Plug Electric Cord Into a Grassy Knoll 
  
By PETER NAVARRO 

It is a conspiracy theory that would make Oliver Stone blush, but the pieces fit so perfectly well together that it has an eerie ring of truth. The theory California utilities and a Texas-based power cartel purposely turned the lights out to pressure California's governor and Legislature into a lucrative bailout. 

If this theory is correct, it would be one of the most outrageous examples of corporate exploitation ever perpetrated. This is not just because of the tens of billions of dollars to be transferred from Californians to corporate interests. It is also because the crisis may well drag the rest of the nation into a nasty recession. 

Let's look then, at the facts and logic supporting the "blackout-bailout" theory. Start by examining how three fatal flaws in California's 1996 deregulation bill set the conspiracy stage. 

First, deregulation was supposed to create a competitive market in which hundreds of generators would provide abundant electricity at low prices. Toward this end, the state forced its utilities to sell off their power plants. These were snapped up by a few large, primarily Texas-based corporations. When no other players entered the market, the forced divestiture effectively turned a regulated monopoly into an unregulated cartel. 

Deregulation's second flaw was to set up a dysfunctional wholesale market that this generator cartel could easily manipulate. Generators could simply withhold power to bid the price up and then dump power at inflated rates. Ordinarily, this market manipulation would simply lead to higher electricity prices. However, California's utilities had agreed to freeze retail rates until the year 2002--the law's third flaw. 

It is important to note that peak electricity demand in California and the threat of blackouts always occurs in the summer--never now, in the winter. During last summer, as physical electricity shortages occurred, wholesale rates soared well above the frozen retail rates. At this point, Southern California Edison and Pacific Gas & Electric began to accumulate billions of dollars in liabilities. As this summer of rolling blackouts passed, as wholesale rates subsided, and as the crisis seemed to ease, utility executives not only realized that their companies were being slowly bled to death by a "vampire cartel." They also realized thisIt wouldn't be until the following summer, when blackouts would once again roll through the state, that there would likely be any political will to bail them out. 

That's when the utilities decided to turn the lights off much sooner--or so the "blackout-bailout" theory goes. To achieve this, Edison paid a huge dividend to its shareholders, thus ridding itself of any excess cash to buy power. Both Edison and PG&E also moved assets over to their unregulated subsidiaries so that these assets couldn't be used as credit to purchase electricity. 

Finally, the utilities took an unusually large amount of capacity off-line for what it described as "routine maintenance." At the same time, members of the power generator cartel also began to systematically withhold power. Ostensibly, this was done because the cartel feared that any power sold to the near-bankrupt utilities on credit would be money lost. The practical effect, however, was to drive wholesale electricity rates through the roof at the same time that the now-artificial electricity shortages triggered rolling blackouts throughout the state. 

Viewed through the conspiracy lens, the withholding of power by the generator cartel is likewise consistent with a conspiratorial profit-maximizing corporate strategy. While the utilities want a bailout, the cartel wants to panic the governor into signing long-term contracts at inflated prices. The reason is simple. Soon, there will be a flood of newly constructed power plants glutting the California market. At the same time, natural gas prices are forecast to fall. The likelihood then is that the long-term cost of power will be in the 3-cent to 5-cent per kilowatt-hour range. Thus, if the generator cartel can lock the state into contracts at 9 or 10 cents for five to 10 years, their continued exorbitant profits will be assured. 

In other words, having bled the utilities dry, it will now be the ratepayers' turn. The bottom line here is that rolling blackouts and soaring electricity rates have rapidly accelerated the timetable for a utility bailout and the signing of long-term power contracts. 

Whether this outcome is the result of a coordinated conspiracy or whether it is simply an "accidental conspiracy," the results are the same. Millions of California residents and thousands of California businesses are suffering while the national economy may be dragged into a recession. If the state and federal attorneys general don't want to investigate, perhaps Oliver Stone will do a movie about it. 

- - -  Peter Navarro Is an Associate Professor of Economics and Public Policy at Uc Irvine. E-mail Pnavarro@uci.edu

 
 
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