The State Should Buy the Electricity Grid

Should the state buy the utility industry’s hydroelectric plants or its transmission lines as part of a utility bailout? Should the rates of small customers be frozen while the rates of large industrial consumers be allowed to rise? These are the two biggest questions the state Legislature is now debating, and it looks like its answers may make a bad electricity crisis worse.

Assemblyman Fred Keeley (D-Boulder Creek) wants the state to buy the utilities’ hydroelectric plants. A generous purchase price would effectively be used to bail the utilities out without raising electricity rates. Currently, the utilities have accumulated about $12 billion in liabilities. These have resulted because unregulated wholesale rates have soared well above regulated retail rates. There is a consensus in Sacramento that the utilities must be bailed out for some--but not all--of these liabilities.

Toward this end, Keeley’s plan would create a nice pot of cash. It also would have significant environmental benefits. The problem, however, is that while the Keeley plan addresses the sins of the past, it does nothing to solve the current problem of a volatile wholesale market and the longer-term problem of a dysfunctional electricity system.

Alternatively, state Sen. John Burton (D-San Francisco) wants to buy the utilities’ transmission lines. This proposal would generate slightly less cash for the utility bailout. However, it has several huge benefits. Most important, it would allow the state to regain control over volatile wholesale rates. Under federal law, if the state owns the transmission lines, it has jurisdiction over wholesale rates. However, because the transmission lines are now owned by the private utilities, wholesale rates are controlled by the Federal Energy Regulatory Commission.

Despite ample evidence of market manipulation, the federal commission has adamantly refused to impose price caps on wholesale generators. They are producing power at 5 cents to 8 cents a kilowatt-hour, selling it for 60 cents or more, and are prime contributors to the market’s volatility. The situation with the federal commission is now more dire with the appointment of Curt L. Hebert as chairman by President Bush. A free market advocate, Hebert has suggested that the commission is unlikely to intervene. For this reason alone, the Legislature should strongly prefer the Burton plan to the Keeley plan.

There are other benefits. The state desperately needs to upgrade the transmission grid. In fact, one of the key reasons why Northern California has been facing blackouts is a bottleneck at a key north-south link. If the state owned the grid, it would pay no federal taxes, it would have a much lower cost to borrow funds to improve the grid, and it would realize considerably more transmission efficiencies. In fact, the savings realized by a state takeover would go a long way toward paying for the purchase.

The second big issue being debated focuses on whether to raise electricity rates. There is now a proposal to split California’s ratepayers into two groups. The “core” group would include small residential and business customers. The “non-core” group would include larger commercial and industrial customers. The rates of the core group would be frozen at close to current rates. The non-core group would have its rates increased or be left to fend for itself in the wholesale market. Proponents argue that since it was the large, industrial customers that originally lobbied for deregulation, they should be forced to pay the bill.

The problem with this argument is that there are literally thousands of companies that would be affected that had nothing to do with the original law. These innocent bystanders are not the enemy. They are our employers and neighbors.

A second argument is that the rates for large customers are now significantly lower, and that’s not “fair.” From a cost-of-service basis, it is simply a lot cheaper to service a large industrial customer because of economies of scale. So everything else being equal, rates for industrial customers should be somewhat lower. More generally, casting the Golden State’s industrial base to the wholesale generator wolves would seem to be a rather short-run approach to a long-term problem. After all, the original motivation for deregulating the market was to obtain cheaper rates so that California could remain economically competitive. This kind of rate structure would work against that goal.