Raymond, May I Interject Something Here?
Look, I agree California got raped over the energy
crisis, but in the interest of understanding what
really happened, let me introduce a few small facts
that you can check yourself. The LA Times ran a
wonderful series on the whole mess.
Nobody likes to admit they screwed up, but the state of
California, the PUC, and TURN had a hand in the situation
getting totally out of hand, and handing total leverage
over to the IPPs. The utilities aren't total dimwits,
and in particular, PGE saw the coming rise in electricity
prices and wanted to lock in long-term contracts at then
favorable rates back about 1 1/2 years ago, just before
electicity prices exploded. Deregulation in California
put meeting almost the ENTIRE demand for the state's
electricity needs on the spot market. This amounted to
a massive one-way bet on the part of California and
consumers that electricity prices had only one way to go:
DOWN...that that by forcing all producers into this narrow
funnel of competition, they would beat each others brains
out competing to sell their products to CAL-ISO and this
would drive electricity prices down.
PGE saw the shortages coming and attendant rising prices
and signalled the PUC that it wanted to lock in some long-
term contracts with producers. TURN (taxpayers for rate
normalization) opposed this as well as the PUC. While I
am glad TURN exists, as nobody else fights for consumer
rights, they DID NOT understand energy and trading markets,
nor did the PUC. PUC told PGE that if they proceeded,
there was no gurantee their contracts would be found
(i forget the word) "fair" and so no guarantee they would
be reimbursed. PGE at that point said forget about it,
why should we shoulder the risk?
Long-term contracts act as a hedge against the spot market
and reduce the leverage IPPs have to manipulate the market
by reducing the amount of power the state needed to go out
and buy daily. By basically being unhedged by disallowing
utilities to sign up long-term contracts, California was
making a massive speculative one-way bet that electricity
prices would either remain stable or go down.
You are an experienced enough investor to know that
whenever the markets come to the realization that any
one player has made a massive one way speculative bet
on the direction of prices (ex the Hunts & silver back
in the 1980s) the other players instinctively know to
bet the other way. When a shortage did arise, the IPPs
were able to amplify this many-fold because of the
refusal by the state to allow any hedging (and refusing
to enter into any hedging long-term contracts itself,
until unfortunately it was all over)
Now I'm not saying there wasn't any chicanery involved
on the part of the IPPs, Enron's, etc. I'm sure these
facts will be proven/disproven when the PUC & state of
California role out their case against the IPPs. I'm
just trying to point out that Californina left itself
massively exposed and then discouraged actions on the
part of utilities to protect themselves (firstly, and
then coincidentaly the state) against rising electrictiy
prices. California was not totally blameless, and they
paid a horrendous price for it.
Peter |
