Unresolved Problems

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Did President Bush Blunder in Not Helping California With Its Energy Crisis?

Fox News Network – THE O’REILLY FACTOR

O’REILLY: Thanks for staying with us. I’m Bill O’Reilly.

In the “Unresolved Problems” segment tonight, did President Bush blunder in not helping California out with its energy mess? The president’s job approval rating is down 8 points since April, according to an ABC News-“Washington Post” poll, and six in 10 Americans say the country is heading into an energy crisis.

Critics of Mr. Bush say he should have agreed to price-cap energy because California’s economy is tottering, and that could hurt the entire nation.

Supporters of the president say price caps will not help the state.

We have both sides. First, joining us from Washington is Jerry Taylor, the national resources studies director at the Cato Institute. And from Los Angeles, Doug Heller, the energy policy analyst at the Foundation for Taxpayer and Consumer Rights.

All right. Let’s start with you, Mr. Heller. And you believe that the

president should have imposed price caps. What good would that have done?

DOUG HELLER, FOUNDATION FOR TAXPAYER AND CONSUMER RIGHTS: Well, at a minimum, Bill, price caps are needed to control what is now unprecedented increase in electricity prices. Californians are facing prices that are 1,000 times what they have been in past years. We’re not using less — more energy. In fact, we’re using less energy right now. When we want to…

O’REILLY: Why are those prices — why did they spike up the way they did?

HELLER: Well, California made the first mistake in ’96 by deregulating our energy system. We allowed a new energy cartel, composed about of six power companies that now control about a third of our power, and they’re largely unregulated. The only place that those prices can be controlled is at the federal government, and President Bush must step in, otherwise California is going into the tank and taking the rest of the nation with it.

O’REILLY: All right.

HELLER: We’re not…

O’REILLY: Now, do you want to reply to that, Mr. Teller?

JERRY TAYLOR, CATO INSTITUTE: Well, the fact is, is, California is somewhere between 5,000 and 10,000 megawatts of power short of what they usually consume in a given summer. So they’re short electricity. Price controls would not add a single megawatt of power to the electricity system, nor would it remove a single megawatt of power from the consumption end of the business.

The fact of the matter is, is that electricity is expensive in California

because it’s scarce, it’s hard to come by. There’s been a three-year

drought, which has taken 5,000 or 10,000 megawatts out of the system. And you’ve also had a huge run-up in natural gas prices, and that’s what you’re looking at…

O’REILLY: Yes, but much higher up in…

TAYLOR: … right now…

O’REILLY: … California than anywhere else. So isn’t it true that El Paso and Duke and these other energy producers out of state have gouged?

TAYLOR: Well, they’re a little bit higher in California than other places on the Western grid, but not all that much higher, because all those states are facing the same wholesale market. But the reason they’re a bit higher in California is because no one’s paying the bills. I mean, there was a story recently about how Duke Power was charging $3,000 a megawatt- hour for some power back in January. It turns out 80 percent of that charge was to take care of the fact that nobody had any money to pay them. They were getting

IOUs, and a bankruptcy court probably wouldn’t give them but 20 percent on

the sale…

O’REILLY: So you’re saying that they weren’t getting paid, so they raised the prices up to make the shortfall. But still, I mean, come on.

TAYLOR: (UNINTELLIGIBLE) buy something from you, then if they don’t have any money, you’re going to charge them more than you might normally, because you might not ever see that IOU made good.

O’REILLY: But if Mr. Heller is correct — and I’m going to get to you, back to you in a second — the price cap would say to the Dukes and to the El Pasos, Hey, you can’t do that, you either sell them or you don’t, but you don’t profiteer off people’s suffering, and the prices would stabilize then. No?

TAYLOR: But it doesn’t solve the fundamental problem that power is short in California. And price caps…

O’REILLY: Yes but you got to stabilize…

TAYLOR: … doesn’t add anything to the system.

O’REILLY: … you got to stabilize before you can solve the fundamental, no?

TAYLOR: Well, price caps have always actually hurt the market by taking investment away. In other words, when you put price caps on, say, apartments in New York City, apartments in New York City disappear, they’re affordable. You put price caps on in gasoline in the 1970s, and you get long lines for it. Price caps cap supply, they don’t really help the shortage.

O’REILLY: All right, Mr. Heller, what about that? If they cap them, then you’d see less energy come into your state, because people say, Hey, even though I’m making a little bit of profit, I don’t want to really be involved with that.

