Shedding Light
HERE WE GO AGAIN.
In the way it has caught us flatfooted, and in the staggering sums (billions of dollars) in play, the California “energy nightmare” has an unsettling resemblance to the last crisis to come this way, namely the Orange County bankruptcy.
This one is even worse, though. For one thing, this time the whole state is in jeopardy. For another, unlike the bankruptcy, which ultimately had little impact other than to strap the county with some annoying but manageable long-term debt, this energy crunch appears to have the potential to do real harm to the state’s economy.
I’m hesitant to editorialize at this point. The issue is a moving target, changing by the day and by the hour. And I frankly have some more spade work to do in figuring out what this mess is all about. In the coming weeks, the Business Journal intends to hone in on this story, placing the daily news reports into context, describing how companies are faring in the crisis and examining both the problems and the proposed solutions.
But for now I’ll hazard a few tentative observations:
n It will be a shame if the current crunch sets back the cause of energy deregulation, since it’s debatable whether California has even given dereg a chance. The system now in place seems to have done less to offer choices than it has to place energy customers at the mercy of an uncontrollable and volatile “spot” market.
n Gov. Davis’ response to the crisis in his State of the State speech was rambling and ambiguous. It didn’t tackle the most immediate issues, i.e., the solvency of the state’s big utilities and ensuring adequate short-term supplies of power. And the governor was unwilling to acknowledge the seeming inevitability that the current high energy prices eventually must work their way down to consumers.
Still, while many businesspeople and free market advocates were horrified over the speech’s populist rantings and its calls for what sounded like a government takeover of California’s power system, maybe (I emphasize maybe) there was a pro-business method to Davis’ madness. For instance, maybe his suggested state power authority would actually act as a fast-track agency to assist and speed private (and municipal) efforts to add capacity. Perhaps a hint of Davis’ intentions is in his proposals to make available low-interest loans to owners who build and refurbish power plants. His endorsement of letting utilities enter long-term supply contracts and retain ownership of their few remaining power plants would begin to address two of the problems created by the state’s “deregulation” setup.
n Just as it now appears that California erred in structuring deregulation by looking to the past instead of to the future, there’s a chance it will tailor a remedy with a mistaken eye on the present instead of on the future.
Dereg was fashioned in the cheaper energy environment of the early ’90s. Indeed, the 1996 legislation was initially driven by business groups upset over the high costs of electricity in California relative to other states and to the spot energy market. But,oops,look at what’s happened when energy prices go up.
Last week, government and industry officials were working on a utility bailout that would re-regulate the industry, capping consumer rates for now, but at the cost of preventing rates from dropping in tandem with future decreases in energy prices. Yet the expert consensus is that the worst of the supply-and-demand predicament is right now; with new power plants coming on line within months and an economic slowdown looming, prices will soon begin to fall and the problems will go away.
So a heavy-handed plan that stifles the free market may be a short-term expedient that is good for frightened politicians and desperate utilities, but it would be a long-term disservice to the state’s residents and businesses.
Again, though, all of these comments are more just hunches right now than they are convictions. So stay tuned, but dim the lights.
A Bright Idea
WHY NOT USE THE TOBACCO SETTLEMENT MONEY TO OFFSET ENERGY BILLS?
