The state of California, which deregulated its power industry using a model remarkably similar to that implemented by the Kennett Government in Victoria, has been left with both a power crisis and the bankruptcy of its power utilities, which could seriously damage the US economy.
California’s Governor, Gray Davis, was forced to declare a state of emergency, as rolling blackouts were imposed throughout America’s largest state with a population of 34 million people.
In a further coincidence, one of the bankrupt utilities, Southern California Edison, is connected to the giant Loy Yang privatised power station in Victoria’s Latrobe Valley, the largest shareholder of which has tried to sell out of its 50 per cent share.
For the past month, California has suffered repeated rolling black-outs, crippling the “new technology” industries centred on Silicon Valley, due to a lack of power-generating capacity due to the privatisation of California’s power industry.
Additionally, the two largest utilities have had to purchase electricity at inflated cost from outside California, in an effort to meet the shortfall in supply.
As in Victoria, tariffs in California’s privatised electricity utilities are capped, effectively preventing them from passing on the cost to consumers. This has cost them $US12 billion since last July, effectively bankrupting them.
The Chairman of the US Federal Reserve, Alan Greenspan, told a Congressional hearing last month that the Californian power crisis threatened the economy of the United States, partly due to the disruptive effect of the power shortages, but also because two of America’s largest banks, Bank of America and Wells Fargo Bank, face huge losses from their exposure to the two Californian utilities.
These banks are reported to have advanced $6 billion in short-term loans to the utilities over the past year, which they stand to lose if the utilities go under.
The underlying cause of California’s problems is that in the privatised power industry, there is little or no incentive to install new electricity generating capacity. No major new power stations have been constructed over the past 10 years, although the state’s economy – and electricity demand – has expanded by a third.
A similar situation prevails in Victoria, where no new power stations have been constructed since the last of Loy Yang’s 500 MW turbo-generators came on stream in 1988.
As a result, Victoria has moved from having surplus power-generating capacity, to a position where maximum supply and peak demand are approximately equal, but demand will shortly outstrip supply.
Since the Victorian power industry was privatised, the wholesale cost of electricity has fallen from about 4 cents/kwh to about 2.5 cents/kwh, as the various electricity generating companies slashed costs to win supply contracts.
The privatised utilities are either making losses or are marginally profitable, ensuring that there is no incentive for construction of new power stations in Victoria. In fact, the largest shareholder in Loy Yang, the US-owned CMS Energy, put its 50 per cent share up for sale last year, but has been unable to find a buyer.
The Yallourn Power Station, owned by Yallourn Energy, recently changed hands, and its former owner sustained a loss of hundreds of millions of dollars.
While the Bracks Government is aware of the looming crisis, it has done nothing about it. In a curious irony, a private consortium is attempting to construct a power cable from Tasmania to Gippsland, to permit Tasmanian hydro-electric power to be fed into the Victorian network at peak-load periods.
However, this project is facing massive opposition from farmers and environmentalists, who are opposed to above-ground power cables passing from the coast to central Gippsland.
The longer term issue – ensuring that Victoria has new generating capacity in Gippsland – is not even on the agenda.
The Governor of California has described the deregulation of the electricity industry as “a colossal failure”, and has pushed through a proposal that the State of California buy shares in Southern California Edison and Pacific Gas & Electric Co, thereby averting their formal bankruptcy, and effectively taking them back into public hands.
Inevitably, Californian consumers will pick up the bill – in the form of higher prices for electricity. Consumers in other American states will also share in the cost, as prices of electricity in neighbouring states rise as a consequence of the drain on power into California.
California will also be compelled to build new base-load power stations, to meet the urgent need for additional electric power, although this solution will takes years to bring into effect.
Soon, Victoria will have to do the same – hopefully before the state suffers the same problems that are currently crippling California.
In the meantime, California provides a salutory warning to other Australian states considering privatisation of their electricity industries, particularly South Australia and New South Wales.