Politicos Promise Power, and the People Will Pay
With rolling blackouts now a daily threat, the Golden State approaches Third World status. Will it be long before we must ask whether we can drink the water? I exaggerate, of course, but not by much.
We have had an utter failure over past years to build sufficient capacity in electric generation and transmission for a future that has arrived with a vengeance, leaving little for public officials to offer except empty and inflammatory rhetoric about purported “profiteering” and “price manipulation.” That is a bit much coming from politicians who would sooner lose an arm than cut taxes.
The state government is about to enter the power business as a middleman because the major electric utilities have been bankrupted by the state and so cannot find partners for long-term contracts. The rationale is that this will avoid increases in electric rates and minimize taxpayer costs.
Really, now. Let us consider some production costs. Even with highly efficient generating equipment and with natural gas prices lower than now being paid, generating costs alone are about 5.5 cents per kilowatt-hour. Pollution credits are about 4.5 cents. Operation and maintenance are about half a cent. Add half a cent for the risk that future politicians will renege on the contracts if daily spot prices for electricity fall below the contract price. We already are at 11 cents per kilowatt-hour and have not included depreciation on the large capital investments.
Therefore, those who argue that the state will be able to obtain long-term contracts at 5.5 cents per kilowatt-hour are inhaling big time. The 8.5-cent figure to which some refer looks dicey as well. (The 6.9-cent average bid in the state auction this week is difficult to interpret because it excludes an important category of peak prices.) Customers of the three major private electric utilities, even with the recent rate increase, are paying about 7.7 cents per kilowatt-hour, excluding delivery costs. So from where will the difference come, as Gov. Gray Davis seems to be committed to the proposition that prices for consumers shall rise no more?
The only other option is the taxpayers’ wallets. Suppose that, by some miracle, the state is able to obtain electricity for 10 cents per kilowatt-hour; that leaves a difference of 2.3 cents above what consumers are paying. Since consumption in the three utilities’ service areas is about 210 billion kilowatt-hours per year, the shortfall would be $4.8 billion per year.
Call me wild and crazy, but I assume that the surplus in the state budget will not last forever. Will K-12 education spending be reduced? Proposition 98 spending mandates and the teachers’ unions--not to mention the sorry performance of California public schools--will prevent it. Cuts in health and human services? Not likely given the prospect of an economic slowdown. Less spending on higher education? Please; this is a middle-class subsidy that few politicians dare challenge. Less for youth and adult corrections? The prison guards’ union begs to differ. And so on. Major categories of spending are included in the budget precisely because they have important constituencies, and that is why they are difficult politically to cut. A nice tax increase perhaps? Maybe, but that will not be good for the economy as a whole.
Accordingly, we now hear talk of confiscating the utilities’ hydroelectric assets in order to “protect” the taxpayers. This is much like a kidnapper demanding title to the house in exchange for returning the ransom. The plain fact is that the state has destroyed two old, proud and honorable companies that have lived up to their legal obligation to serve. They are entitled legally to a fair and reasonable return, and a court already has ruled precisely that. So add a cool $12 billion or so to the bill; spreading that out over, say, 10 years, with interest, adds another cent or so to the price of a kilowatt-hour. More fundamentally, the state government has shown itself willing to enact deeply misguided legislation, falsely labeled as “deregulation,” and then to force the punitive effects on the private sector. Does anyone believe that this will reduce the riskiness of future investment in the state?
The fun really begins next summer. We can barely handle wimpy winter peak demand; wait until the air conditioners are turned on. The snow pack in the north is only two-thirds of normal, and hydro facilities in the Pacific Northwest have used up more water resources than is typical for this time of the year. Past capitulation to the environmental and consumer lobbies is the gift to California that will keep on taking: Either the taxpayers or electricity consumers will be hit hard.
This problem could have been solved months ago. Duke Energy last summer offered 2,000 megawatts of capacity for five years at 5 cents per kilowatt-hour, with no response from Sacramento. A moderate 15% to 20% increase in rates--painful but hardly catastrophic--combined with permission for the utilities to sign long-term contracts would have rationalized the market, enabled the utilities to operate soundly, provided incentives to conserve and strengthened political support for increased construction of generating and transmission capacity. Because of an unwillingness to stand up to the consumer and environmental leftists, the problem is tougher now, but hardly without solution. Rates must rise, the utilities must be allowed to make rational business decisions, more capacity must be built, and the government must get out of this market.
