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CALIFORNIA GREENING
The Real Cause of the New Energy Crisis
by James R. Elwood
The following article appeared in the January-March 2001 issue of the Freedom Network News, the official journal of the International Society for Individual Liberty.
Thanks to the modern marvel of instantaneous global communications, almost everyone on the planet knows about the California electricity crisis. And almost everyone "knows" that the fiasco was caused by the recent deregulation of the California electricity industry. Mainstream press and TV have poured forth a nonstop deluge of stories and images of people suffering from power blackouts and skyrocketing power bills. Utility operators have been portrayed as stupid scam-meisters whose greedy plans to gouge the public backfired – and who are now seen on TV plaintively bleating for consumers to conserve power and
help bail them out of their mess. Concerned government leaders are seen stepping in to solve the crisis with money and promises
of new regulations.
It's time to remember Mark Twain's famous adage: "The problem ain't what men don't know, it's what they know that just ain't so". I was thinking of calling this article "Moscow on the Sacramento." The California utility "deregulation" was the same sort of "deregulation" that happened (or more correctly didn't happen) in Russia following the Soviet collapse – with similarly dismal results. The reality of the California energy crisis is that it is almost totally a creation of socialist government policy. Indeed, the collectivist mindset and actions of California's politicians and bureaucrats and the
resulting economic chaos could hardly be outdone by the villains in Ayn Rand's epic novel Atlas Shrugged.
But bad as the politicians are, they are not the long-term force behind the destruction of affordable energy. The real force has been thirty years of successful campaigning by the radical left environmentalist movement. The damage they are causing to the energy industry and to the economy is growing on a global scale.
CREATING A FRANKENSTEIN
One thing the media are getting right is that the immediate cause of California's electricity woes is the 1996 state utility deregulation legislation. The original idea, which had been advocated by free-market thinktanks for years, was to break up the government-regulated utility monopolies and create a free market in the generation, transmission and purchase of electricity and gas. Competition and innovation would lead to more supplies and lower consumer costs, just as had happened after the earlier breakup of the old AT&T telephone monopoly.
But the mainstream pro-government media is not telling the truth about why "deregulation" is such a mess. They blame business. The truth is that by the time the legislature had finished with the bill, it was a witch's brew of political compromises on behalf of competing special-interest groups. Here are some of the features of the final legislation that have caused so much trouble (According to Adrian Moore of the Reason Public Policy Institute):
- The private utilities were forced to sell their generating plants to independent operators and then buy back the power. Government-owned utilities were allowed to keep their plants.
- The bill mandated an immediate rate cut of 10% in behalf of "consumer groups". But at the same time rate increases still had to be approved by the state's Public Utilities Commision. The PUC blocked subsequent rate-increase requests by the utilities.
- As a sop to the utilities, they were allowed to charge their customers a "competitive transition charge," which almost offset the 10 percent rate cut and allowed them to recoup their "stranded costs". An excellent and humorous "California Scheming" article on the fiasco by Michael Lynch of Reason Online Magazine referred to this as a euphemism for "stupid investments in inefficient plants" made during the days of the incestuous government-enforced utilities monopolies.
- The state mandated that any new competitors seeking to directly supply California consumers had to charge the same "competitive transition fee" and hand the money over as a tax to the state. This made it uneconomical for many outside companies to enter the California market, thus preserving cartel status for existing utilities.
- But then the bill did something that took away the cartel profits and much more. The bill mandated that all power had to be bought and sold through a single "Power Exchange" monopoly located in a building in Pasadena. It gets even better. The bill forbade utilities from independently arranging long-term contracts with individual power-generating companies. And then the bill mandated that all utilities seeking power through the exchange had to pay the highest published spot price of the day! Some free market!
- In spite of the government-sponsored invitation to rape, the wholesale power prices on the Power Exchange remained reasonable for the first few years. But in 2000, shortages developed and spot prices shot up as much as 500 times (that's right – times – not percent) over previous levels.
