When the State Buys Power

Reprinted with permission of the author

Guest Letters

By Tom McClintock

In two devastating acts the state government has jumped into the business of buying and selling electricity. As one power executive said, “I sure hope you guys know what you’re doing. It takes just a small misjudgment to lose an awful lot of money.”

Of course, the state doesn’t know what it’s doing. One capitol wag compared Gray Davis buying power to a day trader going up against Goldman-Sachs. So far, that analogy hasn’t been fair…to day traders. Three weeks ago, Gov. Davis signed SB 7x. It appropriated $400 million of taxes to purchase power on the spot market. It took Davis 10 days to spend it. He has now blown through nearly a billion dollars in this manner, averaging $120 for every family in California.

You can tack that cost onto your January electricity bill. Davis has been buying power for as much as 70-cents per kilowatt-hour, and selling it for seven cents. This gives ratepayers the illusion of cheap power, but the 1 of 4 reality is inescapable: 7-cents shows up on your electricity bill, but the remaining 63-cents is hidden on your tax bill. Using tax money to subsidize rates creates wildly perverse results. The taxes paid by a family that has done everything it can to conserve electricity end up subsidizing a spendthrift household’s bill. Since individuals pay most taxes and businesses use most electricity, families end up paying businesses’ bills. And consumers in municipal utility districts end up paying for their own power on their electricity bill, and for somebody else’s power on their tax bill.

Davis and the legislature have found this arrangement so appealing that they have now approved AB 1x. It gives the Governor a blank check to enter into long-term contracts with energy producers, with no idea how much power will be purchased, or at what rates, or how long consumers will be bound to these contracts.

The reasoning goes like this: long-term contracts are a lot cheaper than the spot market. Last summer, the utilities were offered long-term contracts for as low as 5-cents per kilowatt-hour. But when the utilities attempted to grab them, the Governor’s appointed President of the Public Utilities Commission made it impossible for them to do so. Now that utilities have exhausted their credit and long-term prices have skyrocketed, the Governor wants the state to jump in.

This is a monumentally bad idea for several reasons.

First, the root of the problem is a chronic shortage of electricity. For twenty-five years, the state has actively discouraged construction of new power plants, and now it is out of power. Until this fundamental condition is corrected, long-term contracts will be based on continued supply shortages, and Californians will be locked into paying premium prices for electricity for many years – perhaps decades – to come.

Second, there is no assurance that the state will be able to sell its power. For example, five years from now, California could end up owning 13-cent power in a 7-cent market – with no buyers. A slight misjudgment now could force the state to dump vast amounts of power at huge losses in the future, all paid by the taxpayers. This also sets up a strong disincentive for the state to approve new power plants, knowing that bringing down the cost of power opens the state to huge financial losses.

Third, there is no assurance that taxpayer-purchased power won’t be marked up. Particularly if retail rates rise, power purchased by taxpayers at one price may end up being sold back to them at a vastly increased price, translating into huge windfalls for the private utilities.

According to UC Berkeley Economics professor Richard Gilbert, “We’re panic buying at very high prices. The state doesn’t have a good record as a purchaser of power.”

The Wall Street bond rating agencies reacted to these measures by placing California on a “negative credit watch,” the precursor to downgrading the state’s credit. They know that in a field where just a small misjudgment can cost hundreds of millions of dollars, government-sized miscalculations are likely to cost billions.

Senator Tom McClintock (R-Thousand Oaks) represents the 19th State Senate District in the California Legislature. His website address is www.sen.ca.gov/mcclintock.