Political Meddling Made This Mess--and Here They Go Again!
The elves are busy in the North Pole suburb of Sacramento. Whole new stocking stuffers are being prepared, often literally by candlelight, in the hope that the current electricity mess somehow can be undone through a quick burst of ever-expanded government meddling.
The problem now looming large for power producers, electric utilities and public officials is straightforward. The utilities are close to bankrupt because they have been forced to sell power at retail prices far lower than the wholesale prices at which they must buy it on the daily spot market. Power producers have costs that they must cover and customers outside California to serve and prefer contractual arrangements with entities able to pay their bills.
Bankrupt California utilities, even when finally freed to sign long-term contracts, will face difficulty due to their precarious financial condition and the risk that future bureaucrats and politicians will declare the contracts “imprudent” if future spot prices fall below the contract price. Since no one will bail the producers out if prices fall, they are entitled to receive the benefits of strong demand now. That is what it means to take a risk.
So the obvious short-term “solution” to part of the current electricity mess--allowing the utilities to sign long-term contracts for power at prices far below recent spot prices--is untenable because of the hash created by the state government. The consensus “solution” now emerging is for the state government to buy power under long-term contracts from the producers--the state can pay its bills, at least for now--and then resell it to the utilities for sale to consumers.
Oh, dear; one hardly knows where to begin. The state already is demanding power contracts with the producers at a price clearly below the cost of producing it. Not surprisingly, the producers are resisting. If the state in the end pays the market price--as is likely in that the producers do have many other customers--someone must pay the bill. Public officials will be loath to present the real costs to electricity consumers, given the politics of electricity prices. That leaves--you guessed it--the taxpayers, who, Sacramento hopes, will not notice higher taxes or cuts in other programs. And if the state budget surplus ends? Don’t ask.
Moreover, the shorter the contract, the higher the price, since there would be less time available to cover major cost categories. But longer contracts will be viewed as less credible, in that future politicians will have incentives to renege if spot prices fall below the contract price. Either way, the “low prices” assumed by many to be a benefit of Sacramento as middleman are likely to prove a mirage. And confidence in Sacramento’s good faith is not enhanced by the current talk of confiscating the utilities’ assets as a reward for assuming the role of middleman, in that Sacramento is responsible for the utilities’ plight in the first place.
The other major option is the creation of a state power authority. As it builds and operates power plants, such an authority would be subject to enormous political pressures on siting and construction decisions, the central effect of which would be higher costs. The Legislature might attempt to hide them with various subsidies, but that would not make the higher costs less real. A perfect example is the proposed use of tax-exempt bonds for construction finance, which would not reduce real capital costs for the state economy as a whole, but would transfer wealth from taxpayers to electricity consumers and would allow state government to engage in truly unfair competition with private power producers. Feel free to bet the rent money on the prospect of politicized electricity rates, designed to subsidize various consumer groups and geographic regions with important allies in the Legislature at the expense of other groups. Should the state take over privately owned generating facilities through eminent domain, it would have to pay fair market value determined in part by currently high wholesale prices. If state electricity operations were required to cover those purchase costs in rates, there remains no obvious competitive advantage for a state power authority. An attempt by the state to shield ratepayers from the true high cost of electricity use necessarily means that taxpayers would take it on the chin. And let us take joy in the prospect of the warm smiles and friendly service for which the Department of Motor Vehicles is so justly renowned.
The story now gathering force in Sacramento is that the private sector is responsible for the current mess; that a government electricity bureaucracy would predict the future flawlessly even as it avoids politicization of the market; that capital, fuel, labor and other costs of electricity production would be reduced by government involvement; that consumers somehow would get cheaper and more reliable power; and that taxpayers would not be left holding the bag. Can there be an adult anywhere in the state who actually believes this?
Serious adverse effects already have been created by irresponsible rhetoric from our public officials about profiteering, price manipulation and state takeovers. The effort to force the utilities to bear the huge losses caused by the 1996 legislation is designed to deflect blame from the politicians, but will have the effect of increasing the risks associated with electric power investment for California.
There is no free lunch. Retail prices must rise. The private sector must be allowed to do what it does best: produce electricity efficiently. The state could reduce the absurd regulatory burden substantially, offer protection for the poor and preserve investment incentives for the long term by protecting the property rights of producers and utilities. But that would require that Sacramento act to reduce its political power. So let the games begin.
