September 5, 2001
Business World
Crisis? What Crisis?
By HOLMAN W. JENKINS, JR.

The big news this summer is that Californians haven't been reduced to stone-age lifestyles, running naked in the streets and eating each other.

The state barely had enough electricity to get through this past winter, when demand was not yet pumped up with air-conditioning. Yet here they are surviving the summer with nary a blackout. Gov. Gray Davis must be some kind of a wizard, pulling 15,000 megawatts from his pointy hat. He gave every indication of being a hapless cluck, but obviously we underestimated him.

 
Naah. California's summer of surplus demonstrates just how flukey last winter's rolling blackouts were. Power there was aplenty (or at least enough to get by). What there wasn't was anybody to pay for it, thanks to the political system's paralysis as the state's private utilities ran out of cash and used up their credit trying to keep the lights on.

We won't rehearse the central pinion of this catastrophe, a "deregulation" plan that created scarcity pricing in the absence of true scarcity. A tweak here and there as late as last fall could have saved the state's taxpayers and ratepayers literally billions of dollars at no real cost to anybody. Instead, the utilities were allowed simply to run out of money, accumulating $14 billion in unpayable IOUs to generators.

Now, most of us tend to think of power plants as giant coal or nuclear operations that run 24 hours a day, supplying "baseload" power. But the majority of plants are part-timers, firing up to meet intermediate and peak demand. Revving up their turbines means incurring fuel, labor and maintenance costs, which means operators like to get paid. The crisis months saw three distinct waves of blackouts, each related to plants dropping off line simply because they feared not getting paid.

In January, it was British Columbia Hydro, the big, government-owned operator of Canadian dams, which had kept California afloat on credit for months.

In March it was dozens of small California generators, known as "qualifying facilities," which no longer could meet their own fuel and labor bills because they weren't getting paid by their utility customers.

In July, it was the federal government imposing impenetrably complex price controls across the West, making it impossible for generators to know what price they were allowed to charge. Some shut down rather than take a chance, and since the federal intervention meant the entire region was on the griddle for California's mismanagement, the blackouts just happened to land in Nevada.

There was no shortage, in other words, no "energy crisis." There was only the unaddressed credit problems of the utilities.

We opined in January that Californians would be surprised at how quickly power prices return to normal. Yup. The state threw open the treasury to pay for the power the utilities could no longer afford and suddenly sellers were everywhere and prices fell. In the teeth of peak air-conditioning season, electricity prices are now back to normal.

In retrospect, what's amazing is that so many plants not only kept operating month after month despite being stiffed by the state, but produced 62% more power than they had the year before to keep California lit. Yet they've gotten nothing but abuse from the governor, who is still turning over every legal stone to try to avoid paying the IOUs.

There is no question that Western supplies were tighter than usual thanks to low water levels in Northwest river systems. But the evidence shows that Western markets were flexible enough to accommodate the glitches. All they needed was a creditworthy customer to deal with.

Unfortunately, Californians won't be benefiting from the return of normal pricing. In the throes of an "energy crisis," Gov. Davis signed $43 billion in long-term power contracts at ridiculously high prices.

Hardly was the ink dry on these deals before he was forced to begin selling this unneeded power back into the market at losses of 80 cents on the dollar. It gets worse. Last week came the most humiliating revelation of all. Officials have ordered one of the state's most efficient suppliers, a coal-fired plant that delivers power at a cost of two cents per kilowatt-hour, to dump its power into the ground so consumers can use Mr. Davis's high-cost power instead.

The truth being too gruesome to acknowledge, politicians have devoted themselves to peddling false lessons from all this. The state's new energy czar, David Freeman, insists the mess points up the advantages of socialism to protect the public from shortages. Less insanely, others blame California's rampant not-in-my-backyardism, but even this wasn't really the cause of the meltdown.

It's true California didn't build a major power plant during the 1990s, thanks to lingering surpluses and a raucous debate over the future of deregulation. But a regional wholesale market was already in full swing, allowing the West's existing complement of plants to be used more efficiently. And California actually did manage to add about 6,000 megawatts of output in the 1990s from small plants, thanks to joint federal-state rules that guaranteed a market for every erg they could churn out.

Never mind. The one thing politicians of every stripe can't let voters understand is that there was never any "energy crisis," only a grotesque act of fiscal mismanagement.

Some $25 billion in annual power consumption was transformed into a bill for $50 billion for no good economic reason that anybody could possibly defend. By refusing to look this fact in the eye, Californians have set themselves up to keep paying inflated prices for decades to come.


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