State Must Guarantee Payment for Its Power
The lights are going off in California. But the immediate crisis--this week and next--is financial. The major utility companies in California are unable to pay their bills. They are on the brink of bankruptcy. That is a problem, but there is a danger larger than bankrupt utilities. It is the falling credit-worthiness of California as a buyer of power.
The basic energy problem can’t be fixed in the short or medium term. It doesn’t matter who owns the transmission networks, and shuffling the ownership of the generating facilities can’t help. There just isn’t enough electricity to go around at reasonable prices--prices that would keep California’s costs of doing business competitive with the costs in other states.
In the medium term, the only answer to the current problem is for consumers to use less electricity. In the long term, the state must have new generating capacity or face terrible consequences: an exodus of business and capital, a regional recession, falling property values and unemployment. No power, no growth, no jobs.
There is no short-term pleasant solution to the power problem. Worse, there is the short-term financial crisis, which has the dynamics of a credit crunch or a run on the banks. Utilities buy power on credit. The power shipped today is paid for later. When a buyer’s credit-worthiness is called into question, suppliers get worried and ask for higher prices or faster payment to offset the risk of not being paid. If it looks as if California utilities (or the state) will not pay their bills to power suppliers, then some power suppliers may reasonably stop supplying power. And, if some power is withheld, wholesale prices will rise even higher.
Because retail prices are frozen, rising wholesale prices make it even less likely that the utilities can pay their bills. And that, in turn, makes even more suppliers think twice about supplying power to the state. Falling confidence leads to less credit, which leads to more defaults, which further reduces confidence, and so on. This is the real short-term crisis, the threat of a financial meltdown in the power market.
To prevent this meltdown scenario, Gov. Gray Davis must make a declaration committing California to paying its electric power bills. Such a declaration does not foreclose any useful options. Without such a guarantee, we face the prospect of a sudden sharp collapse in confidence, as happened to financial markets in Asia in 1997-98.
You stop a credit crunch or a run on the banks by having a financially sound institution guarantee that financial obligations will be met. Without guarantees, confidence erodes. And lost confidence leads inexorably to less power, higher spot prices and even greater financial instability. Furthermore, with a guarantee of payment, there is a simple test for the exercise of unfair market power while the price is above cost; any usable generating capacity that is withheld signals the exercise of market power. Without such a guarantee, it may be quite sensible for producers to withhold capacity, making it next to impossible to monitor the conduct of the industry.
If we are to avoid a financial meltdown in the power market, Davis must act as quickly as possible to declare that the state’s power bills will be paid. Time is short, and the stakes are very high.
