Commentary: California: All Sides Must Take A Hit

The fallout from California's eight-month long electricity crisis is spreading rapidly: Factories are closing in Montana and Washington. Utilities are asking for or already have won double-digit rate increases in Idaho, Wyoming, Nevada, and Oregon. The repercussions are being felt as far away as Pennsylvania, where GPU Inc. has asked regulators for permission to charge customers an additional $145 million to cover the cost of buying power in the sky-high wholesale market. "California sucked all of the electricity from the Western states," says Chuck Watson, chairman of energy marketer Dynegy, Inc. "It is reverberating throughout the country."

Clearly, California's power woes are far more vexing than anyone initially realized. The latest development: California's Water Resources Dept., charged with buying electricity on behalf of the state's cash-strapped utilities, conducted an online auction that ended on Jan. 24. California Governor Gray Davis had hoped that bids would come in below $55 a megawatt hour. That price would have ensured that the state didn't lose money on new power that it is trying to buy from private generators around the country. Davis insists that the state can buy power without passing along permanent rate increases to consumers.

Davis, a Democrat, seems to be making the same mistake as his predecessor, Republican Pete Wilson. He's trying to find a solution to the state's energy problems in which nobody gets hurt. In Wilson's administration the problem was that regulated power prices were too high. The deregulation bill he signed in 1996 gave a little something to everyone. Consumer groups got a rate cut. Utilities got the ability to recover billions of dollars they claimed they were owed for old power plants. Power producers got access to a lucrative new market. And environmental groups were assured that the state's strict clean-air policies would be honored.

Truly solving California's electricity problem, however, will require all of these groups to make sacrifices. So far, none of them has shown much willingness to do so. Consider consumers. Overlooked in the debate that surrounded the California Public Utilities Commission's decision to raise rates 9% for residential customers earlier this year was the fact that rates had been cut 10% three years ago as part of the deregulation law. Even after the current temporary rate increase, consumers are paying less for electricity. Rate increases are unpopular, but they're a necessity in a free market. Just as important, asking Californians to pay more for the power they consume is the surest way to coax them into doing a better job of conserving energy.

Even with blackouts roiling the northern half of the state, builders of new power plants continue to battle the not-in-my-backyard syndrome. San Jose has rejected a proposed new plant that had been signed off on by the Sierra Club, among others. Cisco Systems Inc. and other potential neighbors didn't want the plant next to them. Meanwhile, local politicians are fighting the reopening of two closed generators in Huntington Beach on environmental grounds. On Jan. 23, the city of South Gate, near Los Angeles, also shot down a new plant proposal.

Producers must make concessions as well. They have passionately opposed caps on the wholesale price of power. So does the Bush Administration. But with prices having soared as high as $1,500 a megawatt hour in recent weeks, up from an average of $30 a year ago, a reasonable safety net to prevent gouging is needed.

To fix the electricity nightmare and ease the burden it is placing on the rest of the country, Davis will have to do something painful: force everyone to take a hit. Otherwise, this bad dream will keep recurring.

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