It Takes 2 to Tangle Our Energy Future

If political heat were light, California wouldn’t have any more rolling blackouts. Unfortunately, Gov. Gray Davis and President Bush are fighting to a draw, leaving California and the broader national economy caught in the bickering middle.

As Davis correctly argues, Bush could end California’s crisis tomorrow by imposing firm and reasonable price controls on the Western region’s wholesale electricity market. Bush says that such price controls would discourage new power plant construction and make our problems worse.

Let’s take Bush’s argument first: A small handful of large energy companies are manipulating the market from Seattle to San Diego--and laughing all the way to the bank. These energy conglomerates--Dynergy, Reliant, Enron, Williams and others--produce power for as little as a nickel or a dime per kilowatt hour and sell it into the Western states for prices spiking as high as a dollar during rolling blackouts.

The result is not only the transfer of tens of billions of dollars of wealth from consumers and businesses to the energy companies, it is also a massive energy price shock that now threatens to pull the entire West Coast, and eventually the rest of the country, into a recession.

Bush could easily short-circuit this recessionary shock by imposing a firm, regionwide price cap of 15 to 20 cents. This would end the profiteering and still provide ample incentives for generators to supply power and build additional power plants. Moreover, a regionwide price cap, as opposed to a California-specific one, would prevent generators from playing one state against another.

This does not mean, however, that Davis is doing any better for California than Bush. Nothing illustrates Davis’ incompetence better than his botching of the state’s transmission grid purchase.

This option had a dual purpose: provide cash to the near-bankrupt utilities to pay off creditors and get the system working again, and wrestle back jurisdiction over the wholesale electricity market from intransigent federal regulators.

Davis failed miserably in closing that deal, with disastrous consequences: California remains dependent on the feds; Pacific Gas & Electric is in a bankruptcy court, and Southern California Edison continues to hover on the brink of receivership.

Worst of all, the aborted transmission grid deal has left the utilities without adequate funds to pay off the state’s small generators, and many are no longer willing or able to produce. This is perhaps the most important but least understood aspect of the current crisis. About 700 small generators provide roughly a fourth of the state’s power. Davis’ bungling has led to the loss of more than 3,000 megawatts of that supply.

That means that when the lights go out and wholesale prices skyrocket, it is not necessarily because of a physical shortage of electricity but because of an artificially induced financial shortage.

In hindsight, it is clear that Davis’ worst mistake was not seizing the plants of the merchant generators who were ripping off California months ago. These generators bought the plants from the state’s utilities after deregulation for a mere $3.2 billion. Since then, they have used the plants to “game” the market by withholding supply. Partly through such scurrilous methods, the generators have stuck Californians with an electricity bill that may eventually reach $100 billion.

Adding insult to injury, Davis is now using taxpayer money on several high-priced “spin doctors” and the Democratic Party is using millions on a media campaign to redirect the public’s anger toward the Bush administration and the Republicans.

Let’s give the public credit: It understands that it takes two politicians and two political parties to do the blackout tango.