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How not to fix your mistakes: digging yourself in deeper

By aphrael in Op-Ed
Fri Jul 20, 2001 at 08:47:27 AM EST
Tags: News (all tags)

It's turned into a comedy of errors. Activists have reversed their positions, demonizing the state for doing what they demanded just a few months ago; the state, as predicted, is losing a fortune trying to prevent the utilities from losing a fortune; and electric rates are now expected to go up more than they would have if the state had done nothing.

It's almost as if the State of California had found itself written into a Tom Stoppard Play.

How did we get here? I wrote about the origins of this crisis in January; this article merely chronicles the evolution from that point to today's stunning announcement that the Public Utilities Commission is getting out of the regulatory business.

Phase I: Negotiations In Earnest (Feb-Mar 2001)

For most of the late winter, the State had decided to build its solution to the power crisis on two pillars. The first was the idea that it should enter into long-term contracts whereby the state would buy power from third parties and sell it to the consumer, using the utilities as a distribution arm only. The idea was that this would have the positive benefit of cost-averaging: the price the state would pay per kilowatt over a ten-year contract would be far less than what it would pay on the spot market right now (although presumably, at some point, it would be far more than the spot market --- predictability was the key). So the state set about trying to secure these contracts, negotiating left and right with power suppliers behind closed doors, while demonizing them in public to appease the angry California power consumer and activist crowds. Reportedly, this was successful, although it was hard to tell how successful, as details of the contracts were never made public. In the meantime, the state went on buying on the spot market, and nobody could find out how much that was costing, either; while State Controller Kathleen Connell put the information on the state's web page, it was yanked down upon demand from the Governor, who argued that posting that information would seriously harm the state's ability to negotiate long-term contracts (presumably by allowing the people the state was negotiating with to know how much the state was paying now ... an interesting idea, since they already knew, by virtue of the fact that they were selling the state the electricity whose price the governor didn't want published!). Rumors abounded about the state's burn rate, and the original authorization of $400 million had to be replaced with an even larger authorization, along with a $10 billion emergency appropriation for the long-term contracts, to be paid off by a bond measure later in the year.

The second pillar was a plan to bail out the state's utilities. Southern California Edison and the Pacific Gas & Electric Company were on their last legs; their respective debts were each of the same order of magnitude as the state's immense proposed bond issue, nobody would lend them more money, and they were having trouble coming up with sufficient supplies to sell to their customers. So after much talking about different proposals, the governor and his allies in the legislature settled on a scheme to purchase the transmission grid (which is in bad need of upgrade, with a massive bottleneck between northern california and southern california). Negotiations with the power companies began in earnest, while the governor continued lambasting them in public; everything seemed to be going fine, until the governor and PG&E ran into major stumbling blocks, and PG&E gave up, filing for bankruptcy (immediately after granting a large bonus to its executives and a smaller bonus to its workers). The governor screamed; the public shuddered; activists howled. A few days later, the governor reached an agreement to buy the transmission grid from SCE (the utility of which was unclear without the rest of the grid); the legislature looked bored while activists denounced the bailout of the utilities and called upon the state to turn the screws on them.

Phase II: Confusion and Regrouping (Apr-May 2001)

Exhausted from the negotiating effort and bruised politically, the governor seemed to let the issue fade out of the papers in early April. There were some interesting skirmishes in the news --- the bond issue had to be delayed, so more money needed to be appropriated; the state's credit rating was downgraded; some newspapers sued to demand that data on the contracts be released. But mostly things seemed to quiet down; the purchase of long-term contracts was proceeding apace, the judge was setting the schedule for the bankruptcy proceedings, the bailout for SCE had been worked out, and there hadn't been a rolling blackout since January. All was good, right?

Or so it seemed. Local politicians began mounting pressure on the federal government to impose wholesale price caps throughout the western US --- the idea being that ridiculously high wholesale prices were the cause in the retail price spike, and that much of that increase in wholesale costs was due to profiteering (something the federal regulatory agency agreed with when it released the results of its investigations into alleged price fixing by some of the energy producers). After much political juggling, the feds gave in, and agreed to impose the caps; a few days later, unusually high temperatures resulted in rolling blackouts in northern california (sadly, while there was enough power in southern california to cover it, the bottleneck in the transmission grid meant that this power was unable to help). Worse still, the legislature showed no interest in the buyout of SCE; the state was forced to reveal the contents of some of its contracts (by court order!) and it was discovered that the contracts were on the order of 150% the amount the governor had been officially looking for; and the price of electricity began to plummet throughout the region as the seasonal demand for natural gas shifted. (Most electricity in California is made from natural gas; natural gas prices tend to fall in the spring because as temperatures rise, demand for gas heating decreases). Meanwhile, the president and the governor engaged in a war of words about whether it is necessary to drill for more oil (which wouldn't come online until well after the problem is solved) and whether or not conservation was realistically helpful (a few days after the vice-president blasted conservation efforts as being insufficient, an independant study revealed that electricity demand has gone down 12% in california since last year --- although it's unclear how much of that is from conservation; a large price increase approved in March, combined with decreasing demand from silicon valley caused by the unexpected death of many .com start-ups, may account for much of that figure).

