BY MARK GOLDEN
A DOW JONES NEWSWIRES COLUMN

NEW YORK (DOW JONES)--THE CALIFORNIA SENATE IN SACRAMENTO PASSED A
WINDFALL-PROFITS TAX ON SALES OF ELECTRICITY INTO THE STATE'S WHOLESALE
ELECTRICITY MARKET MONDAY AFTERNOON AT 4:50 P.M. PDT. AT ALMOST EXACTLY THE SAME
TIME, CALIFORNIA INDEPENDENT SYSTEM OPERATOR INITIATED ROLLING BLACKOUTS FOR THE
FIRST TIME SINCE MARCH.
COINCIDENCE? PROBABLY, BUT THE CONNECTION SHOULDN'T BE IGNORED.
"THE POLICY DECISIONS THAT HAVE BEEN ADOPTED IN CALIFORNIA TO DATE HAVE
ACCELERATED AN ALREADY SERIOUS MARKET COLLAPSE," SAID A HARVARD UNIVERSITY STUDY
OF CALIFORNIA'S ENERGY CRISIS LATE LAST MONTH.
THIS WEEK'S WINDFALL-PROFITS TAX BILL IS THE LATEST BLUNT INSTRUMENT WIELDED
WITH POTENTIALLY DISASTROUS RESULTS. GOV. GRAY DAVIS WANTED IT AS A STICK WHEN
(CONT)
MEETING WITH EXECUTIVES FROM THE STATE'S MERCHANT POWER COMPANIES WEDNESDAY. THE
MANEUVER WAS LESS THAN ADROIT, AND THE GENERATORS WEREN'T IMPRESSED.
AFTER THE MEETING WITH DAVIS, RELIANT ENERGY'S (REI) JOHN STOUT SAID THAT IF
THE TAX WERE IMPLEMENTED IN CALIFORNIA, IT WOULD "INSTANTLY BLACK OUT ALL THE
GENERATION IN THE STATE."
THE STATE'S LEADERS MIGHT KEEP IN MIND WHO WIELDS THE BIGGER STICK AT THIS
POINT. CALIFORNIA SET UP A MARKET IN WHICH SELLERS HAVE BEEN ABLE TO CHARGE VERY
HIGH PRICES FOR ELECTRICITY SINCE SUPPLIES STARTED GETTING TIGHT A YEAR AGO.
SELLERS SAY THEY HAVE PLAYED BY THE RULES THEY WERE GIVEN, AND NOBODY HAS PROVED
OTHERWISE WITH THE ONE EXCEPTION OF A FINE PAID BY WILLIAMS COMPANIES (WMB) FOR
ONE PARTICULAR INSTANCE OF VIOLATING A CONTRACT.
"IT'S LIKE SOMEBODY INVENTED A NEW GAME, INVITED YOU OVER TO PLAY AND THEN
CHANGED THE RULES A COUPLE OF TIMES IN THE MIDDLE OF THE GAME. THEN, AFTER YOU
BEAT THEM, THEY INSIST YOU CHEATED," SAID ONE WESTERN ENERGY TRADER.
ALMOST EVERY ATTEMPT BY THE BUY SIDE - THE UTILITIES, THE ISO AND NOW THE
(CONT)
STATE TREASURY - TO LOWER PRICES HAS RESULTED IN HIGHER PRICES OR BLACKOUTS OR
BOTH. THE WINDFALL-PROFITS TAX IDEA IS THE MOST RECENT EXAMPLE, BUT THOSE WHO
INSIST ON PRICE CAPS SHOULD KEEP THIS IN MIND: THE ISO HAS HAD PRICE CAPS SINCE
IT BEGAN OPERATION MORE THAN THREE YEARS AGO. OBVIOUSLY, PRICE CAPS HAVEN'T
WORKED, JUST AS THEY HAVE NEVER WORKED EXCEPT DURING WARTIME.
IN FACT, PRICE CAPS HAVE BEEN A QUESTIONABLE MEDICINE PRESCRIBED FOR THE
WRONG DISEASE. AT BEST, PRICE CAPS MIGHT RESTRICT PRICE SPIKES. CALIFORNIA'S
PROBLEM IS PERPETUAL HIGH PRICES. IT CAN'T AFFORD THE GOING RATE AT NIGHTTIME,
LET ALONE THE HIGHER MARKET PRICES DURING THE AFTERNOONS IN A HEATWAVE.
CALIFORNIA MUST FIGURE OUT HOW TO PLAY BETTER THE GAME IT INVENTED. THE
INSANELY COMPLICATED COMPUTER-BASED PURCHASING OF POWER ENDED A FEW MONTHS AGO,
AFTER THE CALIFORNIA POWER EXCHANGE WAS CLOSED DOWN BY FEDERAL REGULATORS AND
THE ISO LOST ITS FINANCIAL ABILITY TO BUY POWER. THE MATCH BETWEEN THE PROGRAMS
AND THE ENERGY TRADERS WASN'T EXACTLY IBM'S "BIG BLUE" VERSUS GARRY KASPAROV.
