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Not Your Father’s Energy Crisis

Richard Nixon refused to light the White House Christmas tree during the energy crisis of 1973. Jimmy Carter told us a few years later to turn down the thermostat and don a sweater, as he did.

Neither gesture saved significant energy, but both presidents wanted to exercise leadership by showing us how bad things were. Today, that seems quaint. Any modern pollster would urge the White House to maintain high approval ratings by accentuating the positive.

Which brings us to California Gov. Gray Davis, the first American chief executive to be tested in our new age of limits. Davis, who just a few months ago looked like a potential Democratic presidential candidate, has failed miserably thus far. His mistakes, and the problems that California and other regions are likely to face when hot weather arrives this summer, are a warning to all of us that energy issues are back on the agenda for a long time to come.

California’s two biggest utilities are on the edge of bankruptcy at this writing. Residents endured several days of rolling blackouts and six weeks of power alerts this winter. Some businesses were significantly disrupted when they were forced, day after day, to shut down at hours of peak electric demand. All this happened at a time of year when California traditionally exports power to neighboring states.

Davis might envy Nixon and Carter. Their crises were caused by fuel shortages that were largely beyond their control. In contrast, there was plenty of electricity available during most of California’s emergency, but at prices California consumers and voters simply did not want to pay. By refusing to disappoint them, Davis and other state policy makers made matters much worse.

This is not your father’s energy crisis. Back in the 1970s, the obvious way out was to reduce consumption through conservation, while roughnecks scoured the planet for new supplies. By 1986 those new supplies helped bring about a major price collapse.

Today’s energy challenge presents a more complex mix of environmental, economic and political bugaboos:

  • The Bush administration and the energy industry want to open new frontiers for oil and gas development, but environmentalists argue that we should refrain from burning fuel that already has been found because of the threat of global warming.
  • People in California and the Northeast Corridor demand their air conditioning, but they don’t want to live near generating plants or transmission lines.
  • Uncle Sam has spent more than $110 billion on energy research over the past 50 years, but more than half that money went into the black hole of nuclear power. Nuclear fusion remains a dream, while the country has not had a single conventional nuclear plant ordered since the Three Mile Island accident in 1979. Only $8 billion has gone to energy efficiency research, where the greatest strides have been made.
  • The United States holds about 5 percent of world population, but accounts for 25 percent of global energy consumption. That is a lot, but it is down from 31 percent in the early 1970s. If China, India, Latin America and eastern Europe develop as rapidly as they hope in the coming years, they could create huge new supply pressures and environmental issues while reducing the impact of U.S. policies on the global situation.
  • A generation ago, Americans thought of power for light and heat as a natural monopoly to be regulated. Today we seek to lead the world to a greater reliance on free market forces — or, at least, we say we do, until our own interests are threatened.

When electricity shortages emerged in California last summer and fall, Gov. Davis and other state leaders did just about everything wrong. First, they refused to consider letting utilities pass along the higher wholesale power costs to consumers. A painful price hike would have encouraged the instant conservation that the state desperately needed. With reduced demand at peak times, prices on the spot market for power would likely have fallen, reducing the overall cost of the emergency.

Instead, California told Pacific Gas & Electric and Southern California Edison to eat the higher costs. Once they had swallowed an indigestible $12.7 billion, Davis spent more than $2 billion of state money to buy power, and proposed to infuse cash into the two large utilities by buying their transmission systems for more than $7 billion. Davis also wants to pay the $12.7 billion debt by issuing tax-exempt bonds, which ultimately would be repaid by the same tax- and rate-payers whom he shielded from a direct rate increase.

As a result, Californians probably will pay higher taxes and/or utility rates in the long term, but without the short-term connection to wholesale power costs that might have stabilized the market and encouraged the creation of more generating and transmission capacity.

It would be nice if Davis would simply tell his fellow Golden Staters to face the economic fact that investors are not going to provide them with cut-rate power indefinitely. But he has shown no stomach for that. When supply disruptions sent power rates in San Diego soaring last summer, Davis signed emergency legislation limiting residential rates to 6.5 cents per kilowatt-hour (kwh). In late February, after a modest rate hike that Davis reluctantly permitted, residential customers of PG&E were paying 11.6 to 13.3 cents per kwh, while Southern California Edison customers paid 12 to 14 cents.

Here in Westchester County, New York, the price on my February bill was about 16.5 cents per kwh. This is close to the figure at which California officials estimated the West Coast supply problems would have been relieved. I paid more, but at least my lights stayed on.

One big difference is that New Yorkers do not have the power to pass laws through voter initiatives, while Californians do. Consumer advocates have been threatening to put a measure limiting electric rates on the 2002 ballot. This would remind voters of this winter’s mess just when Davis and members of the Legislature must run for re-election. Not surprisingly, California politicians are eager to avoid an initiative

New York is not likely to escape unscathed, however, if we have a hot summer. We have not built the generators and wires that we need to keep up with the strong demand that years of economic growth produced. Neither have surrounding states. Supplies also are tight across the West, where rapid population growth is coinciding with a serious drought in the power-hungry Pacific Northwest.

None of this bodes well for the economy or the environment. On the economic front, energy price pressures may constrain the inflation-wary Federal Reserve from cutting interest rates as far or as fast as it would like. This could help start or worsen a recession, which the Fed is likely to view as the lesser evil compared to a potential return to 1970s-style "stagflation."

Environmentalists, some of whom have seized on the global warming issue to promote broader agendas, are not likely to fare well either. Greenpeace, for example, contends that "three quarters of the oil, coal and gas already found cannot be burned if we want to avoid dangerous climate change." The argument is misleading, for much of that carbon is in enormous quantities of coal that is useless for transportation and not likely to be burned in the next century, if ever. Nevertheless, the group calls for an "orderly phase out" of all fossil fuels, a halt to new oil and gas exploration, and a switch to yet-uneconomic renewable sources such as wind and solar power.

President Bush’s proposals to open the Arctic National Wildlife Refuge to development are reminiscent of the manner in which the 1970s energy crisis helped bring about the Alaska Pipeline over environmental objections. People in cold, dimly lit rooms are not too particular about such matters.

The pendulum has apparently swung once again, away from the days of cheap and abundant energy resources, back to an era of hard policy choices. Are conservation and renewable energy sources going to be enough to keep the world economy humming, especially when more Brazilians and Indians want to go for a Sunday drive? Amid the vagaries of long-term climate modeling, can we find the right policies to mitigate global warming — if in fact it is even within human control — without becoming energy anorexics? Can we avoid a worldwide energy panic if there is a political explosion in the Middle East?

It will not be easy to find satisfactory answers to these questions. All of us will have to ante up, and we’re going to have to get a better performance from political leaders than we saw this year from Gray Davis. Otherwise, the bright economic future we have come to take for granted may go up in smoke.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.