Wednesday, April 18, 2001

Blackouts vs. energy price hikes

BY DANIEL BORENSTEIN Knight Ridder Newspapers

WALNUT CREEK, Calif. -- Just say no.

Academics, state legislators and Gov. Gray Davis are considering what once seemed improbable: Telling generators that the state won't pay soaring prices for electricity even if that means rolling blackouts.

``It's being pondered,'' said the Davis spokesman Steve Maviglio. ``The downside is the lights go off. The upside is the state wouldn't be out an exorbitant amount for power. The question is, at what point is a blackout preferable to not paying generators the outrageous prices that they're charging?''

It is one of the boldest strategies that the risk-averse governor has considered. Setting self-imposed price limits would empower the state's bargaining position at times of critical shortages this summer. But it would require collective discipline.

``You have to call the generators' bluff and say, `we'll take rolling blackouts instead,''' said Stanford economist Frank Wolak, a proponent of the idea. ``That's playing chicken in a major way. What it requires is for Californians and the state to just hold the line.''

A state price cap would signal a major policy shift for Davis. Rather than facing rolling blackouts caused by a shortage of supply, lights around the state might go out sequentially because of an unwillingness to pay rates that many complain are forcing the California to mortgage its financial future.

``To the extent we can credibly convince (generators) we won't buy at these prices, that we would rather have rolling blackouts,'' Wolak said, ``the whole nature of the market will change.''

The idea has intrigued a group of Assembly members who are struggling for a way out of the crisis. ``If you're going to stop the prices from escalating out of control, at some point you have to say this is the price we're willing to pay,'' said Assemblyman Joe Canciamilla, D-Pittsburg. ``If you don't do that, there is no incentive for the suppliers to bring the prices down.''

There is some indication Californians might support the idea. A Field Poll in January found that state residents, by better than 2-1, worried more about higher energy bills than rolling blackouts.

Public sentiment could change if generators balk and rolling blackouts continue for extended time, warned pollster Mark DiCamillo.

``It's a risky kind of endeavor. (Davis) is holding himself open to consequences that are out of one's control, which is a very un-Gray Davis thing to do. He's such a control freak.''

There will be real costs if the lights go off and business is hurt, Wolak said. But limits might be the best way to bring the crisis to a head.

Rather than fighting an uphill battle with the Federal Energy Regulatory Commission to impose price limits, the state could empower itself by declaring its own financial limits.

The rates could vary during the day, with higher rates at times of peak demand. The exact numbers have yet to be crunched, but Wolak estimates the state might set a cap averaging $80 per megawatt hour, more than twice the 1999 average.

The rate would be far less than the current average estimated at about $300, and the anticipated summer price that could be twice that or more.

That rate cap, Wolak said, would provide a reasonable profit and investment return for the generators -- and should encourage more power plant construction.

Generators unwilling to provide power at those rates should be publicly scolded, Wolak said. ``You have to put the shame of public opinion on these guys. Who better to do it than the governor?''

Perhaps most significant, Wolak said, the $80 rate would roughly allow the state to cover costs with revenues from ratepayers and without continuing to build up long-term, taxpayer-financed debt.

It might be more risk than the governor is willing to take, said Bruce Cain, UC-Berkeley political scientist.

Davis' current strategy of putting the extra cost into long-term debt defers much of the financial and political impact until after the 2002 election season, whereas a self-imposed price cap risks immediate blackouts.

``There's a lot of uncertainty about the political backlash because you could imagine some companies really suffering,'' Cain said.

On the other hand, ``I've run into a lot of people who have said they'd prefer the blackouts. I've got to believe the governor has heard this, too.''

http://www0.mercurycenter.com/breaking/headline2/AA8160.htm

-- Martin Thompson (mthom1927@aol.com), April 18, 2001

Answers

It is so tragic to watch this three-rign circus go on and on. Has everybody forgotten the 450,000 pounds of milk that was dumped due to lack of refrigeration during a prior blackout, or, the stoppage of gasoline delivery from Southern California to Northern California due to lack of pipeline pumping power? Nobody seems to ever consider all the myriad, residual effects of rolling blackouts. All people seem to think about is, it's either lights on or off. Period.

Sad.

-- Billiver (billiver@aol.com), April 18, 2001.

It is crucial that great care is taken to impose the controlled blackouts only on non-critical loads (such as other infrastructure); otherwise severe cascading effects will greatly exceed any cost savings. Careful planning for a high probability of success in avoidance of this cascading effect potential is critical for this strategy to work. The reason if that if this "buyer's strike" strategy is tried and proven unsuccessful, due to cascading effects, it could backfire, as power generators then will charge even more.

-- Robert Riggs (rxr.999@worldnet.att.net), April 19, 2001.