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Unforgiving Currents

You can hear the waterfall in the Capitol. The raft of state is drifting closer and closer to the edge. The rushing sound grows along with the numbers that define our power crisis, some of which have been kept very quiet.

Here are some of the bigger numbers: In 1999, Californians spent $7 billion on electric power. In 2000, $27 billion. This year, according to several sources, we may well spend $70 billion; state government could be on the line for $20 billion of it.

The Big Gouge is in full swing. Panic city, as George Bush the Elder would say. The Public Utilities Commission’s obvious response this week? Raise rates by as much as 46 percent a month.

It’s time to hold Governor Gray Davis accountable, and to remind him of the actions he could take to resolve the crisis. Remember that he always insisted no rate increases would be needed beyond the 19 percent already factored in — a “temporary” 10-percent increase in January and the end of the 9-percent rate cut that was part of the deregulation deal. This was an article of faith, and central to his political calculations. The governor and his team figured that so long as he could keep rate increases at that level he could head off a ratepayer backlash. But to do that he would have to stop the Big Gouge.

“If I have to use the power of eminent domain to prevent generators from driving consumers into the dark and utilities into bankruptcy, then that’s what I will do,” Davis declared portentously in his January 8 State of the State address. Since then, nothing.

The rationale is there for Davis to act. He has broad police powers under the current state of emergency. He could commandeer power plants, launch intimidating investigations, impose a windfall-profits tax. “The gun is aimed,” says one top state official, “but the governor won’t pull the trigger.”

Consumer advocates, along with Senate President Pro Tem John Burton (D–San Francisco), want tough action. It’s clear that the Southern cartel of power generators — which have made record profits selling, to California, power generated in plants sold to them by California utilities — sees Davis as a paper tiger. “We aren’t concerned” about him using his emergency powers to end the Big Gouge, says a trade-association leader.

The Big Gouge is driven by two major factors. The Southern cartel of out-of-state electricity marketers — many of whose plants are actually in-state, purchased from our myopic utilities — is reaping huge profits from California’s deregulated power market. And the price of natural gas, the state’s fuel of choice, which has gone up around the country, magically multiplies even more when it hits the California border.

Both these factors take us to Texas, home of one George W. Bush, friend of the energy “bidness.” Things are so flush there that one of the key cartel members, Reliant Energy of Houston, which boasts former U.S. secretary of state James Baker, mastermind of the Florida-recount shutdown, on its board of directors, flew in the face of the bear market last week by increasing the share price for its initial public offering by nearly 40 percent. Unless Davis does something, Texans will continue laughing at California, all the way to the bank.

As rate increases go, this one could be worse. Public Utilities Commission chief Loretta Lynch, who takes a tougher line with the utilities than some others in the Davis circle, wanted a tiered rate hike protecting low-income people, penalizing higher levels of use and hitting big business.

Davis, oddly, has tried to distance himself by saying he had “not given any advice” on a rate hike to his PUC majority. Welcome to Credibility Gap. In fact, top Davis aides briefed legislative leaders last week on the need for a bigger rate hike than PUC chief Lynch conceived, and they have been working with her as well, though some in the Davis circle fear the burden big rate hikes will place on large industrial users — that is, on political contributors.

The governor could be much tougher with both the utilities and the power companies. As part of the deregulation boondoggle, the private utilities got a bailout of more than $20 billion for so-called “stranded costs” in uneconomic investments. Billions in profits from the first years of deregulation have been transferred from utility-operating companies to their holding companies. Negotiations with the utilities have been headed by an old utility hand, former Edison president Michael Peevey, who himself helped hatch the failed deregulation scheme. Some in the Davis circle criticize the conduct of those negotiations, which stalled for weeks until the rate-hike talk grew swiftly, from a whisper to a crescendo.

And Davis could demand more from the power companies, which have completely outmaneuvered California’s utility executives, driving them to the brink of bankruptcy. Not only has he been complaining about them for months, the Independent System Operator, which operates the state’s power grid and is now dominated by Davis appointees, released a report last week saying that the cartel has overcharged California by more than $6 billion. And the San Francisco Chronicle recently demolished power-company claims that blamed the crisis on piggish power consumption; the newspaper found that demand went up only 4.75 percent last year.

Meanwhile, the crisis deepens, rate hikes or no. State government has had to take on responsibility for providing about a third of the state’s electric power, buying it on the exorbitant spot market. (The other two-thirds is accounted for by retained generation from private utilities, municipal power and renewable power generators.) And the state government portion is creeping upward, with the accident and sustained outage at the San Onofre nuclear plant, a brewing crisis in hydroelectric power, and the loss of stable utility contracts with renewable power generators, which tend to be much smaller firms and which have received little if any money since November. (PG&E is making partial payment; Edison has simply stiffed them.) California Power Exchange board member Rich Ferguson says that the costs to the state for San Onofre replacement power will be substantially higher than the Weekly has reported, approaching $1 billion for the five months the reactor is projected to be out of service.

Energy economist William Marcus highlights how vulnerable Southern California Edison leaders have left the utility’s power portfolio. After selling plants in the wake of deregulation, only 34 percent of SCE’s electric power comes from its own plants; 28 percent comes from the renewable generators and other sources, whom Edison has stiffed. The other 38 percent comes from the power companies. Of SCE’s retained generation, about 50 percent is nuclear; most of the rest is coal. Thus the failure of one of San Onofre’s two reactors has knocked out a quarter of SCE’s generating capacity, leaving it, and us, very exposed on the spot market.

As we finally begin to pierce the veil of secrecy, we see that the much ballyhooed long-term power contracts have proved to be anything but a panacea. They are coming in much higher, and are far less nailed-down, than has been advertised by the Davis administration. Which shouldn’t be surprising, given that the power companies view Davis as weak and have a great friend in the White House. No fear equals no leverage. Worse still, the contracts will cover only a third of the shortfall the state has taken on through the coming summer peak-load period. The rest will have to be found on the exorbitant spot market.

The state’s short-term spot-market power buys have gotten completely out of hand. More than $4 billion has already been spent from the state’s general fund. In January, Davis set aside $1 billion to be spent on an emergency basis. The state’s surplus could disappear in a few months, leaving core programs at risk. Moves are under way in the Legislature to take away the governor’s checkbook.

The problems of long-term contracting and the hemorrhaging of the general fund into the spot market are already damaging the state’s efforts to finance power purchases. PG&E threatened to go to court to block an order from PUC member Richard Bilas — a Republican appointee — that directed the utilities to at last begin passing on to the state, as partial reimbursement for power purchases, some of the money they continue to collect from ratepayers. “They have some gall to go to the PUC and say they’re going to go to court to keep our money — to keep our money to pay off their creditors,” said John Burton.

As if these problems weren’t enough, the mostly small renewable-power generators who supply some 20 percent of the state’s electric power through contracts with utilities are in trouble. Most don’t have the deep pockets to sustain them through months of non-payment, a nearly unbroken pattern since November. They are owed $1.5 billion by the utilities, mostly Edison, and have threatened to drag the utilities into involuntary bankruptcy if the Legislature fails to help them out. Many have shut down because of nonpayment by Edison and PG&E.

The Davis plan to resolve this part of the crisis fell apart last Friday in the Assembly while the governor was at a Palm Springs golf-club fundraiser, sponsored by the hospitals trade association, for his political committee.

Aren’t waterfalls exhilarating?


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