HELLER: There are two basic problems with that argument. First of all, California and the rest of the nation, for the entire past century, either capped or had cost-based prices on power. We’ve always controlled our electricity power. That’s — this is the new radical sea change in the deregulated world.

But the second problem is that supply is a red herring. We are using less power today than we were using last year, but prices last year cost $40 for a megawatt-hour of electricity, and now we’re spending on average between $400 and $500 with as sometimes as much as $4,000. That’s not, that’s not paying for problems with creditworthiness, that’s profiteering. We’re facing a cartel of electricity companies, many of whom are from President Bush‘s

Texas, and that cartel is gouging California because the unregulated market allows it, and the federal government has refused to step in and protect California.

O’REILLY: You know, Mr. Taylor, I’m — Mr. Heller’s starting to convince me, because the dramatic rise in prices from just a year ago in California is really unexplained. Yes, they don’t have enough power, yes, it’s their fault for electing these pinheaded politicians who, you know, sold them a bill of goods that simply wasn’t true. But now that we have this problem, isn’t it incumbent upon President Bush to stabilize the situation?

TAYLOR: Well, the price is actually explainable. The cost of natural gas in the California market’s gone up 1,000 percent, OK? That’s a huge increase.


TAYLOR: Ninety-five percent of the cost of making electricity is simple fuel costs. So if you get 1,000 percent run-up in natural gas costs on the wholesale market, that’s going to translate to a 900 percent increase in electricity prices just so the generators at the margin don’t lose money on the transaction.

There’s nothing mysterious going on here. Even the economists who think there might be some market manipulation going on don’t think it’s but a few cents on the dollar. It’s not that big a deal. But the real fundamental problem is that these high prices are allowed because they’re not transferred to consumers. In other words, if I’m a generator, and I charge, say, $1,000 for a megawatt of power, whereas I would normally charge $200 or $300 a megawatt of power, that $1,000 charge doesn’t reduce demand at all, because consumers are getting price controls.

This is a dream scenario. So to the extent to which there’s any mischief going on in the market with overcharging, it’s because you have retail price controls in the first place.

O’REILLY: All right, Mr. Heller…

HELLER: No, we’re not, we’re not talk…

O’REILLY: … that’s true, and one of the reasons California got in trouble was because they didn’t pass the increased costs of not building any power plants or delivery systems on to the consumer, and the consumer paid an artificially low price, and then boom, that was it, there wasn’t enough money to pay the bills, and the companies, as Mr. Taylor pointed, Mr. Taylor pointed out, said, Hey, we got to charge you more because we’re not getting paid.

HELLER: Well, in addition to some bad economics there, there’s a fundamental policy problem. We’re not talking about luxury items, we’re not talking about buying automobiles or for computer software, we’re talking about electricity. The heat is rising, senior citizens are going to need to turn on the air conditioning…

O’REILLY: You bet, you bet.

HELLER: … this summer. You can’t, you can’t just say that whatever mar — price the market will bear is an acceptable price. That’s the first problem.

But the other problem here is that our supply has not — our demand, I’m sorry, has not changed fundamentally or dramatically in any way. And if, if, if there — if Mr. Taylor can suggest that a $1,000 price increase over power is acceptable…

O’REILLY: No, I don’t, I don’t…

HELLER: … then the market, the market is unacceptable. The pro — the problem here, and the fundamental problem is that if President Bush doesn’t do something to step in and limit profiteering or set cost-based rates at the federal level, California’s going to have to take much more extreme measures. We have bills in the legislature to tax at a 100 percent level the excess profits of these gouge, excuse me, of these power gougers, and the — there is a new bill…

O’REILLY: All right.

HELLER: … introduced…

O’REILLY: Well, look, I’m going to leave it there, I’m…

HELLER: There is a new, there is a new there is a new plan to take by eminent domain these plants. We are not going to let ourselves be gouged and destroyed here. It’s going to take pre — it’s going to take President Bush to act…

O’REILLY: It’s a mess.

HELLER: … otherwise, he will kill deregulation forever.

O’REILLY: It’s a mess, that’s for sure. And there’s no easy solution.

Gentlemen, thanks very much. Let the audience decide, as always.

Next on the rundown, can you convince a person to fall in love with you? One expert says yes, you can. I, of course, disagree. We’ll be right back.

Consumer Watchdog
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