- Meanwhile, the government-owned utilities in places like Los Angeles kept their own power generators. They are exempt from taxes and continue to have access to cheap credit through the issuance of tax-exempt municipal government bonds.
Moreover they were permitted to buy cheap power from the federally-owned and subsidized Bonneville Power Authority in the Pacific Northwest – which, due to federal regulations, has been allowed to sell power only to government-owned utilities. So the TV news in Los Angeles has been full of interviews and stories on how these government utilities had "wisely" avoided the "de-regulation trap" and protected Los Angelinos from "rapacious" private suppliers. Needless to say, you will never hear about the substantial hidden costs to taxpayers of such arrangements.
On top of this, the LA and other government utilities have been buying the cheap subsidized power from Bonneville and reselling it to the private utilities for huge profits – over $200 million last year for the Los Angeles Department of Public Works alone!
So the windfall profits from the rigged market has allowed the government utilities to pay off piles of debt. Meanwhile, the private utilities are forced by government to pay through the nose for power – while still being subject to government-mandated price controls!
The end result, of course, is that the private utilities were bankrupted. The combined debt of California's two main private utilities: Pacific Gas & Electric and Southern California Edison is a staggering $10 BILLION. That's $300 for every man, woman and child in the state, or perhaps more pertinent, about $1000 for every actual bill payer.
Losses are mounting by hundreds of thousands of dollars each day due to forced purchases through the Power Exchange. The utility stocks have of course been hammered down by over two-thirds. Their debt has been downgraded to junk-bond status by the rating services, meaning that the utilities now have to pay more than double the interest rates of government and top-rated corporations. It's so bad that they are now unable to pay promptly for power purchases.
The situation has become utterly surrealistic. When in mid-January out-of-state suppliers threatened to cut off power for non-payment, the federal government stepped in and ordered them to keep supplying power. Later a State judge issued the same order to in-state power suppliers – again, regardless of non-payment. When the utilities started Third World-style rolling blackouts due to the acute shortages, California governor Gray Davis ordered them to keep the power on regardless of cost. That order lasted all of one day before the blackouts had to be resumed.
Now the governor – by executive order – is lending $450 million of the state budget surplus to the utilities – which will only be enough to buy power for two weeks! Not surprisingly, the credit-rating agencies have started downgrading the ratings on California state bonds. They are afraid the state will blow its entire estimated surplus of $10 billion on emergency expenditures to resolve the power crisis it created.
Another example of madness. In the midst of all this, after our December PG&E bill came with a warning of coming rate increase of 50% or more, the January bill included a piece (mandated by the government) inviting low-income and disabled customers to apply for discounted rates!
Atlas is truly shrugging! The California economy will be socked by enormous price increases for energy. It's also possible there will be a big increase in qualified applicants for those low-income rate subsidies!
Frighteningly, TV news is now interviewing numerous executives in Silicon Valley – the engine of California's economy – who are starting to pull their companies out of the state because of the soaring cost and unreliability of electricity supplies – not to mention other government-caused infrastructure SNAFUs and the prospect of big tax increases to boot.
It is stunning to be here in California and observe what is happening to the richest state in the richest country in the world. To see the speed of the unraveling of an economy that has been powered by two shining examples of the free market – the computer and entertainment industries – all thanks to Soviet-style (or should I say Nazi-style) energy and economic policy on the part of the state government.
All this damage caused by a badly bungled "deregulation" bill which was passed by a unanimous vote of both Democrats and Republicans in the California legislature!
THE SEEDS OF CRISIS
Despite all of the havoc wrought by the botched "deregulation" bill, California would be facing a serious power shortage anyway. This is thanks to longer-term stupidity in government policy, much of it instigated by lunatic-fringe environmentalists.
In a January 14th interview in the Los Angeles Times, libertarian-leaning Republican state senator Tom McClintock pointed out that California's former pro-growth public policy was changed in 1974 by new governor Jerry Brown to that of adjusting to "the era of limits". A wave of environmental regulations crippled power plant construction. Also, a previous state program of building dams for hydroelectric power and water reservoirs (speaking of another looming crisis) was stopped cold.
