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California energy crisis jolts US economy Fiona Buffini in San Francisco 10/01/2001

The US slowdown faces a further serious drag as California, the world's sixth-largest economy, battles a worsening energy crisis that threatens to spill over into the wider economy.

Soaring energy prices, as a result of the State's botched electricity deregulation policies, mean California's two largest power utilities are on the brink of bankruptcy.

Technology companies hit by power shortages are urgently trucking diesel generators to Silicon Valley and news channels are devoting hours of prime time to discussions of double-paned windows, attic insulation and other energy saving tips.

In an extraordinary intervention, California governor Mr Gray Davis yesterday threatened to seize the plants of electricity generators and marketers accused of price gouging consumers and utilities.

"California's deregulation scheme is a colossal and dangerous failure," Governor Davis said in his annual State of the State address to California's legislature.

"It has not lowered consumer prices. And it has not increased supply. In fact, it has resulted in skyrocketing prices, price gouging and an unreliable supply of electricity.

"In short, an energy nightmare," Governor Davis said.

Economists say the Golden State's energy woes could dramatically pump up business costs, making its $US102.9 billion ($180 billion) worth of exports less competitive on world markets, putting a further drag on US economic performance.

The energy mess was "one more negative added to the mix", said Mr Tom Lieser, a senior economist at the University of California.

California's electricity market meltdown has exposed major flaws in the State's deregulated system and has significant implications for energy deregulation in Australia.

In 1996, California embarked on an untested restructuring of its power market.

The three investor-owned utilities - Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric - were forced to sell off their generating capacity to unregulated private companies.

The price of electricity, long regulated by the California Public Utilities Commission, was to be set instead in a free-wheeling commodities market.

However, the out-of-State generators which bought most of the utilities' power plants, are now charging California several hundred per cent more for wholesale electricity than a year ago.

The power utilities are caught in a bind as they pay soaring prices for power on the wholesale market but cannot recoup costs from consumers because of State price caps.

The utilities are already more than $US11 billion in the red because of this price clamp and that deficit will drive them into bankruptcy if consumers cannot be coaxed into paying the bill.

Major US banks, including Bank of America and JP Morgan Chase & Co, are lenders to the struggling California electricity utilities that are facing bankruptcy.

Analysts say Bank of America has a $US500 million exposure to the utilities. The bank was last week forced to issue a statement denying market rumours that it had problems with derivatives trading.

Governor Davis urged sweeping reforms to regain government control of the State's energy market, including: $US1 billion to stabilise prices; $US250 million in consumer incentives; and legislation to prosecute power generators that deliberately withhold supplies from the market to artificially inflate prices.

Governor Davis is scheduled to have emergency meetings with the White House today to get Federal help in creating a new cap on wholesale power prices

This story was found at: http://afr.com/world/2001/01/10/FFXW5UDFRHC.html

-- Martin Thompson (mthom1927@aol.com), January 09, 2001