Fair use for educational/research purposes only

Posted at 7:08 p.m. PST Saturday, Jan. 27, 2001

James Mitchell: How S&L debacle, energy crisis are linked BY JAMES J. MITCHELL Mercury News Staff Writer

Strange as it seems, the fundamental causes of California's energy crisis are the same ones that produced the savings and loan debacle in the 1980s. This time, business executives, government officials and the public had better learn what is sure to be an extremely expensive lesson.

The S&L industry collapsed and California energy companies are in serious trouble because of a general misunderstanding of the breadth and the consequences of deregulation.

In both cases, government and corporate policies exposed long-established -- and previously well-run -- institutions to the possibility of much higher costs without allowing for compensating increases in their prices. In both cases a certain arrogance and desire to help consumers proved fatal.

From the Great Depression until the 1970s, S&Ls were highly regulated businesses that took little risk. The government set a cap on interest rates paid on S&L deposits -- usually 5 percent or less. These rates rarely changed.

S&Ls earned profits by making loans whose interest rates were about two percentage points higher than their cost of funds. The bulk of these loans were 30-year, fixed-rate mortgages that turned over, on average, every 10 to 15 years. For decades this was a relatively simple, slow-changing business.

But in the 1970s inflation took off, forcing companies and state and local governments to pay higher interest rates to attract money. To compete, S&Ls had to keep pace, so the government deregulated interest rates and S&Ls' cost of funds skyrocketed.

S&Ls charged higher rates on new loans. But they couldn't charge higher rates on the billions of dollars in old loans in their portfolios, which were suddenly earning less than the S&Ls were paying for deposits.

The industry tried to compensate by making riskier loans, for which they could charge higher interest rates. Eventually most S&Ls went bankrupt, costing taxpayers hundreds of billions of dollars.

While there was some fraud, the underlying problem was fast-rising costs and relatively fixed revenues. That's the problem California energy utilities face today.

For decades California's utilities generated most of their own power and could, with the Public Utilities Commission's approval, raise their prices to adjust to rising costs of natural gas or other heat sources.

But in the mid-'90s the utilities and government officials decided to "deregulate," a euphemism for a process that in fact was only partial deregulation.

Utilities were encouraged to sell their generating capacity, which exposed them to risk if energy costs rose and fat times if those costs fell. Regulators and the utilities were confident competition would drive costs down, and the regulators wanted to be sure consumers benefited from those drops. As a result, they didn't allow the utilities to lock in long-term energy contracts.

Unfortunately, energy costs have risen sharply. The PUC, sensitive to public pressure, won't allow utilities to raise their rates proportionately, so they're losing money and are close to bankruptcy.

There is no easy out, and we'll all pay the price through a combination of taxes and higher utility bills -- plus potentially serious economic problems that will extend well beyond California's borders.

In the S&L crisis, government officials moved slowly and allowed the problem to fester, which made it much more expensive to fix. And some of their early decisions proved counterproductive and cost taxpayers billions.

Gov. Gray Davis and state officials must take an aggressive, comprehensive approach to minimize the damage. Otherwise, the impact of the energy crisis on California will be enormous.

http://www0.mercurycenter.com/cgi-bin/edtools/printpage/printpage.pl

-- Martin Thompson (mthom1927@aol.com), January 28, 2001