Bush's Mistake in California -Gray Davis

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May 31, 2001

Bush's Mistake in California


SACRAMENTO I hope President Bush understands how perilous a course he is setting for both California and the national economy with his opposition to caps on the outrageously high wholesale price of electricity opposition he reiterated to me when we met Tuesday.

California is experiencing an energy shock like that perpetrated by the Organization of Petroleum Exporting Countries in the 1970's. That episode plunged the United States into deep recession and gave rise to a long period of stagflation rising prices in a no-growth economy.

The size of the energy shock to California this year is likely to be in the range of $40 billion to $50 billion, according to Alan Blinder, the former vice chairman of the Federal Reserve Board. It is enough to threaten the still solid California economy with recession and to knock the nation's gross domestic product down by at least half a percent enough to counter the stimulative effects that the Bush tax cut is intended to have on the stumbling national economy. As the Fed chairman, Alan Greenspan, observed in late January, "It is scarcely credible that you can have a major economic problem in California which does not feed to the rest of the 49 states."

The president's energy policy sets long-term goals of self-sufficiency through increased power generation, energy efficiency and fuel supplies. These are many of the same solutions we in California are rapidly pursuing. But the short-run emergency in California stems as much from energy cost as from energy supply.

Since I've been in office, we've cut approval times in half and licensed 15 major power plants. And we have put in place the nation's most comprehensive conservation program. Still, we are being squeezed to the breaking point by outrageous prices for the electricity we buy. This is why I called on the president for an energy policy that includes short-term caps on the price of wholesale power. Under the Federal Power Act of 1935, only the Federal Energy Regulatory Commission has the power to ensure a just and reasonable wholesale electricity market in California. This is not a matter of discretion for federal regulators; it is an obligation. The law requires the F.E.R.C. to ensure that rates are just and reasonable. California itself can do nothing about the unconscionable wholesale electricity prices that are often more than 700 percent higher than they were just a year ago. President Bush must direct the commission to exercise its authority under the law.

In a letter Tuesday to the president, 10 economists warned, "F.E.R.C.'s failure to act now will have dire consequences for the State of California and will set back, potentially fatally, the diffusion of competitive electricity markets across the country."

It is true that California's problems stem from a fundamentally flawed 1996 state electricity deregulation law. The utilities were required to sell off half of their fossil-fuel-fired power plants while they were barred from entering into contracts for a long-term supply of cheap electricity. The result is an unregulated sellers' market for electricity, susceptible to naked manipulation.

The agency that runs California's power grid has identified $6 billion in overcharges by the generators. Prices are greatly inflated. The same electricity that cost Californians $7 billion in 1999 was $27 billion in 2000 and is projected to cost upwards of $50 billion in 2001. Much of this is fed by escalating wholesale natural gas prices that were 1,000 percent higher in Southern California in December 2000 than in December 1999. The F.E.R.C. has failed to curb these natural gas prices as well.

The Bush administration still maintains that the energy policy it has proposed is all that can reasonably be done and says it opposes further federal intervention in the energy market, even if the problem threatens the nation's economy. The threat is real, and the Bush administration must adopt a more responsible energy policy, one that restrains energy price manipulation and creates a fair and competitive energy market across the West and the whole country.

Gray Davis is governor of California.


-- Martin Thompson (mthom1927@aol.com), May 31, 2001

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