Paying the Price in California


By Howard Gleckman Nobody wants to say it out loud, but there's a simple solution to California's energy crisis: Let the price of electricity rise to whatever the market will bear. Let it go sky high. Then watch it fall. It will fall.

That may seem draconian. And no, big price hikes alone won't fix the energy shortages that are going to make Californians miserable this summer. But without them, the state has no chance of ending its long-term power crisis.

There's still plenty of arguing about who's responsible for the mess -- short-sighted politicians, rapacious energy companies, or energy-thirsty consumers. But there's little argument about what's responsible: Wholesale energy prices have skyrocketed by 500% to 1,000% because not enough electricity exists to go around.

DEMAND AND SUPPLY. What do you do about it? There really are only two solutions for the medium term -- increase supply by building more power plants and transmission lines, and reduce future demand through conservation. Price hikes are essential to accomplish both.

In 1996, California deregulated wholesale prices while trying to keep a lid on retail electricity costs. But five years ago, the state enjoyed a power surplus. Since then, its energy demand has jumped by one-quarter, while power capacity has grown hardy at all. From 1996 until 1999, demand grew by 5,500 megawatts. Meanwhile, supply rose by just 672 megawatts.

What happened? For one thing, it became impossible to get permits to build new plants or transmission lines. The NIMBY (not in my back yard!) movement blocked plants throughout the state. Meanwhile, environmentalists never found a fuel they liked: coal polluted the air, hydropower killed fish and dammed rivers, and nuclear -- don't even ask. All utilities could do was build a handful of small gas-fired plants.

MARKET CHOICES. Consumers responded quite logically. After all, they had plenty of power, and it was cheap. Before last year, electricity prices in California were half what they were in New York. So why would anyone agree to more unsightly and potentially polluting plants? The same economic logic applies to conservation. Think of it as a commodity, just like power itself. People will buy whichever is cheaper. If power is expensive, people will buy conservation.

And remember that conservation is not a matter of turning up your thermostat in July. The payoff occurs only when consumers buy more efficient appliances. Think about it. You can buy a $2 light bulb that lasts 200 hours, or a $15 light bulb that will last 2,000. Before you choose, you do a quick rate-of-return calculation: "How much will I pay up front, and how soon will my light bulb pay for itself?" With electricity so cheap, the payoff took years. It made more sense to buy the $2 bulb -- and to keep that old air conditioner.

Yes, California has made some progress in conservation, but not nearly enough. As House Commerce Committee Chairman Billy Tauzin (R-La.) told my colleague Laura Cohn recently: "When California froze its retail prices, conservation fell 5%. Think about it. If you freeze prices at Nieman Marcus, my wife is going to live there."

FLEXIBILE PRICING? But raise the price of electricity, and everything changes. Out-of-state suppliers will sell into California, at least alleviating the short-term problem. Consumers will reevaluate the costs and benefits of building new plants and transmission lines. They will buy the high-efficiency appliances that will reduce long-term demand. And, when those plants are built and demand falls, so will the price of electricity.

Some people could suffer from these price hikes. But not necessarily. California currently enjoys a massive budget surplus. Instead of using the money to buy and resell power itself, or spending the dough to enforce a silly system of fines for people who use "too much" power, California should provide energy assistance to those who need it. State regulators could also allow utilities to reprice electricity, so that the highest costs could be imposed on those who use power at times of peak demand. That would make it easy to save money by, say, doing a wash early in the morning.

Not many politicians in California want to let retail prices rise. And even talk of such a step is already generating a nasty consumer backlash. (I expect to get a few letters myself.) But think what consumers would say to the prospect of continuing shortages and blackouts for the foreseeable future. I say let the economics of energy truly take hold in California. Only then will the electricity woes end in the Golden State. Gleckman is a a senior correspondent in BusinessWeek's Washington bureau. Follow his views every Tuesday in Washington Watch, only on BW Online


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