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% 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 an earthquake. 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 wisecracks his way through rolling blackouts. But we had better hope that California’s political leaders – faced with mounting voter anger – have the courage and wisdom to make proper, tough decisions that may withstand short-term political fallout for the greater long-term political benefit of protecting the economy. Not just California’s economy, but the entire nation’s.

Just as Florida was the bellwether for the national election, it’s sunny cousin on the other coast has become the bellwether for our nation’s economic health.

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 California 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 (SCE). The $2.7 billion deal Davis cut with SCE has been enormously complicated by the fact that Pacific Gas & Electric, the state’s biggest private utility, has filed for federal bankruptcy protection, their portion of the grid now seemingly out of Davis’ reach.

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 (i.e., 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% 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% of a state-calculated “baseline” amount.

The state’s largest businesses, though, would face rate increases ranging from 87 to 550%, 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 of us 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 that spread 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. For the Hobson’s choice seems to be saving consumers a few cents per kilowatt hour now or their jobs next year.

Sometimes good economics and good politics point to the same action. In this case, good economics may mean short term political pain for the CPUC and Davis, but it ensures long term political survival. And it can only help in preventing a national economic melt down. A tumbling California economy that drags the nation with it would indeed be a poor political platform upon which to stand.


Amy Ridenour is president of The National Center for Public Policy Research.

The National Center for Public Policy Research is a communications and research foundation supportive of a strong national defense and dedicated to providing free market solutions to today’s public policy problems. We believe that the principles of a free market, individual liberty and personal responsibility provide the greatest hope for meeting the challenges facing America in the 21st century.