From the Golden State to the Blackout State

Last November, however, Kaiser saw a better business opportunity. It closed down its smelting plant until October 2001 (laying off 545 workers in the process) and started reselling its Bonneville electricity to California utilities for $ 555 per mwh, 25 times what they paid for it. “We’re obviously not in the business of selling electricity,” says Susan Ash, company spokesperson. “But in the short term it makes sense.”

Ordinary consumers of electricity in neighboring Tacoma, Washington, were less fortunate. Their power bills contained a 50 percent surcharge. Because power supplies were tight in California, secretary of energy Bill Richardson had ordered Tacoma Power to share its Bonneville allotment with the Golden State. To meet its own needs, the municipal utility found itself buying electricity on the spot market for $ 3,000 per mwh. Tacoma ratepayers made up the difference.

California has become an environmentally self-righteous black hole, sucking power and efficiency out of neighboring states. Now the damage is about to spread even further. In early January, the state’s two largest utilities — Pacific Gas and Electric (which operates in the north) and Southern California Edison (south to Los Angeles) — announced they are on the verge of bankruptcy. The overnight evaporation of the net worth of two of the nation’s largest utility companies shook Wall Street. California governor Gray Davis spent most of last week in Washington trying to persuade the Clinton administration to spread the pain. As the San Jose Mercury News editorialized, “The intervention of Energy Secretary Bill Richardson . . . [is] necessary to assure an adequate supply of electricity at an affordable price.”

Adequate electricity at an affordable price — isn’t that the birthright of every tree-hugging, Sierra-Club-dues-paying Information Age specialist from Santa Monica to Silicon Valley? Figuring out the logistics — well that’s somebody else’s problem.

To almost every one of the nation’s pundits, the root of the California fiasco was transparent: “Deregulation is undoubtedly at fault,” proclaimed the Industry Standard, proving once again that Silicon Valley may know ASPs and DVDs, but it doesn’t understand economics. “The experience raises questions about deregulation,” intoned Paul Krugman, resident economist on the New York Times editorial page. “And more broadly, it is a warning about the dangers of placing blind faith in markets.” In his annual address to the legislature on January 8, Governor Davis called deregulation a “colossal and dangerous failure” and proposed a state takeover of the entire electrical generating system with jail sentences for executives of any independent power company that refused to sell at prescribed prices.

But deregulation is not the cause of California’s power crisis. In the first place, the state deregulated only half the market. In 1997, it freed wholesale prices, while it froze retail prices so consumers would feel no pain if prices rose. Caught now between dwindling supplies and unfettered demand, the utilities have been left to subsidize California energy consumption to the tune of $ 11 billion in ten months. Since this is money the utilities don’t have, they now find themselves $ 11 billion in debt.

More important, no regulatory scheme can ever neutralize the underlying realities of supply and demand. All it can do is temporarily cover them up. In 1999, California imported 21 percent of its electricity from out of state — more than 40 percent during peak loads. Last year, demand increased 5 percent, twice the national average. Yet state officials have not allowed the construction of a single new power plant in over ten years. Even as brownouts and blackouts were imposed last summer, opposition to increasing production remained adamant. When PG&E sought authorization to set up clean-burning gas turbines with a capacity of 95 megawatts on barges in San Francisco Bay last July to meet shortages, mayor Willie Brown shot down the proposal on clean air grounds. In San Jose, a proposed natural-gas-fired generating station capable of producing 600 megawatts has been blocked because of opposition from both the city of San Jose and Cisco Systems, the Internet giant and leading local employer.

Deregulation is not the core problem. California’s energy crisis, with its looming adverse impact on the entire economy, has occurred because the Digital Age’s flower children — like many a comfortable elite before them — are obsessed with maintaining the purity of their own environment.

It’s already a century since economist Thorstein Veblen described the underlying phenomenon. In The Theory of the Leisure Class (1899), he explained how the people who get rich in industry become the leading critics of the industrial economy. Instead of singing the praises of the system that produced their wealth, they try to pretend their fortunes derive from mysterious sources that others can’t tap. They aspire to be like the Bostonian lady in the Henry James novel whose hat is admired by a woman from up-and-coming New York. “Where did you buy it?” asks the New Yorker, to which the woman from the center of old wealth replies, “My dear, in Boston we don’t buy hats, we simply have them.”

Veblen put it this way:

The leisure class is in a great measure sheltered from the stress of those economic exigencies which prevail in any modern, highly organized industrial community. . . . As a consequence of this privileged position we should expect to find it one of the least responsive of the classes of society to the demands which the situation makes for a further growth of institutions and a readjustment to an altered industrial situation. . . . The office of the leisure class in social evolution is to retard the movement and to conserve what is obsolescent.

