The ominous parallels between California’s deregulation nightmare and the quickly-degrading energy situation in Montana are as chilling as they are accurate. Now, with his state facing a $38.2 billion budget deficit, California’s Gov. Gray Davis has earned the dubious honor of being the first California governor to face a recall election. In large part, it was actions related to his state’s energy crisis that put Davis’ head on the chopping block. Montana has the opportunity to avoid similar disastrous decisions, but it may require a “pre-emptive strike” to make sure they don’t happen.
California was one of the first Western states to deregulate its electricity market, ostensibly in the belief that competition would force electricity prices down as utilities undercut each other for a share of the state’s millions of customers. That was the theory, anyhow, but the reality turned out to be quite different.
For no apparent reason, beginning in January of 2001, California faced an “energy crisis” in which supply was suddenly incapable of meeting demand. Rolling blackouts shuddered across the Golden State while citizens and businesses faced prices that had rocketed into the stratosphere. The crisis magnified as the summer went on, and the effects on the regional electricity market dragged other Northwestern states, including Montana, into the quagmire.
We now know that California’s so-called “energy crisis” was in fact engineered by large utilities and energy marketing firms, not the least of which was our ex-Gov. Marc Racicot’s client, Enron. Through a series of despicable get-rich-quick schemes, the electricity “shortage” was abetted, if not created, with the sole purpose of driving up the cost of the electricity and raking in billions of dollars. In some ways, it worked—the prices certainly went up and up and up, not just in California, but in the entire region. And some people did indeed get very rich off the nefarious scheme.
Gov. Davis, however, was in the unenviable position of trying to hold the state together while the combination of blackouts and sky-high utility prices crippled California’s formerly booming economy. Davis addressed the problem by trying to expedite new power plant construction and by supporting price caps for power that was generated in California. The utilities got around the effort by sending their power to out-of-state “buyers,” who then turned around and wheeled it back into California, avoiding the price caps and reaping ungodly profits from besieged and befuddled customers. In the meantime, the utilities blamed the “price caps” for driving them “to the edge of bankruptcy” because they couldn’t recoup the “full market cost” of the electricity they purchased.
All of this will sound very familiar to Montanans, who watched as our own electricity prices mysteriously soared to record highs, forcing mines, mills, smelters and other major businesses to cut back or shut down completely. The Butte mines, ironically, were one of the first operations to go belly up over the untenable cost of “free market” electricity.
What happened next will be all too familiar to Montanans as well. As the economy collapsed, Davis and the California Legislature faced the state’s first-ever budget deficit, and responded with desperate fund shifting, borrowing, cuts to government services and programs, higher tuitions, and tax increases.
The result has been disastrous. Davis and the legislature have now authorized the issuance of $24.1 billion in “deficit bonds” and $11 billion in “revenue anticipation” securities to try to “bridge the gap” to economic recovery. But guess what? The financial gurus on Wall St. don’t have much faith in either the economic recovery or the “bridge,” and Standard & Poor recently downgraded the state’s bond rating from A to BBB. To put it in perspective, this is the lowest bond rating ever given to any state, just two downgrades away from “junk bond” status.
The new rating is projected to lower the value of currently held California bonds, add up to a billion dollars to the cost of issuing the new bonds, add $34 million to the cost of issuing the new revenue anticipation securities, and have dire effects on the interest rates municipalities will pay to borrow in the future.
Remember Martz’ plan to rip off the Coal Tax Trust Fund for last session’s budget? It would have fit right in with the desperation measures Davis took, and for which he is now being threatened with recall. But Martz is even more desperate than Davis—and certainly more contrary.
Although she claims to be a “free market” proponent and abhors the idea of “the state being in the utility industry” when it comes to buying back the dams, Martz apparently has no problems whatsoever with the state being in the mining business. The governor thinks it would be a good idea to twist economic development laws and give tax breaks to the re-opened mine as a “new business.”
She also seems receptive to the idea of loaning the closed mine $1.8 million of state investment funds for new transformers for the increasingly expensive electricity it needs to operate. That electricity is likely to be supplied by NorthWestern Energy, a company that is, like those large California utilities, “hovering on the edge of bankruptcy” and has been downgraded and delisted from the Standard & Poor index because of low share price and market value. Nonetheless, Gov. Martz is contemplating using state funds to guarantee payment for NorthWestern’s gas and electricity purchases. Besides being a terribly risky move, it’s totally inconsistent with Martz’ comments that “the state shouldn’t be in the utility business.”
We are teetering on the edge of the California Abyss—and our governor seems inclined to leap. Bailing out private businesses with public funds is a horrifically bad idea that may well lead to a series of mysterious bankruptcies, reorganizations, and “junk bond” status for Montana’s future.
Alternatively, pre-emptively recalling Martz before she can do any more damage—and before she pulls our great state down with her—might be a good idea.
When not lobbying the Montana Legislature, George Ochenski is rattling the cage of the political establishment as a political analyst for the Missoula Independent.