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Jan 31, 2001

"Wall Street West" Turns Power Solution Into Market Solution

by Jamie Court
As California's governor and legislators deal with the energy crisis, the statehouse has become "Wall Street West" with an invasion of New York investment bankers playing pivotal roles. Governor Gray Davis' capitulation of leadership to these Wall Street bankers threatens to turn any reasonable solution to the power crisis, which must include stringent public controls, into a continuing market debacle. Market-based solutions, which caused the crisis, will not solve it. However, Wall Street West's influence is undermining support for public controls such as public ownership of transmission lines and restoration of retail rate regulation which would prevent another crisis.

The deregulation deal that spawned the electricity crisis replaced the legal obligations to provide electricity with market incentives to do so. The system went haywire because making money, not assuring adequate supply, is the real market incentive. Power producers' profits have skyrocketed, in fact, precisely because of the artificial shortages created by the unprecedented number of their mysteriously crippled power plants, as well as the reluctance of the generators to build new plants since that would undermine their ability to manipulate supply. The resulting speculative run-up in price does not reflect the actual cost of producing the energy, but its inflated value in the tight market. This is why power producers are reaping windfall profits for the quarter. With the Wall Street bankers for these companies making policy in Sacramento, the market incentive system responsible for Californians' energy woes is likely to continue with the public paying a multi-billion dollar price to prop it up.

Goldman Sachs, poised to become the state's financial advisor on electricity, has been a banker for the state's largest utility, is involved in energy trades and owns a company that sells natural gas to power generators. It has every incentive to maintain the market incentive system rather than support a publicly accountable power system. Credit Suisse First Boston has on its client list power generators that sell electricity to the state, yet its investment bankers drafted industry bailout legislation for Assembly Speaker Bob Hertzberg. The company's analysts can hardly be relied on for impartial advice to benefit the public since one of them optimistically advised investors to keep faith in the energy market because the California electric grid was not in real trouble, but simply being used as a negotiation lever. "The rolling blackouts in California are more likely to soften up the Legislature and the voters to the need for a rate increase than they are indicative of a permanent 'when the lights went out in California' scenario," the Credit Suisse analyst wrote."The 'unthinkable' rarely will be permitted to happen." If that is the case, no bailout is needed, only greater legal restraints on the companies' power producing clients. If the Credit Suisse analyst was looking out for the public, and not the market, he would have asked the attorney general to file charges against energy companies for colluding to commit fraud, not advise his clients to keep investing..

Californians experienced the first statewide rolling blackouts since World War II only this month because, under the old style public utility system, the corporations generating and distributing the energy had a legal obligation to keep supply available. Amazingly, there is little talk in the capital of restoring such legal obligations. Strikingly missing from the negotiation table in Sacramento, undoubtedly due to the influence of Wall Street West, is a plan to return to electricity rate regulation and impose a windfall profits tax on power generators. The only reason retail prices are temporarily capped today is because, in 1996, rates were temporarily frozen at rates 50% above then market level and the public paid $20 billion of the utility companies' bad debts.When those caps are lifted, without new public controls, the ratepayer will be at the mercy of the vicissitudes of the market once again..

That is the way the energy industry wants it -- to put the market burden right back on the ratepayer, rather than on the companies that promised deregulation would lower prices and improve choice. Kenneth Lay, chairman of Enron, which has profited greatly from Californians' pain, said recently, California's ratepayers "need to see the price signals [a.k.a. pay more] and start modifying behavior to reduce demand until we get new supply." In 1998, as a booster of deregulation, Lay was singing a different tune. "Under open-access restructuring, the end user buys the commodity from competing suppliers at a unregulated price," he said. "The reward will be significantly lower rates ---as much as 30 to 40 percent below what consumer are paying today." Neither Lay's "choice" nor price scenario ever proved true. Still, under the market incentive model consumers just have to keep paying more or using less until the companies get it right.

Without new legal obligations for fair pricing and against excess profits, ratepayers and taxpayers will continue giving and corporations keep taking. The first step on the right road is cleansing the statehouse of Wall Street West's influence and putting the public back in "public policy."

Jamie Court is executive director of the Santa-Monica based Foundation for Taxpayer and Consumer Rights.

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