A promise and a handshake gets power companies shafted in the Golden State

Kathleen Davis, Associate Editor, Electric Light & Power magazine

Feb. 26, 2002 — Like sands through the hourglass, so are the final precious months of Governor Gray Davis. He can see the election day dawning, and he’s publicly trembling as those last grains fall-and with good cause.

There’s a big smudge on his record in the form of last year’s “California Crisis,” and even though he actually inherited most of those structural problems from his predecessor, it clings to him like an odor, pungent and lingering. For years Davis has been making a slow and calculated climb toward a presidential run-state controller, lieutenant governor, governor. Now he faces not only the loss of that presidential dream-for he will forever be associated with the power crisis-but possibly the loss of a gubernatorial re-election. It’s been a rough couple of years for the Governor, but that’s no excuse for his recent actions.

A year ago he was fighting against what he insisted were inflated market prices. He brought in the legal system; he brought in the Department of Water Resources. He brought in the Federal Energy Regulatory Commission (FERC); he tried desperately to bring in the White House as well. In the end, he established a number of long-term contracts and got a number of firms into some serious hot water.

Now he’s fighting against low prices, too. Never let it be said that he discriminates.

This week regulators with the California Public Utilities Commission (PUC) asked FERC to overturn 32 power contracts it made last year with 22 separate suppliers-sending stocks from named power companies plummeting. Once again, in a rerun of last year, the PUC claims that the power market is being manipulated by suppliers. And Davis is also on the bench for this action, ready to get in the game.

Here’s where we rewrite that old saying “You can’t have your cake and eat it, too.” Apparently, you can in California.

It seems that the PUC and Gov. Davis need a quick lesson in basic accounting. When they felt the prices were too high last year, they mitigated potential future losses by entering into long-term contracts. This is called “hedging.” It’s a simple idea, and a secure one. However, it also means that, while you don’t feel those high prices as sharply as your neighbor might, you also don’t get to enjoy the joyous dips in price that let him set up a backyard of Christmas trees in July at half of what you’re paying a month.

With hedging, you’re paying for stability. You may not like those summer months when the neighbor is paying less than you, but it’s part of the deal. You’re not taking the risk; your neighbor is, relying on the whim of the market, which is what got you into trouble in the first place. Indeed, it seems that the Golden State has forgotten any overriding lessons it may have learned about price fluctuations and market reactions. That was then; this is now. We really have such a short memory.

Don’t forget the security, my California friends. It’s what you wanted most of all-knowing what was ahead of you. With those long-term contracts, the power companies are riding the market roller coaster in your place. This does not, however, mean you should be allowed to take the first hill, brake the speeding car to a screeching halt and abandon ship before the end of the ride. It’s a contract, a binding agreement. You see, the companies make those contracts counting on those up and downs; it’s how they make money. You benefit in the ups; they benefit in the downs. And no matter what the PUC and Gov. Davis claim, making money is not always market manipulation, nor is it necessarily “unfair and unreasonable.”

What is “unfair and unreasonable” is this general assumption that Gov. Davis and the PUC can do whatever they please in the monetary interest of the individual consumer and their own political agendas without a look at the wider, more intertwined big picture. For the state to be healthy, the market needs to be healthy. For a market to function, those power companies are going to have to occasionally make money. That’s the bottom line. And to make money, they cannot always cut you a new deal with every miniscule price flutter.

California went into these power contracts with its eyes open. It saw the prices offered; it signed on the dotted line and made a commitment, with the blessing of Gov. Davis. If Davis has any hopes at all of being re-elected, he needs to show the voters a bit of integrity.

Those with integrity honor their commitments, Sir.

Kathleen Davis is an Associate Editor for Electric, Light & Power Magazine, a PennWell publication. Her views do not necessarily reflect those of the magazine or of PennWell. She can be reached at kathleend@pennwell.com.


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The Clarion Energy Content Team is made up of editors from various publications, including POWERGRID International, Power Engineering, Renewable Energy World, Hydro Review, Smart Energy International, and Power Engineering International. Contact the content lead for this publication at Jennifer.Runyon@ClarionEvents.com.

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