Meanwhile, the state has kept growing. Attracted by the recent boom economy and good weather, 400,000 people have been moving into the state each year. The tech industry boom has also jacked up energy consumption. According to the Public Utility Commision, electricity demand increased by 12% between 1996 and 1999, while the supply increased by only 2%. The crunch came in 2000.
Belatedly, Governor Davis has ordered "fast track" approval for six new power plants that were already on the boards. But they have already been slated to run on natural gas – which now leads us into the bigger energy picture ...
TOTAL INSANITY EVERYWHERE
Environmentalist weirdness and government bungling of energy policy extends far beyond the borders of the Golden State.
- There is a severe national shortage of natural gas, which has led to skyrocketing prices. One California friend just told us his gas bill was up five times over last year for similar usage.
- Blame environmentalists and government – again! Due to concerns about pollution and "greenhouse gases", federal government policy in recent years has been encouraging the replacement of coal-fired generators with natural gas ones. Fine, except that while this policy greatly increased demand, other federal environmental policies and punitive taxes played a large role in virtually stopping exploration and development of oil and gas in the United States. Also, pipeline construction has lagged behind demand for gas.
- Federal and state environmental policies have led to a total ban on the development of California's rich offshore oil reserves. This first happened after a 1969 blowout off Santa Barbara that marred the local coast with oil, but the continuation of the ban – recently extended by an executive order of President Clinton to 2010 – ignores substantial improvements in oil-drilling technology that have virtually eliminated the risk of such blowouts.
- Environmentalists have campaigned furiously – and so far successfully – to stop further oil exploration on Alaska's North Slope. Preliminary test results indicate a rich oil field located just east of the existing production field at Prudhoe Bay. The new site could be easily linked to the Alaska Pipeline. Twenty years of operation of the oil field and pipeline have caused little or no environmental damage, but the greens keep scaremongering.
- The result of all this government idiocy of suppressing domestic production is that the United States has ended up importing 60% of its oil – twice the amount imported at the time of the 1973 Arab oil embargo. This is also a major factor contributing to America's astounding $400 billion and growing annual current-account deficit.
- Environmentalists, regulators and local "not in my backyard!" activists have also stopped new oil refinery construction on the U.S. East Coast and Great Lakes region for the last 30 years. Results? A critical shortage and skyrocketing prices for home heating oil, on which most people in New England and the mid-Atlantic region depend. Refineries are running at 97-99% of capacity and thus have little reserve capacity to handle breakdowns or even routine maintenance shutdowns.
Ironically, if refined products have to be imported by sea, the risk to the environment is much greater. Crude oil spills are horrible for fish and birds, but it's still an organic substance. Bacteria love the stuff.
In contrast, refined petroleum products are frequently explosive and highly poisonous, so the risks to ship and crew and the potential environmental damage of any spills is much greater. Don't you just love all these unintended consequences!?
- Nuclear power in Western countries has an excellent safety record and is economical. In the U.S., however, there have been no new nuclear plants built since the trivial radiation leak at Three Mile Island in Pennsylvania in 1979 – an event which got turned into a media feeding frenzy. (Continuous monitoring has shown zero illness among area residents and no environental damage resulting from the accident).
- Environmental restrictions by government on power plant construction of all types, coupled with growing demand, have stretched the entire U.S. electricity grid to the limit. Power is having to be imported from Canada and Mexico during the peak summer usage period – but this is not an unlimited source. And it is costly. Long-distance electricity is very wasteful, as transmission losses can burn up to half the power! California could soon be coming to your neighborhood.
- So with national electricity shortages developing and a supply squeeze on their beloved natural gas, what is the latest idea of radical environmentalists? Tear down the hydroelectic dams!
- There is an active campaign by green wackos to tear down dams such as the giant Glen Canyon Dam on the Colorado River in order to restore the natural scenery. What would the result be? Picture Las Vegas as the world's biggest ghost town!
Other targets are hydroelectric dams on the Snake and Columbia Rivers in the Pacific Northwest, among others. Of course, the replacement power would have to come from gas or coal-fired plants, which would pour forth "greenhouse gases" and aggravate the environmentalists bogeyman of "global warming"!
