he refused to address with rate increases. In retrospect, such increases would have been the quickest and least expensive way to avoid forcing the state into a role in which it can only fail.