- The Washington Times - Friday, January 19, 2001

As Gov. Gray Davis declared a state of emergency and Energy Secretary Bill Richardson issued emergency orders requiring out-of-state power suppliers to sell California electricity, the "rolling blackouts" that began yesterday threaten to do more than turn off the lights. Businesses in Silicon Valley and other areas of California cannot operate in the dark. With the national economy showing signs of weakness, the last thing we need is a major slowdown of economic activity in one of the country's most prosperous, dynamic states.
The effects of the energy crisis are certainly important but perhaps more significant is the source of the problem: rate caps imposed by state lawmakers on California's major utilities Southern California Edison and Pacific Gas and Electric (PG&E;). The caps have prevented utilities from adjusting their rates to compensate for rising wholesale electricity prices which have shot up dramatically from a low of about 3.5 cents a kilowatt in 1999 to 30 cents or more per kilowatt today.
Ironically, the caps were put in place at the same time California's electricity system was "deregulated" ostensibly, to lower costs to consumers. But injecting free-market pressure on the supply side without at the same time permitting those pressures to apply to the demand side was a recipe for disaster. The utilities had to buy electricity at the going rate, but were not allowed to bill end-users accordingly. Result? Southern California Edison is $596 million in the red and will run out of cash about two weeks from now, on Feb. 2. PG&E;, meanwhile, has exhausted its credit lines and both SoCal Edison and PG&E;'s credit ratings have been downgraded to junk-bond status. According to the Associated Press, PG&E; could be suspended as early as tomorrow from the California Power Exchange one of the few lifelines left open to the nearly-bankrupt operation.
State lawmakers are scrambling desperately to fix the mess they created with their ill-conceived "deregulation" scheme. On Tuesday, the General Assembly approved a plan that would allow California utilities to buy electricity at reduced prices from wholesalers. However, the fundamental issue is the matter of cost caps. California utilities must be allowed to pass on the costs of electricity to consumers. This is basic economics.
The natural gas/fuel oil situation provides an instructive lesson. An unusually cold winter and higher natural gas prices have caused home heating bills to rise dramatically around the country. But at least people are not having to go without heat. This is because gas utilities are able to adjust their rates to reflect the real-world price of fuel. For those on low or fixed incomes, programs are in place to help offset the higher costs; similar programs could be put into place in California to help those who might otherwise be unable to pay their electricity bill. All of which this is infinitely preferable to "rolling blackouts" and a collapsing energy infrastructure.

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