Despite the fact that
California was spared the many days of rolling blackouts
that experts predicted would hit the state during
the summer of 2001, the region's energy supply has
failed to stabilize. As the new year begins, the energy
crisis in California has simply taken on a new form:
a vast oversupply, the cost of which is being disproportionately
borne by working people.
According to a report issued in November by the state's
Department of Water Resources (DWR), California will
have a gross surplus of energy for the next nine years.
The reason for this lies with the costly contracts
negotiated by Governor Gray Davis with energy wholesalers
in the spring of 2001. These deals commit the state
to purchasing power well in excess of the actual needs
of the population. The DWR estimates that the wasted
supplies will cost California residents $3.9 billion.
California previously spent $11.7 billion in the space
of nine months to purchase energy to halt shortages
that had been plaguing the area for almost a year.
The present surplus further reveals the irrationality
of a system of energy production and distribution,
which is based on the profit interests of huge conglomerates
and energy-speculators, such as the now bankrupt Enron
Corporation.
In the year 2004, when the financial impact of the
supply imbalance is expected to be its worst, 25 percent
of the electricity purchased by the state under its
contract obligations will have to be resold. In that
year alone, California will lose $772 million by reselling
power that was purchased for $72 a kilowatt-hour at
an expected market rate of about $16 a kilowatt-hour.
The cost of the excess purchases will be put on the
backs of residential consumers who are already paying
rates that have risen by 12 to 47 percent.
The squandering of billions of dollars in public funds
for long-term energy contracts has severely drained
the state treasury, which is also being hit by the
loss of revenue from the economic slowdown. The news
about future energy expenditures was accompanied by
announcements of state budget cuts.
On November 14, Governor Davis announced a plan to
freeze spending in a number of state programs. The
bulk of the proposed cuts will come in education,
which will see its funding slashed by $1.2 billion.
The governor is also asking that nearly $54 million
set aside to assist low-income families pay their
rising energy bills be shifted back to the state's
general fund. In addition, over $200 million in expansion
funds for California's program for uninsured children—Healthy
Families—will be permanently delayed.
The last of these cuts in the state budget has particularly
negative implications because job losses have been
on the rise for several months as the recession deepens
in California. In November alone, 53,400 jobs were
eliminated in the state, the highest amount in any
single month since 1992. Because many employees receive
health benefits as part of their employment, increasing
numbers of people will be turning to state-run programs
such as Healthy Families. Precisely at this point,
however, fewer resources will be made available. One
indication of the mounting economic pressure on working
families is a recent report in the Los Angeles Times,
which notes that California's charities have reported
a 20-40 percent increase in demand over the previous
three months.
Reports indicated that through August, over 50 percent
of households actually saw their power bills decrease.
This reprieve was of a temporary character, however,
and was the direct result of a state program instituted
during the summer months to provide residents with
a discount if they reduced energy consumption. The
summer season, moreover, was cooler than normal. The
longer-term impact on everyday consumers is only beginning
to manifest itself.
A major factor contributing to the excess of energy
scheduled to flood into the state through 2010 is
the long-term protections Davis gave to large industrial
users. Big business, along with certain smaller manufacturers
and grocery stores, were allowed to establish their
own contracts directly with energy suppliers, thereby
permitting them to bypass the higher prices the state
was locked into. Because the 54 contracts with energy
brokers were sealed prior to the government knowing
how many businesses would choose to seek private arrangements
of their own, the supply levels set down in the state
contracts exceed actual needs by about 33 percent.
The negotiations between the state and major energy
suppliers took place behind closed doors, despite
continued appeals by consumer advocates for the public
to be informed of the content of the agreements. Apparently
the California Public Utilities Commission (CPUC)
did not strictly enforce the timeframe allotted to
businesses to broker their own arrangements with power
suppliers. This allowed larger businesses to find
an escape route from their preexisting relationships
with the state's utilities, Pacific & Electric
and Southern California Edison.
In addition to the opt-out option provided to large
industry, many of the arrangements set in place by
Governor Davis also commit the state to purchasing
energy on a 24-hour-a-day/7-day-a-week schedule that
does not accommodate for either daily or seasonal
fluctuations in need.
In principle, the establishment of long-term schedules
for energy production and distribution is a sensible
arrangement, particularly given the ability to track
shifts in demand and population growth, and the inability
to store electricity. However, as the loophole for
businesses demonstrates, the contracts were never
intended to develop a system of energy production
and distribution fundamentally oriented to meeting
the needs of California's population in a rational
manner. Instead they were a stopgap response to the
disastrous consequences of the deregulation of the
state's energy market. There was never any question
in the minds of Democratic or Republican politicians
that the working class would have to pay for the crisis.
The state administration, which had been defending
the contracts for months, finally requested renegotiations
in November. These are still under way, although the
energy suppliers are reportedly resistant to making
modifications.
