Will This Be The Summer Of California's Economic Meltdown?

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SACRAMENTO BEE EDITORIAL Peter Schrag: Will this be the summer of economic meltdown?

(Published April 25, 2001)

If California energy experts are to be believed, rising residential electricity prices in the coming months will be the least of our problems. The real bad news will come from the blow that the larger energy mess, and blackouts particularly, will deal to the state's already uncertain economy -- to business, to jobs and to the public services that depend on them.

According to California Energy Commissioner Art Rosenfeld, the OPEC-driven runup in U.S. oil prices in 1980, which was widely regarded as one of the causes of the recession of the early 1980s, brought oil prices to about 2 percent of the gross national product. The cost of wholesale power in California -- which he estimates at $60 billion to $70 billion a year -- is now running at 6 percent to 7 percent of gross state product. To that he merely added the comment, "Ugh."

University of California Energy Institute Director Severin Borenstein put it more concretely: "Fill in the name of your favorite state program," he said at a UC conference last week, "and it could get wiped out." Since he's not a macroeconomist, he said, "I'm not allowed to use the word depression, except to describe my own mood."

State budgetary officials say the picture isn't nearly as bad. If California can sell the $10 billion to $14 billion in energy bonds that the Legislature authorized earlier this year, said Finance Director Tim Gage, the sky won't fall. Given Wall Street's skittishness about California's financial situation these days, that could still be a big "if." But California State Treasurer Phil Angelides thinks that it can be done.

Still, the assurances depend on a lot of things coming together. The state is already spending between $1.5 billion and $2 billion a month to purchase electricity for California's credit-unworthy utilities; by next month, generators will be able to extract a great deal more. The difference between what Angelides calls obscene rates and "horrifically obscene rates" during the hot months lies in the state's ability to reduce demand and persuade marketers that it won't pay extortionate rates.

What makes the prospects particularly uncertain is that the drought-impacted Northwest hydro supply is at its lowest level in a half-century. That gives energy generators and marketers even more room for manipulation.

"We could get screwed much worse," Borenstein said, "than we've been screwed so far." The bill for the state's purchases this summer could run to as much as $4 billion a month. That, said Borenstein, is the dollar equivalent of one Loma Prieta earthquake every six weeks. But unlike an earthquake, which creates the need for repairs and retrofits, the utility mess "is a job destroyer, not a job creator."

Both consumer advocates and officials of the state Department of Water Resources have talked about a self-imposed cap -- a point when California would suffer blackouts rather than tolerate still higher rates. Californians confidently tell pollsters they could tolerate blackouts. But they might quickly change their minds if the price is jobs and not just a few hours without home air conditioning.

California financial officials are now working on the annual May revision of the state's fiscal projections, due May 14, and the state budget plan based on it. But this year the imponderables, both in revenues and expenditures, could run into the billions.

Here again, the ability to sell the bonds that fund the state's electricity purchases is crucial. If the bonds are sold, they will presumably allow the state to stretch out the real cost of the state's energy purchases over a decade, thereby softening the short-term blow for consumers and the budget -- and for politicians -- though maybe not for the state's long-term economy.

Paradoxically, if the hit is softened to the point where consumers have little incentive to conserve, wholesale rates could go even higher, thereby destroying the fiscal scheme on which the state's whole fiscal plan is based.

The catastrophe could be minimized with federally imposed wholesale rate caps, which is unlikely, given the disposition of the Federal Energy Regulatory Commission. But the key is effective demand management. That means a real-time pricing system, especially for large consumers, under which the user knows the -- at times astronomical -- cost of the power he burns at the moment he uses it, and can adjust consumption accordingly.

Rosenfeld calculates that commercial and residential air conditioning and lighting in commercial buildings account for 40 percent of the state's peak demand. Reduce that demand and the ability of the generators to manipulate the market is reduced with it.

And on that score, the state seems at last to be making some progress. As part of California's conservation funding, the state will help to pay for the metering that real-time pricing requires. If the Public Utilities Commission moves smartly, there's still a chance that the necessary rates and billing system could be in place by midsummer. If so, the catastrophe might be reduced to a crisis.

Peter Schrag can be reached at Box 15779, Sacramento, CA 95852-0779 or at pschrag@sacbee.com.

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Copyright The Sacramento Bee Fair Use for Education and Research Only

-- Robert Riggs (rxr999@yahoo.com), April 26, 2001


Here in the Phoenix metro area with the Salt River Project, a major energy provider like PG&E we already have time of use metering. I'm on the plan myself. Starting May 1st and lasting thru Oct 31st is the summer rates. From 1pm to 8pm is the peak period and electric is 16.50 kWh. At all other times, weekends and major holidays electric is only 3.69 cents per kWh.

Does this article say that the CA utilities don't have this type of metering to promote energy conservation during peak periods? and that the state of CA is willing to pay the tab instead of the utilities to implement the system? OUTRAGEOUS!

-- Guy Daley (guydaley@altavista.com), April 26, 2001.

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