BAILOUT WATCH: Keeping an eye on the energy industry and the politicians
Bailout Watch #19 – Mar 07, 2001
$7 billion for PG&E’s transmission system. You’ve got to be kidding. It is difficult to imagine that anyone is seriously considering paying $7-$10 billion for PG&E’s portion of the power grid. The entire state transmission system has a total book value of approximately $3.2 billion. Governor Davis’s previously announced proposal to overpay for Edison’s lines – Edison agreed to a very generous 2.3 times book value offer tendered by the Governor – looks like peanuts compared to this deal. And maybe that’s the point. By floating such an absurdly overpriced proposal, the previously announced bad deal becomes an improvement. Because we can’t believe that a single legislator would sign onto a transmission deal that pays a utility three to five times book value, it must be that Davis intends to come back in a few days with a lower price. He’ll suggest a global deal with all utilities and he’ll hope that the public and the Legislature will be so relieved that we’re not paying $7 billion to PG&E that there will be no adverse reaction to this bailout cloaked in a buyout. No way, Governor.
It is a familiar strategy, though. Governor Davis cheered earlier this week when the state signed long term contracts for 5 years worth of power at $79/MwH and $61/MwH for the next five years. Phew. That’s a heck of a lot cheaper than the $300 – $400/MwH the state is paying on the spot market today. Same theory at work as the PG&E transmission deal: compare a bad deal to a worse deal and the bad deal seems good enough. But what if you compare these prices to any time other than aberrant months of this deregulation debacle. The utilities paid approximately $24/MwH on the spot market in the higher usage month of April 2000(based on Power Exchange prices on 4/15/00), approximately $32/MwH in November 1999 (11/15/99). What about high summer prices? $22/MwH on the spot market on August 15, 1999. Once you stop comparing bad to worse, it becomes obvious that the Governor has locked us in to extremely overpriced power for the next decade.
Who should get the "right price signals"? The energy industry and Wall Street, as part of the effort to "soften the legislators and voters to the need for a rate hike," have a new way to call for a bailout: "you need to send the right price signals to consumers," an energy analyst told the Associated Press. Consumers won’t conserve energy, the theory goes, unless they are charged the true price of energy and, therefore, Californians need to accept rate hikes. But, Californians reduced energy consumption by 8% in February, according to the Governor. And we are already the second most energy frugal state in the nation. California consumers are not in need of price signals; the price-gouging power generators are the ones that need price signals — from Governor Davis and the Legislature. Namely, if you continue to charge us these blackmail prices for power, we will take your plants and run them at reasonable rates. (The companies bought those plants for $3.2 billion — what we will have spent in less than three months of spot market purchases). Send them a signal they cannot ignore.
