Commentary
Shocking rates

11/07/2001
The Orange County Register
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(Copyright, The Orange County Register - 2001)

Although overshadowed by the war on terrorism, California's electricity system still faces challenges, Public Utilities Commission President Loretta Lynch told the Register editorial board Monday. She updated us on a couple of matters.

Most heartening was that the state is unlikely to face blackouts in the future. "We are stabilizing the power business," she said. The supply now is adequate for the next few years at least, including the summer peaks.

But structural problems remain. The first is the long-term contracts that Gov. Gray Davis signed last spring, which last up to 10 years and will cost the state $43 billion. The high cost will be passed on to ratepayers.

Ms. Lynch decried "the effect on the economy of these rates" as we drop into recession. She pointed out that some of the newest natural- gas electricity plants are churning out electricity at 2.5 cents per kilowatt-hour, but under the Davis contracts they're being paid 9.2 cents.

She's hoping the contracts between the state and the power generators can be renegotiated at lower rates, especially if pressure is applied by the Federal Energy Regulatory Commission. She said market realities mandate changes, with natural gas and other energy prices dropping sharply in recent months, dropping costs to generators.

But "they don't have much of a chance" of changing the contracts, Robert Michaels, a professor of economics at Cal State Fullerton, told us. "There are no neat clauses [in the contracts] that provide for reopening them if the market conditions change." As to the FERC, "the first indication is that it's not going to be entertaining it. The state's going to have a real hard time getting out of these contracts."

The second matter was the state law prohibiting "direct access" to electricity generators, especially by businesses, so ratepayers can cut costs by making their own deals. This law was needed, proponents said, because of the cost of the long-term contracts; if some ratepayers leave the system, those remaining will have to take up the slack with even higher rates.

"I'm open to working out a solution on that with the Legislature," Ms. Lynch told us. The key is "[solving] the problem of the long- term contracts." Then lower prices all around could allow for more flexibility.

But because the contract problem is far from being solved, it looks like all of us could be locked into a high-cost system for a long time to pay for Gov. Davis' experiment in energy socialism.