Phase III: Theatre of the Absurd (June-July 2001)

Enter Summer: the season where energy shortages are expected. The time when temperatures soar, everyone turns in desparation to their air conditioners, and electric supplies run out. Only .... temperatures have been unusually low, and what was a winter shortage has inexplicably turned into a summer surplus: the state is now selling the electricity it bought via fixed contracts on the spot market at an immense loss. (OK, to be fair, this was expected at some point --- but not this fast). In response to this, the activists that had demanded that the state do something to solve the problem back in January have taken to attacking the state as having no business being in the electricity market, and being inexperienced traders who were fleeced by the more experienced wolves of the power industry. PG&E has sued the state, demanding compensation for contracts seized in January. And the Public Utilities Commission, which has the authority to regulate rates, has discovered that if the state is buying and selling electricity and requests a consumer rate increase, it is required to authorize the increase and is not allowed to inspect the department of water and power's books; eg., if the DWR decides it needs an increase for any reason, the PUC can't demand that it prove that the increase is needed, and must authorize the increase --- meaning that, while the state got into the power business in part to prevent rate increases, it's now more likely to cause rate increases than anything else. And the legislature still isn't interested in the bailout of SCE, which seems to be dead in the water, and SCE has no other way to recoup the money it lost last year. And the bond sale has been postponed until October ... by which time it's expected that the DWR will need *another* appropriation to pay for continued purchases.

On the bright side: the lights are still on. On the dark side: the state budget surplus has evaporated, our bond rating is shot, and we're losing money by the gallon daily.

In this case, I really hope the rest of the country doesn't follow California's lead.


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How not to fix your mistakes: digging yourself in deeper | 15 comments (11 topical, 4 editorial, 0 hidden)
California's Crisis (4.00 / 1) (#5)
by Anatta on Fri Jul 20, 2001 at 10:27:39 AM EST

California's energy crisis is so three months ago.

Now the regulators are going to attempt to screw up California's water supply.

News at 11.
My Music

Water (5.00 / 3) (#7)
by aphrael on Fri Jul 20, 2001 at 12:47:26 PM EST

is probably one of the most regulated industries, worldwide; there isn't a significant movement for privatization of water supplies anywhere, that I know of.

In California, there are four problems:

  • Distribution. Most of the water supply comes from rain or snowfall in the north coast area or in the Sierra; most of the population lives in Southern California, significant portions of which are desert. This requires an immense infrastructure for the transportation of water from north to south, and creates a significant sense of ill-will towards southerners on the part of northerners. The infrastructure hasn't been significantly upgraded since the 1960s, and the last attempt to fund a major upgrade, in the early 1980s, was the site of a nasty political battle whose wounds took years to scar, let alone heal.
  • Urban v. Rural consumption. California is a heavily agricultural state with a major demand by farmers for water rights. Water sold to farmers is sold at *less than* the amount charged to urban residents, which irritates the few urbanites who know about it. Meanwhile, urban demand is growing, and previously agricultural areas are being developed into suburban sprawl, leaving the farmers feeling squeezed and more defensive.
  • Enviromental preservation. California has one of the strongest environmental movements in the nation, and there's a significant push (mostly among urbanites) towards setting aside large quantities of water for environmental protection. The same movement makes it politically difficult if not impossible to authorize new dam construction, which makes solving the infrastructure problem more difficult, and creates a hard limit on supply (no additional storage --- since rainfall is seasonal, coming mostly in the winter with the summers being almost completely dry throughout the state, water *must* be stored in order to have a summer and autumn supply).
  • Water table depletion. Some areas --- notably the Salinas Valley and parts of Southern California --- are overdrawing their wells, causing the ground water table to fall across significant portions of the state (and in some areas, the ground water table is subject to salt water intrusion --- this is particularly true of the Salinas area). Moreover, portions of the state have a large heavy metal concentration in the ground water supply, a problem which requires expensive water treatment and which gets worse as the water table falls.

The *fundamental* problem, though, is one of supply: the total amount of rainfall in southern california is not enough to support the population there, so water has to be imported from the rest of the state; and it will within the next 20-30 years be the case that the total amount of rainfall in the state is not enough to support the population, if the census bureau's population growth figures are accurate. This will eventually imply the large-scale use of desalinization plants, but that isn't economical yet (and faces serious environmental opposition because of the problem of disposing of the byproducts).

[ Parent ]

Right (none / 0) (#8)
by jwb on Fri Jul 20, 2001 at 01:07:30 PM EST

Your post is right on the money, but it barely reveals the sad history of California development and the role of water therein. Basically the root problem is that millions of people live in a city in a barren desert. The reason they live there is because many years ago some real estate speculators bought the desert, then advertised all over the nation to get people to move there. After they drained 90% of the stored water from the local aquifers, they started importing water from all over the state and even Arizona to support their booming population. How does this tie into the energy situation? Well, the two largest power draws in the state are: pumping water 3,000 feet over a mountain and back down into Los Angeles, and running the air conditioners of the people who live in Los Angeles. Why the hell are those people living in that desert? Blowing up the LA aquaduct would solve California's main problem.

