California Legislature, Governor Davis Buy Nothing But Failure

Feb. 6, 2001

California Legislature, Governor Davis Buy Nothing But Failure

$10 Billion to Be Spent Purchasing Overpriced Electricity From Profiteers

WASHINGTON, D.C. ? California?s plan to spend up to $10 billion to address the state?s electricity crisis will take the state down a path of debt that is almost certain to lead to higher electricity bills, higher taxes or both, Public Citizen said today.

The plan, which was signed into law late last week, calls for the state to assume utilities? financial risks by spending up to $10 billion to buy electricity on their behalf. It essentially uses public money to pad the profits of profiteering corporations and relieves California’s utilities of all market risk.

The state?s better option is to buy tangible assets, such as power plants and transmission lines, so California can regain control over sky-high prices and unreliable supply. But the legislation forbids the state from using any taxpayer money to “take ownership of transmission, generation, or distribution assets.”

“This bailout is a recipe for taxpayer indebtedness for many years to come,” said Public Citizen President Joan Claybrook. “It?s a boon for the energy industry and a crying shame for taxpayers. Without addressing the inflated wholesale electricity market, the state’s taxpayers will be buying a go-cart for the price of a Porsche. The state ought to buy power plants and regain complete control over the electricity market.”

The plan will be a $10 billion-dollar bust because it will simply hand taxpayer money over to a few out-of-state power plant owners. The state will receive nothing in return but wildly overpriced wholesale electricity, Claybrook said. Under the bailout plan, taxpayers ? not California?s utilities ? will assume all the financial risk, and the more than $10 billion in expenditures won?t guarantee lower wholesale prices.

The bill signed by Governor Davis, ABX1 1, immediately appropriates nearly $476 million in cash from the general fund and up to $10 billion in revenue bonds over the next two years to purchase wholesale electricity from the handful of corporations that own power plants in and around California. California?s utilities will be paid by the state to handle billing and other services, but the state will bear all financial risk of collecting outstanding consumer bills and purchasing wholesale electricity from power plant owners.

The agreement does not require the utilities to sell electricity produced at their own hydroelectric and nuclear facilities to the state at cost. Instead, the utilities can sell their power at market prices and use the proceeds to pay off their “debt.” The state will sell the power it purchases at cost to the state?s consumers. Finally, the legislation forbids the state from using any taxpayer money to “take ownership of transmission, generation, or distribution assets.”

The Fallacy of Long-Term Contracts in an Overpriced Market

The state apparently believes that by purchasing electricity through negotiated long-term contracts at between 5.5 cents and 7.0 cents a kilowatt hour, it will save more money than continuing to rely upon the day- and hour-ahead spot market.

But even the low end of the state?s offer is a grossly inflated price, way above the cost of producing electricity (it is important to note that a week ago, the handful of power producers rejected a state offer to buy electricity at similar rates). The nearly $28 billion of electricity sold to California in 2000 was more than 276 percent higher than in 1999. Binding taxpayer money to purchase wildly overpriced electricity for many more years to come will only handcuff the state financially.

California need only look to the costly mistakes made through earlier over reliance on long-term energy contracts as a way to drive prices down. Expensive long-term contracts for renewable sources of energy were mandated by the federal government in 1986 and forced upon utilities by state regulators. Those contracts helped make California?s consumer electricity rates among the highest in the nation ? something the 1996 deregulation law was supposed to address.

Taxpayers Will Have Nothing to Show, While Corporations Stand to Profit Even More

For the same amount of money as it will spend in the bailout plan, California could force the utilities and power producers to sell their assets to the state. By temporarily taking control of electricity production until longer-term solutions are found, California could guarantee lower prices because it would sell electricity to households and businesses at cost.

But because the bailout legislation expressly forbids the state from acquiring such assets, California?s taxpayers will continue spending billions to pad the profits of a handful of out-of-state power plant owners. The seven major out-of-state power producers and power marketers posted $6.5 billion in after-tax profits in 2000.

“These companies have the money to address this situation,” Claybrook said. “Unfortunately, they?d rather use taxpayer money to bail them out, and the California legislature is setting consumers up to do just that.”

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