While the volatility of the previous year's skyrocketing
spot-market has receded for the moment, California's
energy supply still remains susceptible to the profit
drive of large corporations scrambling to maintain
and expand a foothold in the highly lucrative energy
market.
The energy disaster in California produced billions
in profits for energy traders and speculators. One
such company was Enron, which has been charged with
price-gouging during last summer's crisis. The sudden
collapse of the company last month—an institution
widely hailed by Wall Street commentators as a model
of the new business opportunities opened up by deregulation
of energy markets—reveals the anti-social character
of the capitalist system and its free market proponents.
[Source www.wsws.org
4 January, 2002]
Bankruptcy v. Bailout
California's
Energy Debacle Continues
Harvey Rosenfield
California's largest utility company, Southern California
Edison, has thrown down the gauntlet to Governor Gray
Davis: force the ratepayers to bail us out or we'll
declare bankruptcy.
In an energy system that is more like organized crime
than a free market, this is blackmail. What Edison
really wants is a ratepayer bailout from the failures
of the deregulation law, which Edison lobbied through
the California Legislature in 1996. But there are
disturbing indications that Gov. Davis will seize
on the fear of bankruptcy as justification for rescuing
the utilities, among his biggest contributors. If
he does so, the Governor will pay a capital price
for his disloyalty to the public. So it's worth examining
which would be worse for California's ratepayers:
a bailout or bankruptcy?
BAILOUT. If Governor Davis orders a bailout, it will
be the second one in four years. In 1996, the state's
three utilities -- Edison, Pacific Gas & Electric
and PG&E -- wanted deregulation. But were worried
that their bloated bureaucracies would not be able
to compete. So they demanded that ratepayers be forced
to subsidize billions of dollars in uneconomic deals
on the utilities' books. The Legislature agreed, freezing
residential and small business electricity rates for
four years at 50% above the national average. In exchange,
the law stated that once the debts were paid off,
the rate freeze would end and consumers would receive
a "guaranteed" 20% rate reduction. Ratepayers
have paid Edison and PG&E $17 billion so far under
the "competition tax." That was Bailout
I.
Now, however, the utilities' sweet deal has gone sour.
Freed by deregulation from government oversight, the
dozen wholesale energy companies that generate nearly
half of California's electricity supply are now manipulating
the supply of electricity to create shortages. The
market price of electricity has soared 3900%, far
exceeding the frozen price. The power suppliers' profits
have risen by as much as 500%.
Edison, too, is profiting from the crisis as much
as hurting from it: 70% of its power comes from the
company's own plants, for which it receives the market
price. But Edison isn't counting its profits when
pleading its financial woes, and wants the Governor
to order ratepayers, the innocent victims of this
public policy fiasco, to pick up the entire tab --
presently $6 billion and growing. Bailout II would
be illegal under the deregulation law. Worse, it guarantees
that rates will continue to skyrocket, because it
tells the energy producers: charge whatever you want;
we'll just pass it through to the ratepayers.
BANKRUPTCY. Compared to another bailout, bankruptcy
might well be less costly for ratepayers in the long
run. Contrary to the utilities' fear-mongering, a
bankrupt utility would not shut down or be sold off
for scrap. Instead, the company would be placed under
court supervision and ordered to restructure its debts,
operations and executive staff; borrowing money will
be easier for the company than it is today. With legislative
action restoring regulation, the Public Utilities
Commission would control rates.
Bankruptcy also allocates responsibility where it
belongs. Edison pushed for deregulation, and for awhile
profited handsomely from it. The first bailout enriched
the company, which went on an international spending
spree. Its shareholders prospered, while its CEO,
John Bryson, got a 46% pay raise. But in demanding
to be in the "free market," Edison took
the risk that the market wouldn't always operate to
the company's advantage. Now that their judgment has
proven wrong, Edison's executives want to crawl back
into the womb of government protection. The hypocrisy
of their stance is rivaled only by their audacity.
The shareholders should foot the bill, not the ratepayers.
Bankruptcy would send the correct message to Wall
Street -- and to other states that are considering
deregulation. If you insist on deregulation, you must
be prepared for the consequences.
Bankruptcy is highly unlikely; but it might actually
be helpful to the crucial task before us: to restore
reliability and affordability to California's energy
system. The legislature must reinstate the authority
of state agencies to oversee rates and plan for our
future energy needs, encouraging conservation and
other cost-effective technologies. Moreover, California
should move to a non-profit, publicly-owned system.
Private energy companies operating as a cartel have
no incentive to alleviate the shortages they are prospering
from. Today, publicly-owned utilities like LA's often-maligned
DWP are meeting their customers' needs at lower prices,
without having to ask them to shut off their holiday
lights. A bankrupt Edison would be a cheap purchase.
Rather than force ratepayers to spend billions to
bailout Edison's shareholders, California's leaders
should consider purchasing the company and dedicating
it to public use. A buy-out is better for ratepayers
than a bail out.
May 10, 2002.
[Source: The foundation for taxpayer
and consumer rights www.consumerwatchdog.org
]
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