- Radical environmentalists tend to be wealthy suburban people who are enjoying all the comforts provided by modern technology. Do they think the electricity will come out of thin air after they have shut down most of the power industry? One description of environmentalists is that they are "watermelons – green on the outside, red on the inside" and Ayn Rand said, "Scratch a socialist and you'll find a medievalist every time". If they really want to live in mud huts lit by candlelight and plow the fields with oxen, there's plenty of rural space for them to go and try it! Just leave the rest of us alone!
- Environmental insanity threatens energy elsewhere too. In Sweden, the Greens are trying to get the country's 12 nuclear power plants shut down. The idea dates to 1980, when the Greens, then at the peak of their influence in much of Europe, influenced Swedes to pass an advisory referendum that called for a phase-out of the nukes over 25 years. Greens, who are a minority partner in the current government, got the government to pledge to implement the shutdown.
ISIL Rep Henrik Bejke reports that common sense seems to be prevailing, given that a nuclear shutdown would mean no lights or heat for those long cold winter nights. One reactor did get shut down by government edict – at the only private plant! A messy lawsuit ensued, and a settlement (probably a tax-funded payment) was made to the owners of the plant.
My suggestion is if they tear down Sweden's nukes, that they be replaced by new boilers that burn wood chips from Sweden's vast forests. But somehow I don't think the Greens have that one in mind!
- In the former Soviet-bloc states of Central Europe, new gas-fired power plants have been replacing the old highly-polluting Soviet-era coal plants and dangerous Soviet reactors. This is greatly improving air quality in these countries (I can attest from personal visits that they needed it badly!).
But shortages and rising energy prices are crimping the economies of these still-poor countries. There is one solution – import more Russian gas and oil. However, the Strategic Investment newsletter reports that, in true mafia fashion, Russian president Vladimir Putin has been dangling the prospect of increased Russian energy exports to Europe – but only if the West hands over billions more dollars of "investments" in Russia.
POLITICAL OPPORTUNITY?
A crisis combines both danger and opportunity. The California mess is very dangerous because the major media have bombarded the public with pro-government/anti-business propaganda about the "failed deregulation." There are many calls for an outright government takeover of the utility industry.
That is unlikely to happen, but a massive government-sponsored bailout of the private utilities is a certainty, probably coupled with "re-regulation". There will finally be more power plants built, and the Federal Energy Regulatory Agency recently made a surprisingly sensible order (that word again) that 95% of electricity purchases be done through long-term contracts – or what the utilities would have done on their own in a free market! The state will muddle through the next few years until supplies are increased, but the costs will be horrific.
And if the image persists that business is bad and government is good, the implications for politics across America are scary. If most people don't hear and understand the truth about why government-controlled collectivist systems are failing (and that it is not the fault of the "free market") then there will be a storm-surge of socialism happily provided by the Democratic Party.
However, all is not lost. Unlike the old days, the Internet and talk radio are getting the word out. There is more distrust of government than ever before. The severity and scope of the crisis is so mind-blowing that some people will figure out on their own that somehow the government was involved in causing the mess.
The network of free-market advocates who have been stating the truth in syndicated newspaper columns (among them Thomas Sowell and the Reason Foundation and Cato Institute analysts) is far more extensive than during the energy crisis of the 1970's. This is a major chance to score some points for liberty.
PRIVATE SOLUTIONS
A favorable outcome of the energy crisis will be to accelerate the long-term decentralization of energy-generating systems. Sales of alternative private generating equipment such as solar, windmills, and propane had surged in anticipation of possible Y2K trouble, and they are now doing so again. Some Silicon Valley companies have been buying the new fuel-cell technology to keep their plants running. Fuel cells are close to becoming an economical power source for cars and homes, a move which will have a revolutionary impact on the energy industry.
Taking personal initiative and declaring independence from the costly, failing electricity grid is a way of thinking that could become quite contagious!
James R. Elwood is executive vice-president of ISIL.
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