Infectious California
Okay. We admit it. We have been mean to California. We called it the Alfred E. Neuman state -- "What, me worry?" -- after 57% of its citizens declared to pollsters that there was no power shortage. We called its chief politician brainless when he announced his solution to the crisis. And we have implied the entire place was inhabited by dim light bulbs. We also admit to a certain deep pleasure in having fun at California's expense.
But then we didn't expect that nine months after California's energy crisis began there would still be no end in sight. Now, however, we can see the writing on the wall -- and it spells disaster for summer. In just a few weeks, California will begin to turn on its air conditioners and find itself with demand for electricity running ahead of supply by 10% during peak periods. Result? There will be more brownouts and rolling blackouts and even higher wholesale prices.
Failure to deal with the electricity crisis has already had a deleterious impact on California's economy. Its two largest utilities are pretty near bankrupt, some wholesale suppliers have not been paid, some manufacturing plants have shut down or moved production to other states, its agricultural industry is reeling under higher power costs and some firms are shifting production to other states. All this can already be seen in California's unemployment figures for January -- benefit claims were up smartly and mass layoffs increased more than 14% from a year ago. Estimates for economic growth in California in 2001 have been downgraded to under 1% from 2.5%.
But the real problem is that the power crisis is beginning to bite hard beyond California. Bear in mind that California's economy is the sixth largest in the world -- a touch behind the U.K. and slightly ahead of Italy; further, bear in mind that this giant economy produces less energy per resident than any other state. As the old saying goes, when California sneezes, its neighbors catch cold. Hence, California's energy shortage, with its high and higher wholesale prices, has spread throughout the dozen Western states that share the same power grid. A recent analysis for the state of Washington, for example, predicted that over the next three years the state's job losses could total 43,000 and household disposable income could be cut by more than $5 billion.
And might we mention those other citizens of the Northwest -- the salmon? Because of California's increased power needs, water that flushes the salmon past the dams and lakes of the Columbia River basin during their annual migration is being used to generate electricity.
Of course California doesn't bear the entire blame. The Northwest, which gets 70% of its power from hydroelectric dams, is having its driest winter in more than 20 years. Moreover, prices for oil and natural gas -- chief fuels for electricity generation -- have been zooming nationwide. On average, natural gas prices for utilities skyrocketed more than 50% since the end of 1999.
But other states are passing higher prices on to consumers. In some cities in Western states like Wyoming, Idaho, Nevada, Utah, Arizona, New Mexico and Oregon, utilities have either requested, or have instituted, double-digit rate increases. For example, Tacoma has instituted a 50% surcharge for power and Seattle's rates are up between 28% and 50%. (Gosh, in New York City, where we pay our bill, rates have risen 40% since 1999.) Yet, California has been loath to do the same.
Consider what happened in August last summer: The San Diego Gas and Electric Company -- the first California utility to meet the legal requirements to deregulate retail prices -- responded to higher wholesale prices by passing its costs on to consumers. Those consumers went berserk. Furious homeowners filled the streets and cranky businesspeople yelled about leaving San Diego. In September, the state legislature capped prices at the old, pre-crisis level and demand for power, which had fallen 9%, immediately returned to former levels.
In January, as the pressure on the state legislature grew, it reluctantly agreed to a "temporary" hike of 9% for residential consumers and 7% for small business -- well below the 30% increase that some observers said was necessary. So it's hardly a joke to say that when somebody in California turns on her hot tub, somebody in Utah pays the bill.
All of which brings us back to the coming summer crisis. In recent weeks, California's Governor, Gray Davis, has been running around signing long-term agreements with power suppliers. So far, however, he is way short of the 45,000 megawatts necessary to keep California plugged in over the summer. Thus, absent a necessary and serious retail rate increase, the chances are that California will continue buying power in the cash market, pushing up prices. In just a few short weeks, California's increased need for electricity will become everybody else's worst nightmare. Including the salmon.
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