A newsletter covering news and views on government spending, published by The National Center for Public Policy Research, 20 F Street NW, Suite 700 , Washington, D.C. 20001, (202) 507-6398, Fax (301) 498-1301, E-mail BudgetWatch@nationalcenter.org, Web http://www.nationalcenter.org.

Issue #41 * May 2, 2001 * David A. Ridenour, Editor

California's Electric Rate Increase Proposal Would Shield Voters, But Devastate Business

They're flaky. They take yoga and "fusion cuisine" seriously. They coined the phrases, "Let's do lunch" and "slow speed chase." They are also a whopping one-sixth of our national population and generate almost 14 percent of our gross domestic product. And if it were an independent country their state economy would rank sixth largest in the world.

As California goes so goes the United States. Both the good and bad of the Golden State have a way of rolling across America like a wave. Or a blackout.

So it is that California's current energy crisis is America's next economic crisis. We can laugh along with Jay Leno as he ladles out variations of jokes first heard during New York City's 1977 brownout. The national economy is already feeling chills, thanks largely to the technology sector slowdown and the dot-com die off, both of which disproportionately hit California. Now comes the California energy crisis, which is spreading across the West.

The issue is complex, but California Governor Gray Davis and state legislators are mostly concerned at the moment with Davis' proposal for state purchase of electricity transmission lines and towers owned by the near-bankrupt Southern California Edison. On the horizon, however, looms a political decision with even bigger economic consequences for California's, and, ultimately the nation's economy.

The California Public Utilities Commission is scheduled to vote in early May on the structure of a rate increase that, no matter how you slice it, portends vastly higher electricity rates for California residents and the businesses that pay their wages.

Leading business groups are clamoring, and rightly so, about an inordinate burden being placed on business users while sparing residential ratepayers -- aka voters -- their full share. Let's hope for the sake of the nation's economy this clamor is heard.

Under the rate increase structure proposed by Commission President Loretta Lynch, a Davis appointee, about half of residential consumers in PG&E's territory -- the largest of the three private utilities -- would see an average increase of 24 percent for electricity. The other half will see no rate increase at all thanks to hastily passed legislation exempting residential customers who use less than 130 percent of a state-calculated "baseline" amount.

The state's largest businesses, though, would face rate increases ranging from 87 to 550 percent, depending on the time of day. The proposal would sock it to the very consumers whose economic output will be needed now more than ever to prevent California's from entering a recessionary tailspin.

Businesses operating 24 hours a day, seven days a week, will be harshly punished for their extraordinary productivity. Retailers such as department stores and grocery chains, having already made most of the "easy" conservation changes, will be unable to avoid paying the piper. Most people can't reasonably shop for clothes and food at 3:00 a.m., so retail stores will continue operating during peak periods.

Other businesses process time-sensitive products like perishable foods, are locked into labor contracts prohibiting operations during non-peak hours or are restricted by local noise ordinances from operating after dark.

These businesses -- a wide swath of California's economy -- will have no choice but to take the hit, and harsh economic consequences will certainly follow. In some cases, product prices will rise dramatically. In other cases, production cutbacks will be made. Some companies have already curtailed expansions and may relocate operations to other states. In too many cases, workers will see their wages frozen or reduced and some will be let go.

All this for the sake of politically shielding residential ratepayers from their rightful share of the burden?

The business groups have a tough sell to make. Some have offered alternative rake hike plans spreading the pain proportionately, arguing persuasively that an equitable rate increase would protect California's economy and fully motivate residential and business consumers alike to conserve power.

One way or another, the increased costs of doing business will hit consumers and workers in their pocketbooks and paychecks. Recognizing this, Davis and his Commission would best serve their state by insisting that rate hikes be distributed equitably between residents and businesses.

What's the point in jeopardizing the jobs of tens of thousands of Californians next year in order to save energy consumers a few cents per kilowatt hour this year?

We can only hope that California's political leaders, faced with mounting voter anger, have the courage to make tough decisions that ignore short-term political fallout and concentrate on the greater long-term political benefit of protecting the economy. Not just California's economy, but the nation's.

by Amy Ridenour

Nothing written here should be construed as an attempt to help or hinder legislation before the U.S. Congress. Reprints of material in Budget Watch is permitted provided that original source is credited.

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