Tucson, Arizona Sunday, 3 June 2001

Bonds may not buy all electricity Calif. needs

By Hanh Kim Quach THE ORANGE COUNTY REGISTER

SACRAMENTO, Calif. - Almost all of the $12.5 billion California hopes to borrow this summer to buy cheap power for the future will be spent before the state sees the first dime, according to a projection of the state's numbers by The Orange County Register.

If California continues to spend money on high-priced emergency electricity at the current pace - $66.9 million a day - it will have spent $10.4 billion, or 83.2 percent, of what it plans to borrow through a bond sale by mid-August, the time it hopes to have the cash in hand. That $10.4 billion would be immediately repaid to the state treasury.

That leaves only $2.1 billion to buy future energy. But according to the state's own estimates, its needs at least $2.7 billion to pay for such contracts just through June 2002. The state estimates that it actually needs enough new money to secure such power through at least 2003.

That means that to meet Gov. Gray Davis' energy goals, the state would have to either raise taxes, cut programs funded by the general state budget or borrow more money on the bond market - which would mean yet another increase in electricity rates for all customers of Southern California Edison, San Diego Gas & Electric and Pacific Gas & Electric. Those customers will already face an increase to pay back the $12.5 billion in bond borrowing.

"It's like the emperor's new clothes," said consumer advocate Doug Heller. "Everybody's saying we have to protect schools, law enforcement and infrastructure, when the reality is the (general fund) will be used to buy energy, yet again."

In response to the Register's projection, Davis' energy team says it is wrong to assume that spending for emergency energy will continue at the same pace into the summer.

The administration says the outlook is brightening for the energy supply because of new energy contracts - some taking effect this month - continued conservation and new power plants. The increased supply should drive down prices, thus reducing the average amount the state is spending each day on energy.

"We'll have room to spare," said Davis spokesman Steve Maviglio.

According to the Davis administration, it will need to repay itself only $7.9 billion of the bonds it plans to issue Aug. 14 - $2.5 billion less than the Register's projection. That would leave $4.6 billion, presumably enough to buy an adequate supply of relatively cheap electricity on long-term contracts.

But Davis' predictions have been criticized as too rosy.

"There's certainly a vulnerability to these assumptions," said Brad Williams, chief economist in the nonpartisan Legislative Analyst's Office. "The administration assumption that prices will fall is very risky."

One of Davis' assumptions, for example, is that spot-market prices will be cut nearly in half, from $346 a megawatt-hour in the spring to $195 a megawatt-hour during the summer. The state reasons that this is because it will have secured more power under long-term contracts, under which prices are cheaper.

But if there is only a finite amount of power in California, and the state has secured a good portion of it under contract, the laws of economics say that intense demand could push up the price of the remaining power. And summer power has always been more expensive, not less.

State Controller Kathleen Connell, a Democrat like Davis, has her doubts.

"We don't know whether the governor's estimates are correct. They haven't been correct to date. . . . I have always argued that $12.5 billion is not going to be enough."

http://www.azstarnet.com/star/today/10603RPOWER.html

-- Martin Thompson (mthom1927@aol.com), June 03, 2001

Answers

Now why should wholesale energy prices be cut in half by late summer? There's a faulty assumption if ever I heard one. Talk about whistling in the dark. What a pollyanna.

-- Loner (loner@bigfot.com), June 04, 2001.