ALMOST EVERYONE IN THE MARKET AGREES THAT THE UTILITIES' HUMAN TRADERS COULD
(CONT)
HAVE BOUGHT NEEDED POWER FOR BILLIONS OF DOLLARS LESS THAN THE PROGRAMS THAT THE
UTILITIES WERE REQUIRED TO USE BY STATE LAW.
SINCE THE DEMISE OF PROGRAMMED PURCHASING, THE COMPUTERS HAVE BEEN REPLACED
BY HUMANS, BUT WITHOUT MUCH BETTER RESULTS. THE TEAM ASSEMBLED TO BUY TENS OF
MILLIONS OF DOLLARS WORTH OF SPOT POWER EVERY DAY CONSISTS MOSTLY OF FORMER
EMPLOYEES OF THE POWER EXCHANGE AND ISO, AS WELL AS EXPENSIVE CONSULTANTS WITH
NO ENERGY TRADING EXPERIENCE. ONE OF THE LEADERS OF THE TRADING TEAM, FOR
EXAMPLE, IS A FORMER PUBLIC RELATIONS DIRECTOR FOR THE POWER EXCHANGE WITH NO
TRADING EXPERIENCE PRIOR TO THE CURRENT JOB.
AS ONE ISO EMPLOYEE WAS WONT TO SAY: "IT'S LIKE WATCHING A FOOTBALL GAME
BETWEEN NOTRE DAME AND ST. MARY'S SCHOOL FOR UNWED MOTHERS."
AND THE SIGNING OF TENS OF BILLIONS OF DOLLARS OF FIVE- AND 10-YEAR CONTRACTS
IS BEING EXECUTED MAINLY BY FORMER EXECUTIVES OF SOUTHERN CALIFORNIA EDISON -
PEOPLE THAT LEFT THE UTILITY YEARS AGO TO BECOME CONSULTANTS AND ALSO DON'T HAVE
TRADING EXPERIENCE.
GOOD IDEAS, MEANWHILE, HAVE LANGUISHED. (CONT)
"WE ARE GOING TO INSTALL METERS IN EVERY MAJOR COMMERCIAL CONCERN IN THE
STATE THIS SUMMER AND GO TO REAL-TIME PRICING," DAVIS TOLD WALL STREET ANALYSTS
ON FEB. 28.
THAT PROPOSAL WAS GREETED BY MANY OBSERVERS AS THE MOST CONSTRUCTIVE IDEA
FROM THE GOVERNOR'S OFFICE TO DATE.
WHAT HAS HAPPENED TO REAL-TIME PRICING FOR CALIFORNIA'S BIG BUSINESSES SINCE
THEN? NOTHING.
"THE PROBLEM IS THAT EVERYBODY IN CALIFORNIA IS 'SPECIAL'," SAID STANFORD
ECONOMIST AND CALIFORNIA ISO CONSULTANT FRANK WOLAK. EVERY INDUSTRY FROM OIL
REFINERS TO INTERNET SERVER FARMS HAS HAD LOBBYISTS IN SACRAMENTO SUCCESSFULLY
SECURING EXCEPTIONS TO THE RULE.
"MY POINT HAS BEEN THAT IF WHAT THEY DO IS SO VALUABLE, THEN THEY SHOULD BE
ABLE TO HANDLE THE HIGHER PRICES. BUSINESSES WITH ABOUT 10,000 MEGAWATTS OF LOAD
HAVE REAL-TIME METERS. EVERY ONE OF THEM SHOULD BE GETTING MARKET PRICES," SAID
WOLAK.
(CONT)
ONE OF THE GREATEST ADVANTAGES THAT SELLERS OF ELECTRICITY TO CALIFORNIA HAVE
HAD IS THAT CONSUMERS HAVE FIXED PRICES, SO DEMAND IS INFLEXIBLE. SELLERS KNOW
EXACTLY HOW MUCH ELECTRICITY THE UTILITIES MUST BUY BASED ON TEMPERATURES AND
THE TIME OF DAY, WOLAK SAYS, AND THEY SIMPLY SUPPLY THE MARKET JUST ENOUGH POWER
AT HIGH MARGINAL PRICES.
REDUCING OVERALL CONSUMPTION THROUGH HIGHER RATES WILL HELP THE STATE SOME,
BUT MAKING 25% OF DEMAND FLEXIBLE BASED ON PRICE WOULD GIVE THE STATE A FIGHTING
CHANCE IN THE MARKET, ACCORDING TO WOLAK.
BUT THAT, APPARENTLY, IS TOO COMPLICATED OR POLITICALLY DIFFICULT. PRICE
CAPS, A WINDFALL-PROFITS TAX AND POLITICAL PATRONAGE JOBS FOR BUYING BILLIONS OF
DOLLARS OF POWER MAY NOT SAVE THE STATE FROM BANKRUPTCY, BUT THEY ARE EASIER TO
SELL - OR SLIP THROUGH - IN SACRAMENTO.
-BY MARK GOLDEN, DOW JONES NEWSWIRES; 201-938-4604; MARK.GOLDEN@DOWJONES.COM