Relevant reading for the literate:

[ Parent ]
LA + Pheonix: the twin evils (none / 0) (#9)
by aphrael on Fri Jul 20, 2001 at 01:19:08 PM EST

Basically the root problem is that millions of people live in a city in a barren desert.

And Pheonix is just a recreation of the same thing --- one really stupid move causing imitation. *sigh*

[ Parent ]
DWR, not DWP (3.00 / 1) (#6)
by FlightTest on Fri Jul 20, 2001 at 10:37:26 AM EST

The Department of Water and Power (DWP) is the water and power utility for the city of Los Angeles. They (wisely) declined to enter into deregulation. You meant the Department of Water Resourses (DWR). The DWR is tasked mainly with managing California's water resources. However, I believe that when California decided it was going to start buying electricity for the utilities, it was the DWR that was tasked with managing the electricity purchased by the state.

Other than that, great article. It captures quite well what's going on here.

Why did I flip? I got tired of coming up with last minute desparate solutions to impossible problems created by other fucking people.
Actually this is the interesting period (1.00 / 1) (#10)
by KWillets on Fri Jul 20, 2001 at 03:16:56 PM EST

It's time to pay for all the power deals out of higher utility and tax rates, and I'm wondering where this game will go.

The energy industry went on a huge drilling and power-plant building spree, and now that the first of the expected power glut is here, the free market is the place to be again.

Do consumers still have the right to shop for cheaper electricity and gas? Can they just skip PG&E's rate increases? Of course, moving out of state is the only way to get out of the tax waste, but one can still hope.

What Building Spree? (none / 0) (#13)
by SEWilco on Sat Jul 21, 2001 at 09:13:51 AM EST

What power plant building spree? The first new power plant in California in over 10 years (is it 17 years?) just got approval. Now one will be built. That's one, which does not make a "spree", and certainly not in past tense.

[ Parent ]
Just the beginning (none / 0) (#14)
by KWillets on Fri Jul 27, 2001 at 03:48:25 PM EST

You're right, it may be too early to expect lots of new plants. I had read something that said something like a quarter of our projected capacity increase until 2020 is already being built. Not sure what the source was. The NY times also said the new gas wells are not producing as much as expected. No glut yet, although weather has been keeping demand down. I checked around for alternative electricity providers via PG&E and the CPUC provider list, and found pretty much all of them have stopped offering electricity. They might start up again soon though; they didn't say.

[ Parent ]
Crisis Caused By Regulators? (none / 0) (#11)
by SEWilco on Fri Jul 20, 2001 at 06:22:28 PM EST

Several weeks ago there were reports that the recent electrical shortages in California took place at the request of regulators. One of the state energy controllers specified that only a certain amount of power was to be supplied.

Because this was the maximum desired, electrical generators arranged their supplies appropriately -- including scheduling maintenance and selling to other markets.

When the state's estimate-turned-mandate turned out to be too small, there simply wasn't more available.

Anyone have links to those reports?

How about a little basic research? (3.00 / 1) (#12)
by jmc on Fri Jul 20, 2001 at 07:31:11 PM EST

While most of the article is well written, your libertarian-sounding activist bashing is pretty pathetic. Where did you get your information on the activists' positions? Did you just pull them out of your ass (hey, I said ass... +1FP) or did you get them from some "unbiased" source like CNN? Could you put ONE informative link in your article, besides the link to your earlier (more well written) article?

Check out the activists' web page: power to the people for more info on what (the largest group of) activists have really been saying. If our positions aren't clear, there are plenty of email contacts listed. Saying that we've flip-flopped by calling for the state to "be in the market" and now "get out of the market" is completely misrepresenting our positions. We've always called forDavis to take over power plants by eminent domain; this is the same power George Bush used when he was governor of Texas to acquire land for his new baseball stadium, and few people would call Bush a Socialist. I really don't think any activist in Medea Benjamin's crowd called for what Davis did... secretly negociate contracts with big energy companies, screwing the consumers while (possibly) hitting them up for donations for his next run for office. Sure, these two actions could both be called "being in the market" but there's a world of difference between them.

Miscellaneous thoughts ... (none / 0) (#15)
by aphrael on Wed Aug 01, 2001 at 03:55:20 PM EST

your libertarian-sounding activist bashing is pretty pathetic

This is funny; i'm often attacked for my insufficiently libertarian positions in online political debates.

We've always called forDavis to take over power plants by eminent domain

The LA Times reported that Rosenfeld is now calling for the state to get out of the electric industry entirely.

I really don't think any activist in Medea Benjamin's crowd called for what Davis did... secretly negociate contracts with big energy companies, screwing the consumers while (possibly) hitting them up for donations for his next run for office.

Granted --- but there's a good argument to be made that *any* politician in the same situation would have done that

your earlier (more well written) article?

Point taken. I wrote this article in a fit of irritation after someone posted a story that was basically "wilson says davis is responsible and he must be right", which seriously pissed me off ... I should have taken more time with it.

[ Parent ]

How not to fix your mistakes: digging yourself in deeper | 15 comments (11 topical, 4 editorial, 0 hidden)
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