This is just what we observe today. In the early years of the environmental movement, high-minded, well-heeled people called attention to long-neglected problems, such as air and water pollution and harmful pesticides. Because these were proper subjects for concern, the public never noticed that at bottom the environmentalists opposed all progress. Most people are willing to make sacrifices to improve the industrial system. But leisure-class environmentalists have already taken what they want from the system and are preoccupied with slowing further development — with blocking, say, the expansion of power production. Locating a power plant always inconveniences someone. The objections of nearby residents are usually overcome by political or economic incentives such as property-tax windfalls for the host community. Environmentalists, however, have been able to orchestrate such grievances and give them political resonance and legitimacy. What is dangerous is that, because such attitudes are aristocratic, they have a strong appeal. As Veblen understood,

By virtue of its high position as the avatar of good form, the wealthier class comes to exert a retarding influence upon social development far in excess of that which the simple numerical strength of the class would assign it. Its prescriptive example acts to greatly stiffen the resistance of all other classes against any innovation.

To declare yourself an environmentalist is to show you have arrived.

So things have gone in California. In 1970, the state had 20 million people and generated all of its own electricity. Utilities were in the process of building nuclear power plants. The Sierra Club was an early theoretical supporter, arguing that nuclear power would reduce air pollution. When it came to building actual plants, however, the Sierra Club switched sides and joined the other environmental groups for whom nuclear power was a tool of the devil. Environmental opposition brought nuclear construction to a halt by 1980, although the state continues to benefit from past construction, deriving 16 percent of its electricity from nuclear energy.

What was the alternative? At first, environmental groups campaigned nationally for imported low-sulfur oil. When the energy crisis of the 1970s made it obvious that oil supplies would be expensive and unreliable, they settled on “clean” coal. Between 1980 and 1990, almost 90 percent of new generating capacity around the country was designed to burn coal. Amazingly, California did not go along. To this day the state does not have a single coal-burning plant on its soil. Instead, California utilities built coal-burning plants in Utah and Nevada and shipped the power back home.

In 1997, the Clinton administration began an aggressive campaign to further tighten national clean air standards. According to the original interpretation of the 1990 Clean Air Act, utilities were not required to bring old coal-burning plants into compliance with new standards unless the plants were significantly expanded. But in 1999 the EPA changed its stance. It began requiring utilities to install the expensive technology on older plants when they underwent routine maintenance. Since 1990, 63 plants producing 2,600 megawatts have been taken out of service.

If oil is too expensive and coal too dirty, what does that leave? “The favored fuel, by default, has become natural gas,” says Bill Brier, vice president of marketing and communications at the Edison Electric Institute in Washington. “Nobody feels very comfortable about it, particularly with natural gas supplies starting to dwindle. But public authorities won’t let us build anything else.” Ninety percent of the power plants under construction today are expected to burn natural gas. Many can’t burn anything else.

Until the 1990s, burning natural gas for electricity was considered wasteful. Natural gas heats half the homes in the country and is an important raw material for the fertilizer industry. Yet because of the inexorable march toward environmental purity, low-polluting natural gas is now used to generate 15 percent of the nation’s electricity — and 31 percent of California’s. Of course, just because environmentalists grudgingly accept burning natural gas for electricity doesn’t mean they support drilling for it. Largely because of environmental opposition, domestic natural gas production has not increased significantly in a decade. We now import 17 percent of our natural gas from Canada, three times as much as in 1989. Prices on the spot market quadrupled in 2000.

Amazingly — but perhaps predictably — environmental groups are now beginning to oppose natural gas power stations as well. “If we need more energy, let it be from environmentally friendly sources, not from jet fuel-burning engines,” said Bradley Angel, executive director of Green-action, in leading the successful opposition to the San Francisco barges last summer. (The Sierra Club, to its credit, has supported the San Jose plant that Cisco opposes.) Just to top things off, environmental groups have also opposed new transmission lines, mostly on the now-discredited grounds that they might cause cancer. Even though California imports one-fifth of its energy and thus must transport electricity long distances, the state relies on a seriously inadequate transmission system.

Throughout this long downward spiral, environmental groups have touted two alternative strategies: renewable energy (hydropower, solar, wind, geothermal, etc.) and energy conservation. Yet in practice, they oppose even “clean and renewable” sources. Although the West Coast still gets more than half its electricity from hydropower, and California gets 43 percent, environmentalists are campaigning to tear down hydroelectric dams in Washington and Oregon. Generating capacity of more than 1,600 megawatts has been eliminated in recent years as dams were withdrawn from use. In Los Angeles, the Audubon Society and the Sierra Club have blocked wind-mill farms on the grounds that they would kill endangered condors. Environmentalists oppose geothermal projects because they desecrate natural landmarks — geysers. Solar panels, of course, have extremely limited value for producing electricity. After 20 years of effort, geothermal, wind, solar, and biomass (burning firewood, garbage, or old tires) supply only 9 percent of California’s electricity.

And so we are left with conservation, currently the environmentalists’ favorite strategy. Energy conservation makes good sense and could probably be improved, except that environmentalists and public officials are never willing to use the one incentive that would make people conserve power: market prices.

