Bailout Watch #18 – Mar 06, 2001

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BAILOUT WATCH:  Keeping an eye on the energy industry and the politicians

Bailout Watch #18 – Mar 06, 2001

Would you agree to pay 10 bucks for a gallon of milk until 2006? That’s roughly analogous to the blackmail-induced deal that Governor Davis has struck with energy companies. The long-term contracts that the governor announced Monday will force ratepayers to pay energy prices that are 263% higher ($80 per megawatt-hour) than the prices considered reasonable just a year ago. We are locked in to that price for five years and then we will pay 203% more than 1999 prices for the five years thereafter. This is the equivalent of forcing families to pay about $9.96 for a gallon of milk (currently about $3.79/gallon) until 2006 and then $7.69/gallon through 2011. It would be scandalous to charge that much for milk, and it is a scandal that we will be locked into these prices for electricity. Of course the generators have demonstrated that they will milk us for all we’re worth.

$3 billion down the drain. According to the Associated Press, the state needed to call upon the budget surplus for another $500 million this week to buy power formerly procured for consumers by the utilities. The state has spent $3 billion dollars purchasing the "net shortfall" of electricity from private energy generators over the last 8 weeks. With that money, Governor Davis could have taken and purchased, by eminent domain, every plant sold to the private generators.

First they put you in a bad financial place, then they overcharge you for being in a bad place. That is how the energy generators and market traders justify the obscene energy prices they charged to utility companies in the midst of California’s deregulation debacle. First, power companies forced the price of electricity so high that the utility companies started to whine about bankruptcy and demand a ratepayer bailout. Then they added an extra "risk premium" to the energy price because the companies were allegedly on the verge of bankruptcy.

Can you say "inescapable downward spiral"? According to an Enron spokeswomen (as quoted in the OC Register), "credit-worthy status is one of the reasons the prices are so high. The price [the utilities] pay is directly proportionate to the ability to pay off debt." Does anyone really believe that adding a penalty charge to already excessive prices would have somehow have the effect of encouraging the utilities to pay up? Or were the generators just running up the eventual bailout bill?

"Downward Spiral," Part II. While all the generators insist that they had to charge the utilities a "risk premium" after gouging them out of solvency, that does not explain the indefensible prices that the generators have been charging the Cal. Department of Water Resources, a highly credit-worthy entity. Why didn’t prices fall to reasonable levels after the state took over power procurement from the utilities? Answer: Governor Davis never stood up to the generators, demanding that they sell power at a reasonable price, or else lose their plants.

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