1/10/01 1:55 p.m. As the Lights Go Out in California

A failure of Davis, not deregulation.

By Jeff Sandefer, third generation oilman and professor of entrepreneur at the University of Texas, Graduate School of Business Governor Gray Davis’s response to California’s energy crisis is so foolish that it is unclear whether he is acting out of political desperation, profound economic naivete, or just plain stupidity. Whatever his motive, if the governor continues on his current course, the citizens of California may soon be, quite literally, in the dark.

Davis has indicated that he is willing to seize power plants to “force” them to produce cheap electrical power. Yesterday, he took the first steps: He assumed emergency powers to regulate power markets, and advanced the state attorney general $4 million to prosecute predatory power companies. The governor also declared that the state would take over construction of all new power plants.

This unprecedented threat — a state seizing private assets — comes in response to a growing energy crisis that threatens to either blanket California in blackouts or smother its economy. In recent months, natural-gas prices have soared up to 25 times last year’s averages, forcing wholesale electricity prices up over 900 percent. Two of California’s largest utilities, Southern California Edison and Pacific Gas and Electric, unable to pass along some $12 billion in fuel costs to consumers, are teetering on the edge of bankruptcy.

Gov. Davis and other Democratic politicians would like to blame the crisis on so-called “deregulation,” which the governor has labeled a “colossal and dangerous” failure. In fact, California energy reforms failed because reforms were stopped halfway. Utilities could not sign long-term contracts, which would have signaled natural-gas producers and power generators in advance to add more supply. And once the crisis started, utilities were prohibited from passing cost increases on to consumers, preventing a tempering of demand.

Whatever the cause, the outlook for California consumers is bleak. While Gov. Davis may make good on his threat to seize generating stations, much of California’s energy supply comes from neighboring states. Interventionist policies are likely to further frighten financial markets, worsening the fiscal plight of California utilities, which could cause suppliers to refuse to transport energy across state lines.

At this late stage, allowing prices to climb to market levels would decrease demand, but at the cost of shuttering much of California’s industry, causing a deep recession and a rout of incumbent politicians in the next elections. Gov. Davis’s recent actions may be a sign that he understands the stakes and is simply looking to transfer blame.

As with past trends, California may be a leading indicator of troubles to come for the entire country. Natural-gas storage levels across the United States are 30 percent below normal levels. A few more weeks of cold weather, and the country could run short of fuel for factories, homes, and schools: a crisis that even Joe Stalin couldn’t nationalize away.

http://www.nationalreview.com/comment/comment011001f.shtml

-- Martin Thompson (mthom1927@aol.com), January 11, 2001

Answers

Great piece! Tells it just like it is.

-- JackW (jpayne@webtv.net), January 11, 2001.

I vote for just plain stupidity.

-- Billiver (billiver@aol.com), January 11, 2001.

I thought this only took place in third world countries. Here, take my shovel, dig a deep hole and jump in, I'll cover you up so you don't freeze to death and here, take this long straw you might need some air.

-- NdewTyme (NdewTyme@NdewTyme.com), January 11, 2001.

Very well put. Davis and his ilk are the real culpris. Blame it on "deregulation" as an excuse to socialize the power industry. Remind anyone of Hitler's Reichstag fire?

Last fall amid the debate over Y2K, power generation was not in danger, there was somewhere between 30=40% excess capacity and the nationwide power grid provided almost instantaneus diversion to any localized crises.

Where did all the power go? A clue appeared in a GICC post of Wednesday, Dec 6, 2000 entitled "California surprise inspections at power plants" by Steve Johnson and John Woolfolk of the SJ Mercury News. The big news here was the state power gestapo was investigating the large amout of power lost to unscheduled maintainance. Has anyone seen any reference to what they found? I haven't. It must not have been what they wanted.

Hidden amid the obligatory mass media blather were some interesting numbers re generation. Of 11,000 megawatts short, 4,500 was scheduled, 4,000 was emergency and 2,500 was plants closed because of having reached polution limits. That's 41%, 36% and 23% respectively. That unscheduled number appears a bit high. Might it have anything to do with those pesky embedded chips? Fix on fail was about the only choice available in power plants, transmission and distribution. Oh, and by the way, weren't there some disruptions in the oil industry which had a similar chip problem?

One might also wonder where is all that excess power from other states? Or, are they running on the ragged edge too, as Washington and Oregon apparently are? That still leaves AZ, NV, NM, CO, MT, ID and points East.

-- Warren Ketler (wrkttl@earthlink.net), January 11, 2001.