The great California energy debacle ended ninety years of tradition at Pacific Gas and Electric. PG&E had built and operated power plants to feed a growing population since 1905, but once the state "deregulated" its electricity market, the utility sold off its generating capacity except for those hydropower and nuclear facilities that government officials didn't want to go unregulated. From then on, PG&E officials decided, they would make money not by producing electricity, but by distributing it along their nest of wires. Ten years, one bankruptcy, and $8 billion in debt later (debt you help retire every month), those officials have changed their minds. Last year, they announced their intention to build enough power plants to light more than one million homes, turning their attentions back to the wholesale electricity market they worked so hard to abandon.
They're doing this for one simple reason: The energy crisis may have faded from the headlines, but it's far from over. And unless Sacramento does something soon, it's about to get worse.
The companies that bought PG&E's power plants had a grand old time gouging us and PG&E back in 2000, assembling an informal sellers' cartel, faking plant malfunctions to trigger energy shortfalls, and using an artificial, short-term crisis to sell electricity at three or four times the going rate. Caught between fraudulently skyrocketing wholesale prices and state-regulated retail prices, PG&E lost billions of dollars, the confidence of Wall Street, and -- once they were caught hiding assets from creditors and dumping the liability on us -- whatever goodwill the public had left to offer.
Officials are determined not to repeat the same mistakes, and controlling more of their supply is a good first step. "There's significant stability in the energy market when you have that power under long-term contracts rather than having to procure it on the spot market," says spokesman Jon Tremayne. "Either owning the power plants or having the long-term contracts in place provides that stability and helps keep rates down for our customers."
Unfortunately, PG&E also is getting into the power generation business because nobody else seems able to. The San Jose-based company Calpine, for example, has permits to build major power plants in Hayward and East Altamont, but since it is saddled with roughly $18 billion in debt, officials can't begin to break ground without a hefty outside investment. Suffice it to say that Wall Street financiers have no interest in putting money into California's power market for the time being. State regulators have ordered PG&E to secure power for more than two million additional homes by 2010 and, in the absence of new construction, the utility must either build its own plants or buy power from outside the state at inflated prices.
So the weather is getting warmer, the state's economy is getting hotter, and more people are coming to California, all of which guarantees that the demand for power -- and the price paid for it -- will rise. Yet Wall Street doesn't think it can make any money here. Something is very wrong.
That something is Sacramento. During the peak months of the crisis in 2001, the state signed almost $9 billion in long-term energy contracts to buy time while lawmakers figured out how to fix what they had broken. But time is running out, and neither the governor nor the legislature have been able to agree on what kind of electricity market we should have. Should we go back to the old model of regulated monopolies? Bring back the volatile state commodity market created under what came to be called deregulation? Or find a compromise between the two? "There continues to be an uncertain regulatory environment and a lack of investment in new generation, coupled with the fact that the governor hasn't presented an overarching energy plan," says Nick Velasquez, a spokesman for Assembly Speaker Fabian Nuñez. Until that uncertainty is removed, and bankers know just how they'll see a return on their investment, they won't spend money building new power plants. Every day Schwarzenegger and the legislature dither about is a day closer to rolling blackouts. Do the math; rising demand plus static supply equals sure-fire shortages.
The legislature and the governor disagree about more than just the big picture. Schwarzenegger believes industry ought to be able to negotiate with power companies and cut deals that would free it from having to pay the nation's highest electric rates. But Nuñez was dedicated to making sure that big business didn't stick us with its share of the debts incurred by California and PG&E. After Nuñez trimmed the ability to shop around from his 2004 energy legislation, the governor vetoed the bill, thus guaranteeing another year of paralysis.
This tension is just one of countless variables that have to be resolved before Wall Street will again invest in California's energy market. But there might be a way out of this mess. Back in 2002, the legislature passed an obscure law that could help resolve the energy crisis.
The legislature empowered cities to create electricity buyers' cartels that could finally deliver the lower prices that deregulation's supporters have promised for a decade. If the citizens of, say, Oakland approved an ordinance establishing a cartel, the city could then shop around for power on behalf of its residents and businesses, bypassing PG&E and negotiating directly with power producers. Cities would rent transmission space on PG&E's power lines. The more cities that join together, the better the deal they're likely to cut. In fact, Berkeley, Emeryville, Oakland, Pleasanton, and Richmond all have agreed to explore pooling their resources. "We are doing studies that assess whether or not it's possible to procure electricity on behalf of Oakland that is at lower cost and has more renewable content," says city engineer Scott Wentworth. In other words, we could finally get to do to the power companies what they did to us in 2001.
Like everything else in California's energy market, buyers' cartels leave a lot of problems unresolved. The most serious of these involves PG&E's requirement to find power for its customers through 2010. If the utility contracts to buy wholesale power on behalf of customers who then leave, PG&E would have to eat those costs. But cartels would solve several of the problems that led to the impasse in Sacramento, because every customer -- from factories to renters -- would be treated the same.
So why aren't we doing this today? The state Public Utilities Commission is still figuring out the rules that will govern such cartels. But they're taking their sweet time about it, since the law's been on the books since 2002. Every day that regulators put off implementing the cartels brings us closer to the day when the last turbine gives up its last drop of juice. Let's hope we don't look back on these times during a future blackout and wonder what might have been.
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