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California and the West | On California

Wuz We Robbed?

March 04, 2001|PETER H. KING

Californians have been lectured constantly that they themselves are to blame for the energy crisis. They demanded more and more juice. They fretted about the environment instead of building new power plants on every Pacific cove and mountain stream. They got themselves caught in a classic supply and demand squeeze, and so get over it. Quit whining.

Four simple numbers offer an alternative version of the matter. These numbers can be found on a statistical chart submitted last week to federal energy overseers. The chart was filed by the California Independent System Operator in support of a call for a closer examination of what actually launched energy prices into orbit.

Figure No. 1, the amount of electricity, as measured by megawatt hours, consumed through the California market system for the pre-crisis month of December 1999: 19,284,096.

Figure No. 2, the amount of electricity consumed during December 2000, one year later: 19,412,015. Note: Virtually the same as the year before.

Figure No. 3, the total average cost for each megawatt hour consumed in December 1999: $30.

Figure No. 4, the total average cost for each megawatt hour consumed in December 2000: $317.

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What these numbers are saying is that consumption levels effectively remained constant between the pre-crisis December of one year and the Stage 3 alert December of the next. There was no drastic upward spike in demand, no great electricity binge. In other words, maybe it wasn't those darn Christmas lights after all.

Between the two Decembers, however, the price of electricity multiplied by 10 times. Same amount of energy, 10 times the price. How can this be? If demand stayed the same, the rise in price must reflect events occurring on the supply side. Was there 10 times less supply available to California from one December to the next? No. After all, the same amount of energy eventually did make it to the grid.

Is it possible that it cost 10 times as much to produce this electricity? Without question a shortage of natural gas needed to generate electricity and the penalties paid to run smog-producing power plants increased production costs. But 10 times higher? In their federal filings, Cal-ISO officials said their analysis of the inflated energy prices took these additional costs into account.

And while higher natural gas costs and so-called smog credits were responsible for a portion of the leap in electricity prices, the ISO officials asserted, they "do not explain the high overall prices for real time energy being demanded by suppliers."

Well then, what might?

The Cal-ISO people have an idea. They contend that their numbers demonstrate that "prices in the California market have exceeded competitive levels, are unjust and unreasonable, and warrant further [federal energy] commission investigation and refunds." That's fairly polite language. There is a rougher way to describe prices that are unjust, unreasonable and in excess of competitive levels. The word is gouging.

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The Cal-ISO brief took note of the "record profits" being piled up by companies selling energy to California. It lingered on the reported net income increases between the third quarter of 1999 to that of 2000: "AES Corporation had an increase of 131% from $58 million to $134 million; Williams Energy Marketing & Trading had an increase of 342% from $1.9 million to $8.4 million; Duke Energy Corporation had an increase of 75.7% from $436 million to $766 million," and so on down the line.

Energy executives, of course, expressed indignation at the implications: "We played by the rules, acted ethically and legally in our operations," said a spokesman for one of the many Texas energy companies. And maybe he had a point. Maybe, as the infamous saying goes, they stole it fair and square. California, because of flaws in the design of its deregulation plan, left the house unlocked and the windows open, all but inviting suppliers of electricity to back up the truck.

To switch metaphors, instead of cranking out beer by the keg, the electricity suppliers happily found themselves hawking the same stuff by the bottle--at champagne prices. Eventually those higher prices would cause utility nonpayment, which would spook some sellers, which would tighten supplies further and lift prices higher still. Yeehaw.

In this context, a recent comment in the San Francisco Chronicle by a Texas politician seems illuminating. Texas state Sen. David Sibley recalled how, before the crisis, he and some colleagues came to California and looked into its new energy market. On the flight home, he said, "it took us about 15 minutes drawing on a napkin . . . to figure out how to game it."

"Gaming," it should be noted, is market-speak for what the rest of us call gouging. And there's that word again.

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