October 2001

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Energy Crisis 

Ray Haynes
has represented Riverside and northern San Diego counties in the state Senate since 1994. He also served in the state Assembly in 1992-93. Mr. Haynes, who has pressed for a legislative investigation of the role of public power companies in the California energy crisis, wrote this commentary for Cal-Tax Digest’s October issue.

The laws of economics are immutable. They are unchanging. Supply, demand, and free market competition, with the free flow of capital and labor, always work. Not sometimes, not in a theoretical world, not with a “little help” from government. Always, on their own. If these laws don’t work, it is because someone in government has screwed them up. It is that simple.

That is why the first rule of politics ought to be always blame the government when something in the economy goes wrong. Of course, those in charge of the government always try to blame those in private business for the problem. They will call them “evil” and “greedy” profiteers. They will call them shysters, criminals, polluters, charlatans, crooks, thieves, and the like. Indeed, some of them may be. There are always bad people in any endeavor, but usually the market is ruthless with the bad actors. Any good business owner will say that success in business is built on satisfied customers. Crooks usually go broke in a short period of time. Usually (though not always), the market weeds out the bad actors in any business long before they affect the performance of that market.

Market forces, however, do not weed out politicians. Elections do (at least in our country). The goal of every politician is to get through the next election. If something goes wrong during that politician’s term, the politician needs someone to blame to get re-elected. An easy target for any politician is a business owner. The business owner is usually the first person people see. The gas station owner who posts his or her prices on the pump, the utility that bills the consumer for electric power sold, the car dealer, the store; whatever are usually the people who take the consumer’s money. The politician is usually higher up on the food chain, and can, with relative ease, blame the business owner for problems that the politician has caused.

How can someone tell if the politician is engaging in this blame-shifting strategy? Look for hypocrisy. Is the politician asking someone to do something that politician is not willing to do? For instance, did you know that government-run electricity providers, the so-called municipal utility districts, sold their excess electricity into the state’s grid at prices double that of the so-called gougers from Texas? In fact, the Texas guys only sold California about $100 million worth of power since January. The Los Angeles Department of Water and Power (LADWP) sold us $331 million of power. On average, the price LADWP sold its electricity was $100 per megawatt more than the Texas guys were charging. LADWP is in California. Sacramento Municipal Utility District (SMUD) charged the state almost double the cost of the Texas guys, a total of $90 million worth of power. The average LADWP rate for wholesale electricity to the state of California was $292 per megawatt. SMUD charged $338 per megawatt. Enron, described by Governor Gray Davis as the “gouger” in chief, charged the state an average of $181 per megawatt. Davis could order LADWP and SMUD to return that excess money right now. He has not.

Interestingly enough, the excuses that the government power companies give for their high prices are remarkably similar to those used by the private providers. They were just helping us out of this crisis, they said, and they had to replace the power sold with later power, and had to predict the price it would cost. Of course, the power they are receiving now to replace the power sold in March costs $55 per megawatt, not $338. The utilities, however, do not wish to return the difference. They want to keep it.

In a series of moves recently taken by the PUC, and the Department of Water Resources (DWR) that bought the power, the state wants to raise electrical rates in the investor-owned utility territory to cover the costs the state incurred in purchasing this electricity. If this plan is implemented, the ratepayers in the these areas will be paying for the gouging of the government-run power authorities for the next 20 years. These government agencies will have received enormous profits at the cost of the ratepayers in the rest of the state. Two years ago, LADWP nearly went bankrupt from mismanagement. It is now awash with money, at the taxpayers’ and the ratepayers’ expense. To allow this situation to continue would not only be unfair, but it would also place businesses in the IOU territory at a tremendous competitive disadvantage. The impact on California’s economy could be devastating.

The solution is for the Legislature and the governor to order a return of that money, estimated by the California Independent System Operator at more than $600 million. This does not require federal action; it doesn’t even require legislative action. The governor could get the money today with his emergency powers. To date, he hasn’t even started looking into this apparent rip-off of the taxpayers. The bonds are supposed to be sold in the next month. Quick action is necessary.

Editor’s note: Further information on this issue, a report submitted by Senator Haynes to the Senate Select Committee to Investigate Price Manipulation of the Wholesale Energy Market, is available at the Senator’s website at www.sen.ca.gov. Further, it has been reported that this committee will expand its probe of electricity pricing to include municipal utilities.