Last week, Gov. Gray Davis proclaimed that conservation and new
energy supplies will allow California to make it through this summer
without additional rate increases. On Monday, he announced a "sweetheart
deal" to save one of the state's largest utilities even as the other
slunk behind the protection of a bankruptcy court.
In fact, none of these actions will change this basic reality: An
unscrupulous "seller's cartel" now manipulating California's electricity
market is likely to make this summer unbearable. This cartel consists of
the major companies controlling most of the uncommitted electric
generation and natural gas transmission contracts in the Western United
To fight this cartel, we propose a plan with a stiffer backbone--a
hard-nosed "buyers' cartel" and, if necessary, the forced purchase of
in-state generating plants. Failing such actions, Californians face a
blackout-riddled summer with a potential electricity bill of nearly $50
The governor's plan to beat the sellers' cartel is built on too many
"ifs": If the West escapes a hot summer, if the increasingly unreliable
power plants suffer no outages, if 20% conservation gains materialize, if
there's enough natural gas to fuel new plants, if the cartel doesn't
Failing any one of these "ifs," and with forecasts warning of Stage 3
alerts that could stretch a full six months, the sellers' cartel would
gorge as it never has before. Wholesale prices could double or triple
from already exorbitant rates of 25 and 50 cents per kilowatt-hour to a
dollar or more. This power costs no more than 15 cents to produce.
Unfortunately, Davis' strategy to negotiate long-term power contracts
does little to reduce California's short-run vulnerability. Most
contracts don't even begin until 2002. President Bush and federal
regulators could end this crisis tomorrow by imposing hard price caps and
ordering the cartel to supply power to the market. They have steadfastly
refused. The results are staggering.
The sellers' cartel first took utility shareholders on a $13-billion
ride to insolvency. After bleeding them dry, it was the taxpayers' turn.
Indeed, after state government took over purchasing power in January,
California's healthy budget surplus dropped by more than $5 billion. This
led the Public Utilities Commission to approve the largest rate hike in
However, if the governor's "Hail Mary" strategy fails, we project
additional rate hikes of 100% or more. To avert this disaster, we propose
that California join with the other "victim states" of Oregon and
Washington to form a "buyers' cartel"--in essence, a buyers'-side
monopsony to fight the sellers' price-fixing oligopoly.
In particular, we propose offering a "fair price" to the sellers'
cartel, but not a penny more. This fair price would be cost-based--not
market driven--and calculated daily on natural gas prices and other
factors. It would include a generous profit margin to ensure sufficient
incentives for investment in the Western market and result in an average
price of 15 to 20 cents.
As an ancillary weapon, California must force the sale of all in-state
plants owned by any member of the sellers' cartel refusing to provide
ample power at the fair price. Under a declared state of emergency, the
state has the authority to purchase the plants at reasonable prices, and
they can be run by qualified utility operators.
Forming a buyers' cartel will almost certainly spark retaliatory
blackouts as the sellers test the political will of our legislators and
governor. To prepare, we must end highly disruptive random rolling
blackouts. Instead, divide the states into identifiable blackout zones
and, with sufficient notice, flip switches off as need be. The benefits
to businesses and residents of knowing when the power will be turned off
are considerable. Increased crime risks can be offset by targeted police
The state should also buy literally truckloads of new, efficient air
conditioners. Utility employees, youth groups and other volunteers must
move systematically through the hot valley spots throughout the
California offering to replace old air conditioners--our Achilles' heel
during the summer time peak.
On the energy supply front, the state should continue its effort to
build emergency power plant capacity far from population centers but near
the transmission grid--no-frill plants built quickly. There will be no
better weapon against the cartel than standing reserves.
We do not understate the challenge of staring down a group of
well-financed energy companies. There are no other reasonable options,
and the stakes are too important to succumb to the generators' "rolling
Michael Shames is the executive director of the Utility Consumers' Action Network. Peter Navarro is a business professor at UC Irvine. This article is based on a more comprehensive UCAN report available at www.ucan.org
Copyright © 2001 Los Angeles Times