Since the Progressive Era, every state has administered its electricity market as a publicly owned monopoly, or utility. In practice, this has meant holding down consumer prices while assuring utilities a small profit on each new plant. In the 1970s, environmentalists argued quite effectively that this policy had produced much unnecessary generating capacity, including nuclear plants.

During the 1980s and 1990s, state utility commissions reversed the policy and started subsidizing and sometimes mandating conservation. The Natural Resources Defense Council says that thanks to hundreds of millions in state investment in conservation, demand in California is 200 megawatts less a year than it would be otherwise, the equivalent of a small power plant. Yet even with improved efficiency — and the slowing of the state’s population growth — demand for power has continued to rise in California, mainly because of the digital economy. Despite early speculation that improved information would help conserve energy, the Internet has turned out to be a devourer of electricity. Silicon Valley had the fastest growth in demand for energy in the country last year: 12 percent. Moreover, as the Industry Standard notes, “an uninterrupted energy flow is especially critical for high-tech firms. Blips as brief as 1/60th of a second can zap computers and other electronic gear, and blackouts can be catastrophic.”

In an attempt to start reconciling supply and demand, the federal government finally moved toward deregulation. In 1995, the Federal Energy Regulatory Commission announced it would free all prices for electricity sold interstate and encouraged states to free prices in their local markets. Twenty-four states did so. In truth, no state has deregulated completely, although most have loosened the reins. But few are facing supply problems on the scale of California’s. Illinois gets all its power from coal and nuclear and exports electricity. Texas has built 22 new power plants since 1995 and is also an exporter. Both Texas and Pennsylvania allowed utilities to retain some of their own generating capacity; most important, they let the companies handle their own affairs, entering long-term contracts with suppliers.

California opted for a pseudo-market overseen by the California Independent Systems Operator. First, the state broke up the “vertical monopolies,” forcing companies to sell their generating plants to the new breed of independent energy companies such as Calpine, Enron, and Exelon. Second and perhaps more devastating, California forbade utilities to enter long-term contracts with wholesalers. Instead, they were forced to shop on the day-ahead spot market, through the Independent Systems Operator. Even then, politicians couldn’t bear to tell consumers the bad news. The state legislature froze retail prices until 2002 (with the complicity, it should be noted, of the utilities, which were expecting a price drop). The window to disaster was open.

It didn’t take long. In the summer of 2000, as rising demand pushed against dwindling supply, cities up and down the West Coast were forced into revolving blackouts. By December, California Steel in Los Angeles had interrupted production seven times. The Claremont Colleges canceled night classes and closed libraries during final exams. On December 7, the state’s first Stage 3 emergency shut down the giant pumps along the aqueduct that supplies Southern California with water. (Winter, remember, is the season of low demand for power. The big strain will come next summer.) In December, the Wall Street Journal interviewed a PG&E executive in his San Francisco office as he forlornly surveyed a garish Christmas display on a neighboring building. “We’re subsidizing every one of those light bulbs,” he moaned. “Yet I can’t even get those people to turn them off during the day.” By January, the utilities were begging the California Public Utilities Commission for a 25 percent consumer rate increase. Under extreme pressure from consumer groups, the commission granted only a 10 percent increase, virtually ensuring that the utilities would become insolvent.

Where have conservation-minded environmentalists been during all of this? Hiding under the table, of course. “We don’t have a position on rate increases,” said Craig Noble of the Natural Resources Defense Council’s San Francisco office. “Our policy is that the state should be spending more money on energy conservation.”

Environmentalists are right to lie low. As long as confusion reigns, California residents will never have to contemplate the simple equation that says universal opposition to power plants equals rising rates for electric power. By making it nearly impossible to build power plants, environmentalists have given the new power wholesalers a virtual monopoly, with high prices assured.

Would reregulation solve the problem? Not for a minute. If the state tried to hold wholesale prices low, out-of-state suppliers would simply refuse to sell in the California market. Unless some kind of extradition treaty can be negotiated, Governor Davis is going to have trouble throwing Washington and Utah executives into jail. Instead, energy price controls will produce their logical result — energy shortages. The only clear solution is for California residents to face the unalterable choice: sacrifice a little on environmental standards, or pay ever-escalating prices for electricity. It is precisely this confrontation with reality that California’s liberal political establishment works day and night to avoid.

Eventually, the solution to California’s energy problems may involve lining the Nevada border with coal plants and pumping electricity to Los Angeles and San Francisco by underground transmission lines. Yet even this won’t happen until the state’s liberal establishment is willing to make one simple concession: You can’t be a “consumerist” and an “environmentalist” at the same time. “Clean energy at prices everyone can afford” is a perpetual pipe dream conjured up in front of wood fires in mountain hideaways. In the real world there must be compromises. So far, no one in the Golden State has been willing to make them.

William Tucker is the author of Progress and Privilege: America in the Age of Environmentalism.